Monday, February 13, 2017

Some Lessons from the Big Data from Panama Papers and Tax Haven Secrecy (2/13/17)

Readers of this blog interested in offshore tax havens may want to read this law review article:  Arthur J. Cockfield, Big Data and Tax Haven Secrecy, 18 Fla. Tax Rev. 483 (2016), here.  The author, a professor of law at Queens University (Canada), dives into a subset of the Panama Papers data and draws some conclusion as to the offshore account secrecy offered by so-called tax havens, both for persons avoiding taxes but also for persons avoiding scrutiny of large sums of illegal cash and assets.

While there is now significant literature in law, politics, economics, and other disciplines that examines tax havens, there is little information on what tax haven intermediaries — so-called offshore service providers — actually do to facilitate offshore evasion, international money laundering, and the financing of global terrorism. To provide insight into this secret world of tax havens, this Article relies on the Author’s study of big data derived from the financial data leak obtained by the International Consortium for Investigative Journalists (ICIJ). A hypothetical involving Breaking Bad’s Walter White is used to explain how offshore service providers facilitate global financial crimes. A transaction cost perspective assists in understanding the information and incentive problems revealed by the ICIJ data leak, including how tax haven secrecy enables elites in nondemocratic countries to transfer their monies for ultimate investment in stable democratic countries. The approach also emphasizes how, even in a world of perfect information, political incentives persist that thwart cooperative efforts to inhibit global financial crimes.
On April 3, 2013, the International Consortium for Investigative Journalists (ICIJ) announced that it had obtained the world's largest financial data leak. The leak included over 2.5 million documents detailing the tax haven financial dealings of over 70,000 taxpayers and over 120,000 offshore corporations and trusts. This leak had been investigated by over eighty-six journalists in forty-two countries prior to its public revelation, forming what is likely the most comprehensive global journalist collaboration in history. For the first time, the secret world of tax havens was revealed in great detail. 
The "big data" derived from the ICIJ financial data leak provided journalists and selected researchers, including this Author, with the opportunity to understand how individuals use tax havens to criminally evade taxes, launder illegal earnings, and finance cross-border terrorism (collectively, "global financial crime"). This Article provides a taxonomy of offshore tax evasion efforts derived from the Author's study and analysis of the data leak, with the ultimate aim of providing insights into the incentive and information problems that make it difficult to inhibit global financial crime. 
While there is now a significant literature in law, politics, economics, and other disciplines that examine tax havens and offshore tax evasion, there is little information on what tax haven intermediaries--offshore service providers such as finance and trust companies--actually do to facilitate offshore evasion.  The gap in the writings can be largely explained by the secretive nature of tax haven activities that shielded them from outside scrutiny. For example, the ICIJ financial data leak revealed that offshore service providers were often not complying with international "know your customer" standards, which creates information problems that significantly raise transaction costs for law enforcement authorities with respect to enforcing tax and criminal laws governing offshore tax evasion and other global financial crime.  
A less explored idea is that the secret world dramatically lowers transaction costs for criminals engaged in these offshore activities--the secrecy effectively reduces certain risks facing tax evaders, international drug launderers, and financiers of global terrorism. A transaction cost perspective can assist with understanding the incentive and information problems revealed by the ICIJ financial data leak. The approach emphasizes the ways that offshore service providers take advantage of information problems to facilitate global financial crime. 
The ICIJ financial data leak also provides evidence of capital flight from non- or quasi-democratic countries to wealthier democracies such as the United States and other Organization for Economic Cooperation and Development (OECD) nations; it reveals how a small portion of ruling elites in countries such as China use tax haven intermediaries as conduits to invest their monies in stable democracies. The capital-importing countries hence benefit from trillions of dollars of inward foreign direct and portfolio investment, a significant portion of which would not likely take place in the absence of tax haven secrecy.  
This environment provides a moral hazard for the capital-importing countries, as the current regime in many ways benefits their economies at the expense of the capital-exporting countries. Tax havens, non-democratic states, and even wealthy democracies all face political incentives to pursue the status quo of tax haven secrecy. This Article shows that, even in a world of perfect information, until political incentives change it will be difficult to make any real progress to inhibit global financial crime. 

Saturday, February 11, 2017

Whistleblower Claims Swiss Bank IHAG did not Come Clean with DOJ as Category 2 Bank Receiving an NPA (2/11/17) reports (based on a Tax Notes report) that 
A whistleblower reported a Swiss private bank to U.S. prosecutors for violating an offshore settlement, it has emerged. Among his accusations: a Zurich-based bank shielded a gigantic precious emerald from the prying eyes of tax officials. Has IHAG [Private Bank] got a new problem on its hands?
Katherina Bart, Whistleblower Alleges Swiss Bank Cheated in U.S Tax Pact ( 2/8/17), here.

Other excerpts:
He [Rolf Schnellmann]  is the most recent in a series of Swiss private banking whistleblowers including former UBS banker Bradley Birkenfeld, ex-Julius Baer banker Rudolf Elmer, and Herve Falciani, who stole data from HSBC private bank when he worked at the Geneva-based institute as an information technology specialist.  
* * * * 
Schnellmann came forward as an informant to U.S. justice officials several months before IHAG reached a settlement in the U.S. for helping wealthy Americans cheat on their taxes. The bank, founded in 1949 by a wealthy weapons manufacturer and art collector, agreed in 2015 to pay a nearly a $7.5 million penalty to to avoid prosecution for its wrong-doings with U.S. clients. 
The bank voiced confidence that it is out of the woods. 
* * * * 
$870 Million Emerald 
A cursory read of Schnellmann's accusations, summarized in letters to U.S. officials through a lawyer, appear to at least partly jibe with the bank's own admissions to U.S. prosecutors.  
IHAG admitted to using several steps, including with the help of third parties, to strip assets of any sign they belonged to U.S. taxpayers. 
The gist of Schnellmann's accusations is that IHAG's deception went further: for example, he maintains that IHAG also set up a fund structure to hide beneficial ownership – the true account holder. 
Schnellmann also accuses a Zurich private bank of safekeeping an emerald valued at $870 million for a client who has since died. This claim appears far-fetched: the world's most expensive emerald gemstone, the Bahia Emerald, is valued at $400 million – a 341-kilogram schist. 
U.S. Revisits IHAG? 
The Department of Justice, or DoJ, must determine if Schnellmann's accusations are compelling enough to warrant revisiting IHAG's non-prosecution agreement. The DoJ didn't comment to 

Horsky is Sentenced for Major Offshore Accounts (2/11/17; 2/12/17)

DOJ Tax announced here the sentence for Dan Horsky.  I previously blogged about him here:  Former Business Professor Pleads Guilty to Tax Related Crimes; In Addition, Will Pay $100 Million FBAR Penalty (Federal Tax Crimes Blog 11/4/16; 11/9/16), here; see also Credit Suisse Being Investigated for Omitting at Least One Large Account (Federal Tax Crimes Blog 11/22/16), here.

The sentence was 7 months.  Given the sentencing factors indicated in the press release (excerpted immediately below) and set forth in the parties' sentencing memoranda (linked below), that is a phenomenal result.  I discuss the guidelines sentence below in this blog.  The 7 month sentence is way below guidelines.  For reasons that may be apparent from the discussion below, that appears to be a very good result for Horsky, given what the objective factors indicate.  However, I understand that there were sealed documents that bore upon sentencing so we may not be able to fully understand the sentence.

Key excerpts from the press release:
According to documents filed with the court and statements made during the sentencing hearing, Dan Horsky, 71, formerly of Rochester, New York, is a citizen of the United States, the United Kingdom and Israel who served for more than 30 years as a professor of business administration at a university located in New York. Beginning in approximately 1995, Horsky invested in numerous start-up companies, virtually all of which failed. One investment in a business referred to as Company A, however, succeeded spectacularly. In 2000, Horsky transferred his investments into a nominee account in the name of “Horsky Holdings” at an offshore bank in Zurich, Switzerland (the “Swiss Bank”) to conceal his financial transactions and accounts from the IRS and the U.S. Treasury Department. 
In 2008, Horsky received approximately $80 million in proceeds from selling Company A’s stock. Horsky filed a fraudulent 2008 tax return that underreported his income by more than $40 million and disclosed only approximately $7 million of his gain from the sale. The Swiss Bank opened multiple accounts for Horsky to assist him in concealing his assets: including one small account for which Horsky admitted that he was a U.S. citizen and resident and another much larger account for which he claimed he was an Israeli citizen and resident. Horsky took some of his gains from selling Company A’s stock and invested in Company B’s stock. By 2015, Horsky’s offshore holdings hidden from the IRS exceeded $220 million. 
Horsky directed the activities in his Horsky Holdings’ account and the other accounts he maintained at the Swiss Bank, despite the fact that he made no effort to conceal that he was a U.S. resident. In 2012, Horsky arranged for an individual referred to as Person A to take nominal control over his accounts at the Swiss Bank because the bank was closing accounts controlled by U.S. persons. The Swiss Bank later helped Person A relinquish that individual’s U.S. citizenship, in part to ensure that Horsky’s control over the offshore accounts would not be reported to the IRS. In 2014, Person A filed a false Form 8854 (Initial Annual Expatriation Statement) with the IRS that failed to disclose his net worth on the date of expatriation, failed to disclose his ownership of foreign assets, and falsely certified under penalties of perjury that he was in compliance with his tax obligations for the five preceding tax years. 
Horsky’s tax evasion scheme ended in 2015 when IRS special agents confronted him at home regarding his concealment of his foreign financial accounts. 
Horsky willfully filed fraudulent federal income tax returns that failed to report his income from, and beneficial interest in and control over, his foreign financial accounts. In addition, Horsky failed to file Reports of Foreign Bank and Financial Accounts (FBARs) up and through 2011, and also filed fraudulent 2012 and 2013 FBARs. In total, in a 15-year tax evasion scheme, Horsky evaded more than $18 million in income and gift tax liabilities. 
I have not yet obtained any documents that may have been filed and posted to Pacer from yesterday.  I did gather some of the documents earlier in the week.  They are:

Major Attorneys Fee Award for BASR Partnership Prevailing on the Allen Issue in Federal Circuit (2/11/17)

In BASR Partnership v. United States, [citation coming later] (2017), here, the  Court of Federal Claims held that the partnership in a TEFRA proceeding in which it prevailed after sending a qualified settlement offer of $1 was entitled to recover attorneys fees at the higher than normal attorney fee rate.  There is a good story here and practice tip for attorneys interested in recovering attorneys fees should they prevail in tax litigation.

BASR Partnership won the merits decision -- really a procedural decision -- at the trial and appellate levels holding that the fraud of persons other than the taxpayer or someone related to the taxpayer is not sufficient to invoke the unlimited statute of limitations in § 6501(c)(1).  BASR Partnership v. United States, 113 Fed. Cl. 181 (2013), aff'd BASR Partnership v. United States, 795 F.3d 1338 (Fed. Cir. 2015), reh. denied.  I previously blogged on these decisions, but link here to the one on the appeals decision:  Court of Appeals for Federal Circuit Holds that Fraud of the Taxpayer (Or Someone Closer to the Taxpayer than the Fraudster) is Required for Section 6501(c)(1) Unlimited Statute of Limitations (Federal Tax Crimes Blog 7/30/15; 7/31/15), here.

Having won the decision, rather than being satisfied with the substantial victory -- the avoided cost of large tax liabilities for its partners -- the partnership desired to recover attorneys fees.  That leads to § 7430, here.  Normally, recovering attorneys fees requires that the party seeking recovery be the "prevailing party."  The prevailing party is defined in § 7430(c)(4) to be the party who "substantially prevailed" as to the amount and who meets certain financial requirements (in relevant party net worth of less than $7 million).  BASR did not fail the financial test. (As noted below, the Government argued that the "real parties in interest" -- the ultimate parties behind the partners -- had net worths exceeding the $7 million limit, but the Court rejected that argument.)

The prevailing party requirement is a bit more nuanced.  Certainly, in ordinary parlance, BASR was the prevailing party.  It won the whole cahuna, so that the IRS is not able to assess and collect tax from its partners under the TEFRA procedures.  But, prevailing party is defined to exclude positions as to which the government was "substantially justified."  Given the holding in Allen v. Commissioner, 128 T.C. 37 (2007), the Government position was substantially justified.

But wait, there is an exception to the substantially justified exception.  If the taxpayer has made what is referred to as a qualified offer under 7430(g) then the party will be treated as the prevailing party if the judicial result "is equal to or less than the liability of the taxpayer which would have been so determined if the United States had accepted a qualified offer of the party under subsection (g)."  See § 7430(c)(4)(E).  The result of the BASR litigation is that the Government gets $0 from affected taxpayers which is certainly less than the $1 offered.  Hence, bottom-line, the Court award BASR its attorneys fees and at a higher than normal hourly rate.  The aggregate award was $314,710.49.

DOJ Tax Summary of Its Activities Update through December 2016 (2/11/17)

I link here a Tax Division Summary of Civil Tax Matters - Highlights (Updated through December 16, 2016).  The 30-page document contains briefly summarizes DOJ Tax activity (decisions, court filings, etc.), mostly I think in 2016.  Readers should note that the pdf file is bookmarked to help moving around to the topics and is also searchable.

The topics covered are:
A. Summons Enforcement
B. John Doe Summonses
C. Foreign Account Tax Compliance Act.
C. Supreme Court Activity  (Outline Level C appears twice)
D. Tax Shelter Litigation
1. STARS Shelters
2. DAD Shelters.
3. Son-of-BOSS Shelters
E. Offshore-Related Activities.
1. Summons Enforcement.
2. FBAR Issues
Recent collection cases filed:
F. APA Challenges to IRS or Department of Treasury Actions
G. Injunction Litigation
1. Return Preparers and Tax Shelter Promoters
2. Pyramiding Injunctions
H. Other Significant Matters
1. Affordable Care Act-Related Cases.
2. Railroad Retirement Act
3. Bankruptcy Issues.
4. § 1603 of the American Recovery and Reinvestment Tax Act.
5. Miscellaneous
JAT Comment:  I was already aware of most of the case decisions reported, but most of the other case activity (such as cases started) was new to me.  For example, among the recent FBAR collection suits filed is with respect to Ashvin Desai.  I had previously reported on the criminal conviction of Ashvin Desai.  See HSBC India Client Sentenced Ever So Lightly Given Facts and Trial Conviction Rather than Plea (7/12/14), here.  The new DOJ Tax document describes the civil suit filing against Desai as follows (pp. 12-13):
United States v. Ashvin Desai (N.D. Cal.) – On June 20, 2016, we filed suit seeking a judgment against Ashvin Desai for his willful failure to file Reports of Foreign Bank and Financial Accounts (FBARs) for 2007, 2008, and 2009. During those years Desai had a financial interest in, and signatory or other authority over four accounts maintained at Hong Kong and Shanghai Banking Corporation Limited (HSBC) India. Millions of dollars flowed into these accounts. Desai failed to file FBARs for the accounts, did not report the income earned in the accounts on this Form 1040 returns for 2007-2009, and indicated on Schedule B of those returns that he did not have an interest in or signatory or other authority over a financial account in a foreign country. The IRS assessed more than $14 million in penalties under 31 U.S.C. § 5321 against Desai for willfully failing to file the FBARs. With accruals, Desai’s total debt exceeds $16 million. In October 2013, a jury found Desai guilty of three counts of failing to file an FBAR for 2007 through 2009. It also found him guilty of three counts of attempting to evade or defeat tax in violation of I.R.C. § 7201 and two counts of aiding in the preparation of false tax returns for his two adult children in violation of I.R.C.§ 7206(2).
Many other previously unknown FBAR collection actions are reported, as well.

One other comment:  The report (p. 17) identifies a case filing on March 18, 2016 as follows:  United States v. Shoaleh Yermian (C.D. Cal.) for an FBAR penalty amount of $32,142.79.  I was surprised by the low amount for which DOJ Tax will spend significant resources to pursue (including further collection activity if judgment is given).

Wednesday, February 8, 2017

Tax Court Holds that 6662A Penalty on Reportable Transaction Understatement Does Not Violated the Eighth Amendment Excessive Fine Clause (2/8/17)

Today, I post on Thompsom v. Commissioner, 148 T.C. ___, No. 3 (2017), here, in which the Tax Court held (i) based on a contemporaneous case, that the President's limited removal power for Tax Court Judges does not violate the Constitution and (ii) the penalty in § 6662A, here, penalty on reportable transaction understatements does not violate the Eight Amendment's Excessive Fines Clause.  I focus this blog entry only on the Excessive Fines Issue because that issue has arisen in prior blogs, particularly with respect to the FBAR willful penalty (see blogs listed and linked at the end of this blog).

The Court describes the Section 6662A penalty as follows:
Section 6662A(a) imposes a penalty on any reportable transaction understatement. If a taxpayer fails to adequately disclose a reportable transaction giving rise to an understatement under section 6662A, the penalty is imposed at a rate of 30%, and there are no available defenses. Secs. 6662A(c), 6664(d)(2). However, if a taxpayer sufficiently discloses the details of the transaction, the penalty rate is 20% of the amount of the reportable transaction understatement. Sec. 6662A(a). In this latter instance, a taxpayer may be able to avoid the penalty under section 6662A if he or she shows reasonable cause and good faith, as well as that there is or was substantial authority for a position he or she took on a tax return, and the taxpayer reasonably believed that such treatment was more likely than not the proper treatment of the transaction in question.  Sec. 6664(d)(1) and (2).
The Court then describes the Eight Amendment's Excessive fines clause as follows (case citations omitted):
The Eighth Amendment to the United States Constitution provides: “Excessive bail shall not be required, nor excessive fines imposed, nor cruel and unusual punishments inflicted.” “The Excessive Fines Clause limits the government’s power to extract payments, whether in cash or in kind, ‘as punishment for some offense.’” Austin v. United States, 509 U.S. 602, 609-610 (1993) (emphasis in Austin) (quoting Browning-Ferris Indus. of Vt., Inc. v. Kelco Disposal, Inc., 492 U.S. 257, 265 (1989)). 
In a case discussing application of the Double Jeopardy Clause to a State tax on possession of illegal drugs, the Supreme Court stated: “Criminal fines, civil penalties, civil forfeitures, and taxes all share certain features: They generate government revenues, impose fiscal burdens on individuals, and deter certain behavior. All of these sanctions are subject to constitutional constraints.” Dep’t of Revenue of Mont. v. Kurth Ranch, 511 U.S. 767, 778 (1994). At the same time, the Supreme Court recognized that taxes are typically motivated by revenue raising rather than punitive purposes. Id. at 779-780. “[N]either a high rate of taxation nor an obvious deterrent purpose automatically marks * * * [a] tax as a form of punishment.” Id. at 780. Nevertheless, “at some point, an exaction labeled as a tax approaches punishment, and our task is to determine * * * [when it] crosses that line.” Id.

Friday, February 3, 2017

Court Denies FBAR Penalty Relief Under APA, Requiring Alternative Paths to Remedy (2/3/17)

In Kentera v. United States, 2017 U.S. Dist. LEXIS 12450 (ED WI 2017), here, the Court dismissed the complaint filed by two persons, husband and wife, seeking review of the FBAR nonwillful penalties asserted by the IRS pursuant to an audit after they withdrew from OVDI.  The Kenteras had not paid any of the FBAR penalties, so sought declaratory judgment pursuant to the APA.

In addition to the Order, linked above, the following documents might be interesting to readers of this blog:

  • Complaint, here.
  • Joint Rule 27(f) Report (related to discovery), here.
  • U.S. Motion to Dismiss, here.
  • Memorandum in Support of U.S. Motion to Dismiss, here.
  • Kenteras' Opposition to U.S. Motion to Dismiss, here.
  • U.S. Reply to Kenteras' Opposition, here.

I cut and paste the facts underlying the order as presented in the Order:
The relevant facts are drawn from Plaintiffs' complaint. The Bank Secrecy Act ("BSA"), 31 U.S.C. § 5311 et seq., requires U.S. citizens to keep records and file reports when they "mak[e] a transaction or maintai[n] a relation with a foreign financial agency." 31 U.S.C. § 5314(a). The report must be made in an FBAR, which is IRS Form TD F 90-22.1. The FBAR must be filed on or before June 30 of the year following the calendar year for which the report is made. If the individual fails to comply with the requirements of Section 5314, the BSA provides that civil penalties may be imposed. Id. § 5321(a)(5). For non-willful violations, the penalty cannot exceed $10,000. Id. § 5321(a)(5)(B)(I). 
In 1984, Plaintiff Milo Kentera inherited money located in a foreign bank account at Banque Cantonale de Geneve ("BCGE"). He added his wife's name to the BCGE account shortly thereafter. The balance in the account increased dramatically in 2007 due to the sale of Milo Kentera's parents' property in Montenegro, certain proceeds of which were distributed to Milo and deposited in the BCGE account. 
Plaintiffs have consistently disclosed the BCGE account on their federal income tax returns since 1984. However, in 2006 their accountant failed to prepare or file an FBAR in connection with their federal income tax return. Their accountant for tax years 2007, 2008, and 2009 made the same error, despite having information from which he could have discovered the existence of the BCGE account. In 2010, a third accountant acknowledged the existence of the BCGE account in Plaintiffs' return, but again seems to have failed to prepare or file an FBAR. 
In February 2011, the IRS announced a federal amnesty program for taxpayers with foreign bank accounts—the 2011 Offshore Voluntary Disclosure Initiative ("OVDI"). To participate, taxpayers were required to amend their tax returns and file FBARs for tax years 2003-2010. OVDI participants were required to pay all delinquent taxes, interest, and penalties, and, under this program, taxpayers were subject to a 25% penalty on the highest aggregate account balance on their previously undisclosed accounts during those years. 
In around September 2011, Plaintiffs applied to the OVDI program. They amended their tax returns for 2006-2010 to include omitted income and filed completed FBARs for 2005-2010. In August 2013, the IRS provided Plaintiffs with a Form 906, Closing Agreement on Final Determination Covering Specific Matters (the "Closing Agreement"). The Closing Agreement provided, in relevant part, that Plaintiffs would be liable under the tax code for a miscellaneous penalty of $90,092. Plaintiffs withdrew from the OVDI program the next month. 
After Plaintiffs withdrew from the program, IRS agent Kimberly Nguyen ("Nguyen"), who works in Milwaukee, examined the matter and recommended that Plaintiffs be assessed non-willful FBAR penalties pursuant to 31 U.S.C. § 5321(a)(5). The amounts of the penalties were as follows: 
(1)Lois Kentera: $500 for calendar year 2006; and $2,500 per year for calendar years 2007, 2008, 2009, and 2010, for a total penalty of $10,500; and 
(2) Milo Kentera: $500 for calendar year 2006; and $10,000 per year for calendar years 2007, 2008, 2009, and 2010, for a total penalty of $40,500. 

Switzerland Seeks Information on Hidden Deposits In Other Countries, Including Liechtenstein (2/3/17)

Joshua Franklin, Famed tax haven Switzerland chases hidden cash (Reuters 2/2/17), here.

Switzerland, a perennial target for governments pursuing tax evaders, is finding out what it is like to chase down hidden cash. 
The Swiss finance ministry said on Thursday it had reached a deal with Liechtenstein to exchange tax information, potentially helping to uncover billions of dollars in undeclared assets kept by Swiss citizens in neighboring Liechtenstein. 
"These assets will be declared and the person has the chance either to repatriate the assets to Switzerland, or he will be taxed and he keeps his money in Liechtenstein," said Joerg Gasser, head of the State Secretariat for International Financial Matters, a branch of the finance ministry. 
* * * * 
The situation is a role reversal for Switzerland, whose strict bank secrecy laws for years had made the wealthy Alpine country a haven for hidden money. 
* * * * 
The Swiss-Liechtenstein agreement is under a global tax sharing initiative spearheaded by the Organisation for Economic Co-operation and Development (OECD). 
Under the OECD's Automatic Exchange of Information (AEI), banks pass on information to local tax agencies, which in turn share it with foreign counterparts.
Cabinet adds countries to tax data exchange (Swissinfo 2/2/17), here.

Excerpts (bold-face supplied by JAT):
The Swiss government says it intends to begin automatic exchanges of tax data with 20 additional countries in 2019. 
Switzerland already has agreed to such exchanges – based on international standards aimed at ensuring that taxpayers pay the right amount of tax to the right jurisdiction – with 38 nations and territories starting in 2018. 
Now, the Swiss finance department will begin consulting with 20 more countries to set up the exchanges starting in 2019, the cabinet said in a statement on Thursday. 
The new countries to be added are China, Indonesia, Russia, Saudi Arabia, Liechtenstein, Colombia, Malaysia, the United Arab Emirates, Montserrat, Aruba, Curacao, Belize, Costa Rica, Antigua and Barbuda, Grenada, Saint Kitts and Nevis, Saint Lucia, Saint Vincent and the Grenadines, the Cook Islands and the Marshall Islands. 

Wednesday, February 1, 2017

Should the Indictment Be Submitted to the Jury In Determining Guilt or Innocence? (2/1/17)

In United States v. Larkin, 2017 U.S. Dist. LEXIS 10362 (D NV 2017), here, the Magistrate Judge denied a defendant's motion to strike surplusage related to a single count tax evasion indictment.  The indictment, the second superseding indictment, is here.

Larkin was charged with tax evasion, § 7201, here, of Trust Fund Recovery Penalties assessed against her under § 6672, here.  (While I have not researched the issue, I presume that the reason evading the TFRP can be tax evasion is that § 6671(a), here, provides that the TFRP is "assessed and collected in the same manner as taxes" and "any reference in this title to “tax” imposed by this title shall be deemed also to refer to the penalties and liabilities provided by this subchapter.")

By way of background, tax evasion is usually -- in my experience -- charged in an indictment without elaboration of the facts.  See, for example, the DOJ CTM form indictments in the DOJ Criminal Tax Manual ("CTM"), here.  by way of example,
26 U.S.C. § 7201
GOVERNMENT PROPOSED Jury Inst. No. 26.7201-1
Tax Evasion –The Nature of the Offense Charged 
 Count ___ of the indictment charges that on or about the ___ day of _______,
20___, in the __________ District of _________, Defendant _________ willfully
attempted to evade and defeat a substantial income tax which was due [in addition to any
income tax declared on the defendant’s tax return] [in addition to any income tax the
defendant paid]. 
The Essential Elements Of Attempt To Evade Or Defeat A Tax 
 To establish the offense of attempting to evade and defeat a tax, the government is
required to prove beyond a reasonable doubt the following three elements: 
First, a substantial income tax was due and owing from the defendant in addition to that
declared in his [her] income tax return; 
Second, [after _______,]1 the defendant made an affirmative attempt, in any manner, to
evade or defeat an income tax, and 
Third, the defendant willfully attempted to evade and defeat the tax. 
The burden is always upon the prosecution to prove beyond a reasonable doubt every
essential element of the crime charged; the law never imposes upon a defendant in a
criminal case the burden or duty of calling any witnesses or producing any evidence.
Some of the other forms have more language to discuss the elements of the crime, such as willfulness.  But, generally, the indictments are straight-forward allegations of the elements without detail, even for example the specific affirmative acts of evasion.  By contrast, indictments of tax conspiracies are often embellished with much of the background of the conspiracy and the overt acts of the conspiracy, often presenting a sinister story indeed.

In Larkin, the indictment went substantially beyond the bare bones suggested in the DOJ CTM.  The actual indictment is linked above, but the Magistrate Judge covers the salient points in the opinion as follows:

Update on Passport Revocation, Denial or Limitation for Seriously Delinquent Tax Debts (2/1/17)

A new article has good information on the state of § 7345, here, dealing with potential State Department denial, revocation or limitation of use of the U.S. passport. Jim Buttonow, Ten things you need to know about passport restrictions on delinquent taxpayers (TaxProToday 1/31/17), here.  I previously wrote on the subject, New Transportation Bill, FAST, Adds Some Tax Provisions (Federal Tax Crimes Blog 12/7/15; 2/27/16), here, but I strongly recommend the TaxProToday article.

I offer some excerpts for new information since my blog, but encourage readers to read the entire article:
4. What will happen to the person who owes seriously delinquent tax debt? 
Starting in late March, the IRS will send Letter 508C, Notice of certification of your seriously delinquent federal tax debt to the State Department, to the taxpayer’s last-known address to notify the taxpayer that they are certified as owing seriously delinquent tax debt. At that time, the IRS will also send the certification to the State Department. 
* * * * 
6. Can taxpayers just pay the balance to under $50,000 to remove the certification and passport restrictions? 
The short answer from the IRS is no. Just reducing the amount under $50,000 will not decertify the taxpayer. The key is to get into good standing – that is, individuals certified as having seriously delinquent tax debt must either pay the entire balance or set up a payment agreement with the IRS. 
Two quick collection alternatives come to mind. First, the quickest way to remove passport restrictions could be paying the balance to under $50,000 and setting up a streamlined installment agreement for the rest (payment terms up to 72 months).
Second, taxpayers who owe between $50,000 and $100,000 can use the new IRS expedited installment agreement process to quickly get in good standing with the IRS. Taxpayers who owe more than $100,000 can pay the balance down to under that amount to get into this special 84-month payment plan. Otherwise, taxpayers who owe more than $100,000 or need terms longer than 84 months must file detailed collection information statements (Form 433 series) with the IRS and wait for the IRS to approve their installment agreement. This process can take months, which will also mean extended passport restrictions until the IRS approves the agreement and decertifies the taxpayer. 
7. Can taxpayers appeal their seriously delinquent tax debt certification? 
Under Section 7345(e), taxpayers can appeal their status in federal district court or U.S. Tax Court. But the taxpayers’ passports will remain restricted while they appeal.
Expect further legislative and administrative remedies to allow taxpayers to contest their status at the same time they learn about passport restrictions. One reason we should see these additional remedies is the uncertainty of international mail. Many taxpayers may not be receiving IRS letters about their unpaid taxes. In fact, they may first find out about their passport restrictions when they try to travel to another country or return to the United States. A 2015 Treasury Inspector General for Tax Administration study reported that the IRS had no idea whether U.S. taxpayers living abroad had received the 855,000 notices it sent. 
For taxpayers who are surprised by their passport restrictions when they try to travel, the best way to expedite travel is to obtain a quick installment agreement. 
8. What if taxpayers don’t think they owe the tax?

IRS LB&I "Campaigns" to Focus on OVDP Declines-Withdrawals, Among Other Issues (2/1/17)

The IRS has announced that LB&I "is taking a new approach to tax compliance, with a series of 13 campaigns aimed at cracking down on tax evasion."  Michael Cohn, IRS rolls out new compliance campaigns for large businesses and international taxpayers (AccountingToday 1/31/17), here.  The campaigns are directed to several issues of tax compliance that the IRS will focus on.  The article lists them all, but the one particularly relevant to the subjects previously covered on Federal Tax Crimes Blog is:
OVDP Declines-Withdrawals Campaign 
The Offshore Voluntary Disclosure Program allows U.S. taxpayers to voluntarily resolve past non-compliance related to unreported offshore income and failure to file foreign information returns. The campaign addresses OVDP applicants who applied for pre-clearance into the program but were either denied access to OVDP or withdrew from the program of their own accord. The IRS will address continued noncompliance through a variety of treatment streams including examination.
The article has the other categories, so interested readers should go there.

The article notes in concluding:
These campaigns represent the first wave of LB&I's issue-based compliance work. The IRS said more campaigns will continue to be identified, approved and launched in the coming months. 
JAT Comment:  I am not sure what this adds to the current process.  I had only two OVDP submissions that were  not completed -- one denied and one withdrawn.  Both were audited with good results -- in the denied case, ended up with same result as OVDP (which is what we wanted in the first place) and the other got a great result (which we anticipated in withdrawing).  So my limited anecdotal experience is that the IRS was attending to this category anyway.  But, perhaps the IRS had fallen behind or some were slipping through the cracks.

Monday, January 30, 2017

Third Circuit Reverses District Court on Application of Work-Product Privilege for Email to Return Preparer (1/30/17)

In In re: Grand Jury Matter #3, ___ F.3d ___, 2017 U.S. App. LEXIS 1498 (3d Cir. 2017), here, the Third Circuit in an unusual procedural setting reversed a district court holding that an email turned over by an accountant pursuant to a grand jury subpoena was subject to the crime-fraud exception to the work-product privilege.

The Unusual Procedural Setting - Appeal by Target Rather than Party Compelled Not Mooted by Indictment Because Grand Jury Ongoing.

The grand jury was investigating an individual, pseudonymed as John Doe, for potential fraud.  (The precise nature of the potential fraud is set forth in the opinion, but not important for this summary.)  Part of the fraud related to ownership of a company.  In the events leading to the possible fraud, Doe claimed he did not own the company.  However, Doe had previously filed tax returns indicating that he did own the company.  Doe received an email from his attorney indicating steps needed "to correct his records so that they reflect that the business associate, not Doe, owned Company A since 2008."  Doe forwarded this email to his accountant.  The accountant retained the email in his files.  Doe never amended the returns or otherwise corrected the information as suggested in the email.

Pursuant to a grand jury subpoena, Doe's accountant delivered his copy of the email to the grand jury.  The accountant's attorney shortly thereafter asked that it be returned as it was within the work-product privilege (the attorney said it was not for legal advice).  Based on the request, the government attorney refrained form presenting it to the grand jury and asked the District Court for permission to present it to the grand jury, on the ground that Doe had waived the privilege (presumably by showing it to the accountant).  The District Court ruled that (i) the attorney-client privilege did not apply because Doe did not send the email to the accountant to obtain legal advice, (ii) the work-product privilege (called, or miscalled, the attorney work-product privilege) did apply because the accountant was not an adversary, and (iii) the crime-fraud exception applied.

Immediately after the order, Doe appealed.  While the appeal was pending, the email was shown to the grand jury.  And, while the appeal was pending, the grand jury indicted Doe and then issued a superseding indictment.

Through the appeal and rehearing up until the decision discussed here, the grand jury continued its investigation of Doe with the possibility of returning a superseding or even a new indictment.

The Third Circuit first issued an opinion holding that it lacked jurisdiction.  Doe sought rehearing.  This opinion is the opinion on rehearing.

So, the first question addressed in the new opinion was whether the Court of Appeals had jurisdiction.  The panel held that the Court of Appeals did have jurisdiction.  Although not a perfect fit, the Court of Appeals applied by analogy the rule in Perlman v. United States, 247 U.S. 7 (1918), that permits a party other than the party compelled (here the party compelled was the accountant) to contest an order to comply with a grand jury subpoena where the party compelled may not have sufficient interest to follow the normal procedure of refusing to comply and suffering a contempt order in order to obtain appellate review.

Sunday, January 29, 2017

Fourth Circuit Rejects Two-Inference Jury Instructions in Criminal Case (1/29/17)

In United States v. Blankenship, 2017 U.S. App. LEXIS 961 (4th Cir. 2017), here, the Court sustained Blankenship's conviction for conspiring to violate federal mine safety laws and regulations.  Although not a tax case, the case is noteworthy here because of the Court's holding that the two-inference jury instruction, although inappropriate, was harmless error.

So, what is the two inference instruction?  The two inference instruction given was that if the jury "view[ed] the evidence in the case as reasonably permitting either of two conclusions—one of innocence, the other of guilt—the jury should, of course, adopt the conclusion of innocence."

In United States v. Khan, 821 F.2d 90, 92 (2d Cir. 1987), here, cited by the Fourth Circuit in Blankenship, the Second Circuit held (bold-face supplied by JAT):
In our view, trial judges should not include any variation of the "two-inference" language in their charge. See Sand, Siffert, Loughlin Reiss, Modern Federal Jury Instructions ¶ 4.01, at 4-5 (1986). The "two-inference" language, that if the jury believes the evidence permits either the inference of innocence or of guilt, the jury should adopt the former, is obviously correct as far as it goes. But such an instruction by implication suggests that a preponderance of the evidence standard is relevant, when it is not. Moreover, the instruction does not go far enough. It instructs the jury on how to decide when the evidence of guilt or innocence is evenly balanced, but says nothing on how to decide when the inference of guilt is stronger than the inference of innocence but no strong enough to be beyond a reasonable doubt. In a charge that properly instructs the jury on reasonable doubt, the "two-inference" language "adds nothing." Id., ¶ 4.01, at 4-9. Therefore, we want to make clear now that the "two-inference" language should not be used because, standing alone, such language may mislead a jury into thinking that the government's burden is somehow less than proof beyond a reasonable doubt.n1 In addition, we expect the government, as well as defense counsel, to assume responsibility for bringing these comments to the attention of trial judges.
   n1 This opinion was circulated to all active judges of the Court prior to filing.
Following that lead, in Blankenship, the Court said (bold-face supplied by JAT):
Although this Court has not had an opportunity to pass judgment on the two-inference instruction, our Sister Circuits disfavor it. See, e.g., United States v. Dowlin, 408 F.3d 647, 666 (10th Cir. 2005); United States v. Jacobs, 44 F.3d 1219, 1226 (3d Cir. 1995); Khan, 821 F.2d at 93. In Khan, the Second Circuit explained that, although correct as a matter of law, the two-inference instruction "by implication suggests that a preponderance of the evidence standard is relevant, when it is not. . . . It instructs the jury on how to decide when the evidence of guilt or innocence is evenly balanced, but says nothing on how to decide when the inference of guilt is stronger than the inference of innocence but no[t] strong enough to be beyond a reasonable  doubt." 821 F.2d at 93. We agree and therefore direct our district courts not to use the two-inference instruction going forward.
JAT Comments:

Saturday, January 28, 2017

Sixth Circuit on Deliberate / Willful Ignorance Instruction as Harmless Error (1/28/17)

I posted a few days ago on willful blindness.  The Willful Blindness Concept -- What Does It Do? (Federal Tax Crimes Blog 1/23/17), here.  I had not yet picked up the Sixth Circuit decision in United States v. Asker, 2017 U.S. App. LEXIS 1057 (6th Cir.  2017) (unpublished), so I offer it here.  The defendant, Happy Asker, was convicted for conspiracy, tax perjury and tax obstruction.

Asker was a successful pizza chain owner and franchiser entrepeneur.  The DEA began a drug investigation based on credible tip information of individuals associated with the operation.  Based on the investigation, the DEA obtained a wiretap authorization.  The wiretap resulted in additional information that was used to obtain a search warrant.  The grand jury thereafter charged Asker and some associates  with income tax offenses related to income and payroll taxes for which Asker was ultimately convicted.

Asker raise several  arguments on appeal.  I deal only with the argument related to the willful blindness instruction.  The Court sets up the background (bold-face supplied by JAT):
As trial neared its conclusion, the government submitted proposed jury instructions that included an instruction for "Deliberate Ignorance." The instruction, which was modeled after the Sixth Circuit Pattern Criminal Jury Instruction § 2.09, read as follows: 
(1) Next, I want to explain something about proving a defendant's knowledge. 
(2) No one can avoid responsibility for a crime by deliberately ignoring the obvious. If you are convinced that the defendant deliberately ignored a high probability that the returns at issue that the defendant filed or aided or assisted in filing were false, then you may find that the defendant knew that they were false. 
(3) But to find this, you must be convinced beyond a reasonable doubt that the defendant was aware of a high probability that the claims were false, fictitious or fraudulent, and that the defendant deliberately closed his eyes to what was obvious. Carelessness, or negligence, or foolishness on his part is not the same as knowledge, and is not enough to convict. This, of course, is all for you to decide. 
Asker objected to the giving of this instruction, arguing that the evidence in the record failed to satisfy the "factual predicate" necessary for the instruction to be given. Asker believed that the record reflected that his attention was focused elsewhere in the business during the perpetration of this tax fraud, not that he had "purposely contrived to avoid learning the truth." Nonetheless, Asker conceded that Sixth Circuit law suggested that the giving of such an instruction even where the factual predicate has not been met can only amount to harmless error. 
Judge Hood took Asker's objection under advisement, but ultimately gave the contested instruction to the jury. She, too, acknowledged that the giving of this instruction could only amount to harmless error in the Sixth Circuit, but further reasoned: 
[I]t can be given . . . when the Defendant claims lack of guilty knowledge or when the facts and evidence support an inference of deliberate ignorance[,] and there are some statements made during the course of the Government's proofs and by the Defendant that I think may raise a question about whether or not there was some inference of deliberate ignorance. 
I think it is also appropriate where the evidence establishes that the Defendant deliberately chose not to inform himself of critical facts[,] and the [c]ourt may find based on the Defendant's testimony that he didn't look to critical facts relative to the amount of his income and whether or not there was unreported gross receipts and underreporting of payroll paid by cash. 
In addition, I think whether the Government can prove willfulness or whether the Defendant's actions constitute deliberate ignorance are all for the jury to decide in this particular case. 
Consequently, Judge Hood gave the proposed instruction to the jury. At the conclusion of the nine-day trial, and with this proposed instruction in hand, the jury convicted Asker on all counts. The district court sentenced him to fifty months of imprisonment, and he brings this appeal.
The Sixth Circuit then discussed and rejected his argument as follows:

Wednesday, January 25, 2017

Contempt Sanctions Continued in GJ Subpoena for Required Records (1/25/17)

In In re Various Grand Jury Subpoenas, 2017 U.S. Dist. LEXIS 9697 (SD NY 2017), here, the Court continues a prior sanction order against a person, identified as Subject E.  In 2014, Subject E previously responded with two document totaling 3 pages.  The Government subsequently obtained a number of documents from the Principality of Liechtenstein that indicated the production was seriously deficient.

The Court, Judge Pauley of SDNY, recounts the relevant facts as follows:
More specifically, after reviewing translations of the Liechtenstein Documents, the Government discovered that Subject E was identified as a beneficiary of the Subject E Foundation (the "Foundation"), n1 an allegedly sham foundation organized in Liechtenstein that maintained several foreign bank accounts and had, on several occasions, transferred tens of thousands of dollars directly to Subject E. (Mot. at 13.) The Government also unearthed documents signed by Subject E indicating that she was the "beneficial owner" of the Foundation (Lenow Decl. Ex. DD at 15), possessed all of its assets (Lenow Decl. Ex. DD at 10), and had authorized changes to the listed beneficiaries (Lenow Decl. Ex. DD at 7). Finally, the Liechtenstein Documents provided information regarding several of the Foundation's foreign accounts, each of which held in excess of several million. (Lenow Decl. Ex. DD at 94, 165, 178.)
   n1 The Foundation was organized as a "stiftung," a legal entity akin to a trust under the laws of Liechtenstein. Stiftungs have been used regularly by U.S. taxpayers to conceal bank accounts overseas. Financial advisors and/or legal advisors are appointed and directed to act on behalf of the stiftungs for the benefit of the taxpayers. (Mot. at 6.) In essence, by holding bank accounts in its own name, the stiftung conceals any connection between taxpayers and their foreign assets.
While many of the Liechtenstein Documents were responsive to the 2010 Subpoena, Subject E had produced none of them. Based on the discrepancy between Subject E's bare production of three pages and the mass of materials comprising the Liechtenstein Documents, the Government concluded that she failed to comply with the 2010 Subpoena. Additionally, the Government contends that Subject E failed to produce records relating to other foreign accounts—records from a supposed joint account at Credit Suisse that Subject E shared with her former husband, and additional records from the previously referenced HSBC France account. (See Mot. at 23-24.)
The Government moved for additional contempt sanctions.

The Court's opinion addresses the following defenses asserted by Subject E:

1.  What does it mean to be in "care, custody or control" for the compulsion of the subpoena?

Tuesday, January 24, 2017

9th JDS Authorized for Sovereign Management & Legal LTD Information (1/24/17)

DOJ Tax announced here the unsealing of a district court order, here, to serve a John Doe Summons on "to serve a John Doe summons on Michael Behr of Bozeman, Montana, seeking information about U.S. taxpayers who may hold offshore accounts established by Sovereign Management & Legal LTD (SML), a Panamanian entity."  The order seeks "records of U.S. taxpayers who, during the years 2005 to 2016, had been issued a 'Sovereign Gold Card' debit card that could be used to access the funds in those accounts in such a manner as to evade their obligations under internal revenue laws."

Key excerpts:
U.S. taxpayers seeking to hide their offshore assets often utilize the services of offshore trusts and corporate service providers that open bank accounts, create corporations and other entities, and serve as nominee officers. In its petition seeking the issuance of the John Doe summons, the United States alleges that SML advertises various “packages” to allow taxpayers to hide their assets offshore. These packages include corporations owned by other entities (to include fake charitable foundations), all held in the name of nominee officers provided by SML. SML then opens bank accounts for these entities and provides debit cards in the name of the nominee to the taxpayer. By using such cards, taxpayers seek to access their offshore funds without revealing their identities. U.S. District Court Judge Brian Morris found that there is a reasonable basis for believing that U.S. taxpayers may be using the Sovereign Gold Card to violate federal tax laws. 
* * * * 
This case is part of an ongoing effort to stop U.S. taxpayers from using offshore financial accounts as a way to evade federal tax laws. The Justice Department previously obtained a similar order from the U.S. District Court for the Southern District of New York, authorizing issuance of eight separate John Doe summonses on bank and other entities for information related to SML and its customers in the United States. The evidence submitted in this request to issue a John Doe summons was built in part on information provided in response to the earlier summons.
SML was already on the IRS list titled "Foreign Financial Institutions or Facilitators, here.  It is #14 on the list as Sovereign Management & Legal, Ltd., its predecessors, subsidiaries, and affiliates (effective 12/19/14).    The list is maintained so that U.S. taxpayers joining OVDP will know that their OVDP penalty cost is 50 percent rather than 27.5 percent of the high amount.

There is no indication why so many separate JDS were required (8 in SDNY and this 1 in Montana).

I did a quick google search on Sovereign Management & Legal LTD and found this web site for a company (LTD) of the same name:   I don't know whether it is the same or a related company, but seems to be the type of company that, if it has U.S. persons as customers for the services it offers, might draw the interest of the IRS.  And, if this company is related, then it is within the scope of the SML listing on the IRS web page.

Compromises of Nonrestitution Assessments with Restitution Assessments Unpaid (1/24/17)

This blog entry will principally serve as a reminder to readers on the subject of tax assessments related to tax restitution awarded at sentencing in criminal cases. Readers recall that in 2010 Congress enacted several Code provisions the net effect of which is (i) to permit the IRS to assess immediately any restitution in a criminal case awarded for unpaid taxes and (ii) prohibit the person (usually a taxpayer) from contesting the amount of the tax restitution assessment.  (At the bottom of this blog entry, I list the Code Sections involved and various blog entries on the subject.)

I call readers attention to a very good article, Robert Horwitz, The Tax Court Issues a Reminder that You Cannot Compromise Criminal Tax Restitution (Tax Litigator Blog 1/15/16), here, which discusses Rebuck v. Commissioner, T.C. Memo. 2016-3, here.  Rebuck and 10 other co-defendants were convicted of tax conspiracy under 18 U.S.C. § 371, here, for promoting offshore and domestic trust packages falsely representing that the trusts permitted taxpayers to avoid paying tax.  The sentencing court imposed tax restitution of $16,339,199, jointly and severally, on the 11 convicted defendants.  The restitution amount appears to be for then outstanding unpaid taxes avoided by taxpayers purchasing the trust schemes. (I make this assumption since it would be odd to have joint and several liabilities for the defendants' own personal income taxes.)  After the restitution award, the outstanding restitution amount would be reduced as payments against those liabilities were made either by the taxpayers themselves or by the defendants.  (It may be that the IRS did not seek payment from the taxpayers, either because their statutes had closed or for other reasons.)  The IRS then assessed the tax restitution amount against Rebuck and presumably against the other co-defendants.

In 2009, the IRS assessed against Rebuck civil penalties under § 6700, in the aggregate amount of $130,000.  Rebuck and  the IRS subsequently entered an installment agreement to pay these § 6700 penalties.

Rebuck was also assessed his own income taxes for a number of years, including some of the same years involved in the tax restitution assessment (which, to remind readers, was for other persons' income tax liabilities).  Rebuck then commenced a CDP appeal with regard to his income taxes, but asked that the § 6700 penalty assessments subject to the installment agreement be considered along with his own income tax assessments in an offer in compromise based on doubt as to collectibility.   Rebuck did not ask relief in the CDP proceeding for the tax restitution assessments, apparently because relief for those assessments comes, if at all, from the sentencing court.  During the CDP process, the § 6700 penalty installment agreement was reversed for default.  The IRS rejected the offer in compromise based on the IRS's position that such offers were not available for the same years in which there is unpaid tax restitution assessments.  The IRS did suggest that, without resolving the unpaid restitution, the IRS could enter a Partial Payment Installment Agreement ("PPIA") with respect to the income tax and § 6700 penalties for $540 per month.  Rebuck declined.

The taxpayer raised two issues:
(1) whether the IRS abused its discretion in rejecting petitioner’s OIC because it did not include full payment of petitioner’s criminal tax restitution; and (2) whether the Appeals officer abused his discretion in proposing to petitioner a PPIA of $540 per month.
The only issue I address in this blog entry is the first issue.  The Court's analysis of the first issue is short, so I quote it in full (one footnote omitted):

Monday, January 23, 2017

The Willful Blindness Concept -- What Does It Do? (1/23/17)

Willfulness is a statutory element of most Title 26 tax crimes.  E.g., § 7201 (tax evasion), here.  Willfulness is the "voluntary, intentional violation of a known legal duty." Cheek v. United States, 498 U.S. 192, 201 (1991).  Willfulness has been described as "specific intent to violate a known legal duty."  Safeco Ins. Company of America v. Burr, 551 U.S. 47, 58 n. 9 (2007) (citing Cheek).  For example, a typical jury instruction on the willfully element for tax evasion is (Seventh Circuit Pattern Jury Instructions, here, quoted in DOJ Tax CTM Government Proposed Jury Inst. No. 26.7201-18, here):
The term “willfully” means the voluntary and intentional violation of a known legal duty, in other words, acting with the specific intent to avoid paying a tax imposed by the income tax laws or to avoid assessment of a tax that it was the legal duty of the defendant to pay to the government, and that the defendant knew it was his/her legal duty to pay.
The question I address today is the role of the concept of willful blindness with respect to the willfulness element of tax crimes.  I have discussed this issue before and list at the bottom of this blog entry some of my more significant prior blog entries dealing with some aspect of this issue.  I want to address it again today because I continue to be concerned about the issue and would appreciate feedback from readers either by comment or by email (

First, readers should be aware that the willful blindness concept goes by several names -- willful ignorance, deliberate blindness, deliberate ignorance, conscious avoidance, etc.  I use the term willful blindness in the current blog.   (For more on the issue of the use of various terms and my decision to use willful blindness in this blog entry, see the note at the end of this blog entry.)  The key for present purposes to make sure that the use of the term willful blindness is not in any way conflated with the willfulness element of the tax crime.

In Global-Tech Appliances, Inc. v. SEB S.A., 563 U.S. 754 (2011), here, a civil patent case, the Supreme Court found support for applying a similar concept in the civil patent infringement area.  In dicta, the Court said (footnotes omitted):
The doctrine of willful blindness is well established in criminal law. Many criminal statutes require proof that a defendant acted knowingly or willfully, and courts applying the doctrine of willful blindness hold that defendants cannot escape the reach of these statutes  by deliberately shielding themselves from clear evidence of [*2069]  critical facts that are strongly suggested by the circumstances. The traditional rationale for this doctrine is that defendants who behave in this manner are just as culpable as those who have actual knowledge. Edwards, The Criminal Degrees of Knowledge, 17 Mod. L. Rev. 294, 302 (1954) (hereinafter Edwards) (observing on the basis of English authorities that “up to the present day, no real doubt has been cast on the proposition that [willful blindness] is as culpable as actual knowledge”). It is also said that persons who know enough to blind themselves to direct proof of critical facts in effect have actual knowledge of those facts. See United States v. Jewell, 532 F.2d 697, 700 (CA9 1976) (en banc). 
This Court's opinion more than a century ago in Spurr v. United States,  174 U.S. 728, 19 S. Ct. 812, 43 L. Ed. 1150 (1899), while not using the term “willful blindness,” endorsed a similar concept. The case involved a criminal statute that prohibited a bank officer from “willfully” certifying a check drawn against insufficient funds. We said that a willful violation would occur “if the [bank] officer purposely keeps himself in ignorance of whether the drawer has money in the bank.” Id., at 735, 19 S. Ct. 812, 43 L. Ed. 1150. Following our decision in Spurr, several federal prosecutions in the first half of the 20th century invoked the doctrine of willful blindness. Later, a 1962 proposed draft of the Model Penal Code, which has since become official, attempted to incorporate the doctrine by defining “knowledge of the existence of a particular fact” to include a situation in which “a person is aware of a high probability of [the fact's] existence, unless he actually believes that it does not exist.” ALI, Model Penal Code § 2.02(7) (Proposed Official Draft 1962). Our Court has used the Code's definition as a guide in analyzing whether certain statutory presumptions of knowledge comported with due process. See Turner v. United States, 396 U.S. 398, 416-417, 90 S. Ct. 642, 24 L. Ed. 2d 610 (1970); Leary v. United States, 395 U.S. 6, 46-47, and n. 93, 89 S. Ct. 1532, 23 L. Ed. 2d 57 (1969). And every Court of Appeals--with the possible exception of the District of Columbia Circuit, see n. 9, infra--has fully embraced willful blindness, applying the doctrine to a wide range of criminal statutes.