Saturday, October 22, 2016

IRS Release on Offshore Compliance Requirements, with Statistics on Recent Initiatives (10/22/16)

Offshore Voluntary Compliance Efforts Top $10 Billion; More Than 100,000 Taxpayers Come Back into Compliance, IR-2016-137, Oct. 21, 2016, here.  Excerpts:
As international compliance efforts pass several new milestones, the Internal Revenue Service reminds U.S. taxpayers with undisclosed offshore accounts that they should use existing paths to come into full compliance with their federal tax obligations. 
Updated data shows 55,800 taxpayers have come into the Offshore Voluntary Disclosure Program (OVDP) to resolve their tax obligations, paying more than $9.9 billion in taxes, interest and penalties since 2009. In addition, another 48,000 taxpayers have made use of separate streamlined procedures to correct prior non-willful omissions and meet their federal tax obligations, paying approximately $450 million in taxes, interest and penalties. 
“The IRS has passed several major milestones in our offshore efforts, collecting a combined $10 billion with 100,000 taxpayers coming back into compliance,” said IRS Commissioner John Koskinen. “As we continue to receive more information on foreign accounts, people’s ability to avoid detection becomes harder and harder. The IRS continues to urge those people with international tax issues to come forward to meet their tax obligations.”
The release then continues with a description of the options for coming into compliance.

Opinion on Effect of Parallel Civil Proceedings, Statute of Limitations on Tax Crimes, and Kassouf (Again) (10/22/16)

In United States v. Ogbazion, 2016 U.S. Dist. LEXIS 143358 (SD OH 2016), here, the Court addressed several claims by the defendant for dismissal of counts in his criminal indictment.  The defendant was a principal in a national franchisor of tax preparation services.  The IRS first proceeded against the franchise operation with an IRS civil investigation and an ensuring civil case to enjoin the business operations.  The defendant apparently cooperated to some extent in that investigation and case, including giving a deposition.  In that case, the court entered a civil injunction and order of permanent injunction against the defendants in the case.  Approximately one and one-half years after the civil case was fully resolved, the indictment was filed.  The criminal indictment charged the defendant with
engaging in a corrupt endeavor to obstruct and impede the due administration of the Internal Revenue Code, in violation of 26 U.S.C. § 7212(a) (Count 1); conspiracy to commit wire fraud, in violation of 18 U.S.C. § 1349 (Count 2); [*2]  wire fraud, in violation of 18 U.S.C. § 1343 (Counts 3-7); money laundering, in violation of 18 U.S.C. § 1956(a)(1)(A)(ii) (Counts 8-13); bank fraud, in violation of 18 U.S.C. § 1344 (Count 14); tax evasion, in violation of 26 U.S.C. § 7201 (Count 15); and failure to collect and pay over payroll tax, in violation of 26 U.S.C. § 7202 (Counts 16-23). (Doc. 6).
The defendant moved to dismiss the criminal indictment and certain counts therein.  Briefly, the motion sought the following relief:

1. Parallel Civil Proceeding; Dismissal of the indictment or certain counts or, in the alternative, suppression of evidence.  This gravemen of the claims here is that the civil case was improperly used to obtain evidence for the criminal case.  Basically, after detailed consideration of the facts,
the Court finds that the civil proceedings were not a ruse undertaken to obtain evidence for the criminal prosecution and, further, finds that the Government's representations and actions throughout the civil investigation did not constitute trickery or deceit. The Government's conduct throughout the course of the parallel proceedings did not amount to bad faith such that the use of evidence obtained through Defendant's voluntary cooperation would amount to a constitutional violation or a "departure from the proper administration of criminal justice." See Kordel, 397 U.S. at 11-13 [United States v. Kordel, 397 U.S. 1 (1970)]. Accordingly, neither the dismissal of the Indictment in its entirety, nor the suppression of evidence, is warranted.
For more on parallel proceedings, see Parallel Civil Proceedings and Criminal Proceedings - The Balancing Act (Federal Tax Crimes Blog 10/12/12), here; and Assertion of the Fifth Amendment by a Taxpayer in a Tax Court Deficiency Redetermination Proceeding (Federal Tax Crimes Blog 12/21/15), here.

Order Denying Suppression -- Grand Jury Target or Subject and Miranda Issues (10/22/16)

In United  States v. Cason, 2016 U.S. Dist. LEXIS 142434 (D WV 2016), here, the Court denied Cason's motion to suppress evidence of Cason's statements in an interview of Cason by IRS agents serving a search warrant.  Cason denied that he was testified that he was a subject of the grand jury investigation and that he was given the appropriate Miranda warnings.  The Agents testified differently, and their contemporaneous memorandum of the interview to that effect was entered.  The Magistrate conducting the hearing on the motion had made the key findings:
• After knocking on Cason's front door, the agents waited on his porch for three to four minutes while Cason's daughters left for school, hardly indicating custody or restriction;
• The agents tone did not change once they entered the home;
• The agents twice informed Cason that he was the subject of an investigation, that he was free to consult with an attorney, and that he was free to end the interview at any time n4;
   n4 Agent Gandee recounted this fact in his memorandum of interview, which he gave Cason the opportunity to review a few weeks later. The memorandum clearly indicated that Cason had been "informed he [was] the subject of a criminal investigation, that he had the right to legal counsel, and that he did not have to answer any of [their] questions." After reviewing the memorandum together with his legal counsel, Cason noted that there were no "major" inaccuracies.
   In his objections to the R&R, Cason argues that he "should have testified as to the nature and completeness of his review of the Memorandum, as should have [his attorney]," and that "[n]onetheless, [his] brief review of the Memorandum weeks later does not change any of the facts recited above." (Dkt. No. 39 at 9). Yet, Cason fails to explain how a memorandum wrongfully indicating that he had been informed of such highly pertinent facts and rights, of which both he and his attorney were fully aware, somehow contained no "major" inaccuracies.
• The agents did not restrict Cason's freedom of movement;
• When the agents requested that Cason ride with them to his office, he willingly agreed;
• While at his office, Cason was free to take phone calls and to leave the room, which he did multiple times, indicating that he freely ended his conversation with the agents at multiple points;
• While at his office, Cason was free to consult with counsel, and to end the interview, which he ultimately did; and
• Nothing in the record indicated that Cason was threatened or coerced.
In the opinion linked above, the district court affirmed those findings which controlled the disposition of the motion to suppress.

I write to address two issues -- the grand jury "subject" issue and the Miranda warnings issue.

Grand Jury Subject Issue

Sixth Circuit Affirms Tax Protestor Conviction, Rejecting Evidence and Reasonable Doubt Arguments (10/22/16)

In United States v. Myr, 2016 U.S. App. LEXIS 18963 (6th Cir. 2016) (unpublished), here, the Court affirmed the Myr's conviction for "count of tax evasion, 26 U.S.C. § 7201, and four counts of willful failure to file individual income tax returns, 26 U.S.C. § 7203."  Myr was "a self-employed auto mechanic with a professed interest in tax-protester theories."
Myr ran an auto-repair and brokerage business specializing in rare and exotic cars from a farm in Port Huron, Michigan. When he was not fixing luxury vehicles, Myr spent his free time studying the federal income tax laws. His reading list included the Internal Revenue Code as well as various tax-protester pamphlets and books which opined that the income tax applied to corporations but was "voluntary" or "unconstitutional" as applied to individuals.
Myr put those theories into action as he was earning substantial income from his business.  As in most supposed tax protestor cases, the ultimate issue in a criminal case is whether the taxpayer (or nontaxpayer) really believed that he was not subject to tax or was just hiding behind supposed tax protestor theories to disguise his "willful" conduct.  This is the so-called cheek willfulness issue, named for Cheek v. United States, 498 U.S. 192 (1991).  For many protestors, the objective elements of the charged crime -- e.g., for failure to file, he did not file -- is the only potential defense.  Myr's defense at trial was that the Government's proof did not meet the mens rea element beyond a reasonable doubt.  The jury rejected the defense.

Apparently realizing a frontal attack on the jury's holding was a loser, the issues Myr raised on appeal were (i) that the district court erred in excluding from evidence a civil complaint filed by DOJ Tax against the return preparer for the corporate return (the suggestion being that the preparer did the dastardly deed of preparing the false return and not the taxpayer); and (ii) the jury improperly instructed the jury on beyond a reasonable doubt.  The latter issue although applying to all elements of the crime is in the facts of these types of cases directed at the mens rea element, since the other objective elements of the crime are proved beyond a reasonable doubt.

So, let's look at the issues he did raise and the Court of Appeals rejected.

Exclusion of the Complaint Against the Tax Preparer
Myr uses the district court's decision to exclude the Pope complaint from evidence as the basis for two challenges to his conviction. The first asks us to consider the decision as an evidentiary matter under Rule 401. The second asks us to address it as a constitutional issue. Although these challenges differ somewhat conceptually, both rely on common propositions: that the complaint supported Myr's defense and its exclusion possibly affected the trial's outcome. We find no reversible error under either theory because the complaint offered—if anything—equivocal evidence on an insignificant point. 
* * * * 
As an initial matter, it is important to keep in mind that Myr was not charged with filing a false return. Rather, he was charged with willfully evading the tax obligation assessed in May 2007 for tax years 2000 to 2003. The On Track tax return—which was prepared by Pope, underreported the $610,000 proceeds from the engine sale, and took unjustified deductions—was simply one piece of evidence offered in support of the Government's theory that Myr hid assets to avoid paying the amounts assessed for back taxes and penalties. The On Track return had no relevance to the charges that Myr willfully failed to file his individual income tax returns, and thus the Pope complaint also had no relevance to those charges. 
Assuming arguendo that the Pope complaint would have decreased the evidentiary value of the On Track return in relation to the evasion charge, it is clear that the complaint's exclusion, even if erroneous, was harmless. Myr equates the complaint's exclusion to a total inability to offer a defense on willfulness. See United States v. Canty, 499 F.3d 729, 734 (7th Cir. 2007) (holding that the decision to forbid defendant in a counterfeiting trial from even testifying about his motive for printing fake bills was harmful when intent was the only issue at trial). At multiple points in his briefing, he asserts that the complaint was "critically important" or related "directly" to his intent. And evidence going to intent should particularly matter here, he reminds us, because lack of intent was his only defense. See id. 
But these bare assertions belie what actually happened at trial. The jury heard Myr's intent defense in detail and received instructions on his theory. They also heard him testify about his role in the filing of On Track's return—an event that played a minor role in the proceedings. The indictment alleged three intentionally evasive acts as part of the tax-evasion charge: (1) conveying his property to a nominee entity after notice that the IRS intended to place a tax lien on it; (2); using nominee entities, including On Track and Hosea Holdings, to conceal his income and assets; and (3) dealing in cash. The allegations surrounding the Ferrari transaction—the use of nominee entities, the dealing in gold coins, the bank-account withdrawals with checks written to cash, and, yes, the On Track return—merely evidenced a single act that satisfied the evading charge. The government presented overwhelming evidence on all three alleged intentionally evasive acts. And it specifically offered voluminous evidence that Myr violated a known legal duty—to pay his tax debt—in bad faith: it presented multiple direct communications where-by the IRS informed Myr that, indeed, he was liable for the federal income tax. 
The falsity of the On Track tax return was offered by the government as one piece of evidence showing that Myr had used nominees to conceal income, itself one of three core allegations underlying the single tax-evasion charge. Had the complaint been admitted into evidence, it would have been—at most—evidence that minimally rebutted minor evidence related to the tax-evasion charge. On this record, admitting the complaint into evidence would not have affected the verdict on this or any other charge.
The Reasonable Doubt Issue

Friday, October 21, 2016

Former Tax Court Judge Kroupa Enters Plea to Conspiracy Count (10/21/16; 10/25/16)

Note:  The following includes substantial revisions through 5:00pm on 10/25/16 after I received the plea agreement.

On October 21, 2016, former Tax Court Judge Diane Kroupa entered a guilty plea to Count 1 of the indictment.  The Plea Agreement is here; the transcript of the plea hearing is here (thanks to Keith Fogg, Former Tax Court Judge Kroupa Pleads Guilty to Conspiracy (Procedurally Taxing Blog 10/24/16), here).  (Just a reminder that most readers of this blog should also be following the Procedurally Taxing Blog.)

Kroupa pled to Count 1, the conspiracy count of the indictment, here.  That count is a defraud conspiracy (referred to in a tax context as a Klein conspiracy, named for the leading case, United States v. Klein, 247 F.2d 908 (2d Cir. 1957), cert. denied 355 U.S. 924 (1958)).  The conspiracy is charged under 18 USC § 371, here, which is a five-year felony.  The relevant language of the statute is:
If two or more persons conspire * * * to defraud the United States, or any agency thereof in any manner or for any purpose, and one or more of such persons do any act to effect the object of the conspiracy, each shall be fined under this title or imprisoned not more than five years, or both.
Her husband, Robert E. Fackler, pled to tax obstruction, § 7212(a), here, which is a three year felony (and has even in earlier, simpler times been described as a one person conspiracy because the conduct punished, other than the conspiracy, is basically the same as the defraud / Klein conspiracy).  See Update on Judge Kroupa Prosecution - Her Husband Pleads Guilty (Federal Tax Crimes Blog 9/26/16; 9/27/16), here.  In his plea agreement, Fackler admitted participating in a conspiracy.  The other person in the conspiracy was his wife, Kroupa.

The single five-year conspiracy to which Kroupa pled should fully vindicate the tax imperatives involved.  Under the agreed Sentencing Guidelines calculation (discussed below) produces a sentencing range substantially below the maximum allowed by the five year count of conviction.  (As is often stated in the presentence investigative report (discussed below), based upon the sentencing guidelines calculations, convictions under the other counts dismissed under the plea agreement would not generate a higher guideline range.)

The following are key items of the plea agreement and the sentencing hearing transcript.

1.  The factual basis for the plea is in paragraph 2 of the plea agreement starting on p. 1 of the plea agreement.  The factual basis of the plea is also covered at sentencing hearings.  The presentation at the sentencing hearing begins on p. 27 of the transcript.  The factual basis includes the machinations to falsely report the components of tax liability on the return and the obstructions, including false representations in the 2012 audit.

2.  The agreed total tax loss is "approximately" $455,257 (federal) and $57,784 (state).  (See chart on plea agreement p. 10.)  The tax loss is the principal driver of the sentencing guidelines calculations.  The tax loss for guidelines purposes includes the state tax loss.  Hence, the total tax loss for guidelines purposes is $513,041.  She benefits from the recent guidelines amendments to the tax loss table which moved the the upper end bracket from $500,000 to $550,000 (otherwise, under the old guidelines, her base offense level would have been 2 levels higher and her resulting sentencing level would be two higher; generally the current guidelines apply unless the guidelines in effect at the time of the offense conduct are more favorable, which they are not here).

3. The calculations (beginning on p. 10 of the plea agreement; beginning on p. 20 of the transcript) are:
18 Base Offense Level (because tax loss is around $500,000).
+2 for abuse of public trust
+2 obstruction of justice
-3 acceptance of responsibility
Yields 19 Sentencing Level
The sentencing history is I.

The sentencing table range for 19:  30-37 months imprisonment

The Guidelines calculation is just advisory; the Court can "vary" upward or downward based on other sentencing considerations in 18 USC § 3553, here.  See United States v. Booker, 543 U.S. 220  (2005).  Upward variances in tax crimes cases are rare, so I would not expect an upward variance here.  I would expect for her attorneys to strive mightily for a significant downward variance.  I have no crystal ball on that downward variance, however.  But, if there is no downward variance, my hunch -- pure speculation -- that sentencing will be a the low end of the range.

3.  The sentencing will occur after the Probation Office provides a presentence investigative report (acronmyned or initialized to PIR or PSR) and the parties provide the comments or objections to the report, along with such other sentencing factors as appropriate.

Thursday, October 20, 2016

Is Stupid a Defense to a Tax Crime? (10/20/16)

DOJ Tax announced, here, the following indictment of a Utah resident for "one count of attempting to evade the payment of his federal income taxes for the years 2005, 2006, 2007 and 2010, and one count of corruptly endeavoring to impair and impede the due administration of the internal revenue laws."  The indictment is here.  Here is the key excerpt from the press release:

According to the allegations in the indictment, in March 2012, Louis Hansen, presented a check to the Internal Revenue Service (IRS) in the amount of $342,699.41 that was drawn on a closed bank account in an attempt to pay taxes, penalties and interest that he owed for tax years 2005, 2006, 2007 and 2010.  He also caused a copy of this check to be mailed to an IRS revenue officer, as well as a signed certified letter claiming that he had submitted the check to discharge his debt.  The indictment further alleges that in June 2012, Hansen presented four additional checks to the IRS drawn on a different closed bank account in an attempt to have funds credited to his IRS tax account.  Each check was in the amount of $425,000.  According to the indictment, at the time these four checks were presented to the IRS, Hansen owed more than $240,000 in taxes for the years 2005, 2006, 2007, 2010 and 2011.
JAT Comment:

1.  I presume that this guy, if convicted, will not be subject to the sophisticated means sentencing specific offense characteristic requiring a 2-level upward adjustment to the base offense level..

2.  I just wonder if this defendant could argue that he did not have the specific Cheek willfulness intent required for tax evasion or the intent required for tax obstruction (sometimes equated to Cheek willfulness) because what he did could not have evaded the tax or materially obstructed the IRS.

Former IRS CI Special Agent Indicted for Tax Perjury and Other Crimes, Including Obstruction (10/20/16)

The DOJ announced, here, an indictment (actually superseding indictment), here, of a former IRS criminal investigation agent (excerpted):
A federal grand jury in Sacramento, California returned an indictment [superseding indictment, here] today charging a former Internal Revenue Service–Criminal Investigation (IRS-CI) special agent with six counts of filing false income tax returns, one count of corruptly endeavoring to obstruct the internal revenue laws, one count of theft of government money and one count of destroying records during a federal investigation * * * *.   
According to the allegations in the indictment, Alena Aleykina, of Sacramento, a certified public accountant and former IRS-CI special agent, filed false individual income tax returns for the years 2009, 2010 and 2011, on which she claimed false filing statutes, dependents, deductions and losses and tax returns on behalf of two trusts.  The indictment further alleges that, between 2008 and 2013, Aleykina attempted to obstruct the IRS by preparing false tax returns for herself, family members, trusts and partnerships and by making false statements to representatives of the Department of the Treasury and attempted to obstruct a federal investigation by destroying evidence on a government computer.  Aleykina is also charged with fraudulently causing the IRS to issue IRS Tuition Assistance Reimbursement payments to her. 
If convicted, Aleykina faces a statutory maximum sentence of three years in prison on each count of filing a false tax return and corruptly endeavoring to obstruct the internal revenue laws, 10 years in prison for the charge of theft of government money and 20 years in prison for the destruction of evidence charge, as well as a period of supervised release and monetary penalties.
JAT Comments:

1. The indictment was filed in the Eastern District of California but only the U.S. Attorney for ND CA is on the press release.  The Superseding Indictment identifies several Government attorneys other than the USA.  The lead government attorney (per the docket sheet) is Thomas Newton, described on the indictment as "Special Attorney to the United States Attorney General"  In the docket sheet, he is identified as Thomas M. Newton with the U.S. Attorney's office in San Jose, CA.  I did some quick Google searches on "Special Attorney to the United States Attorney General," but could not discern from hurried reading of the hits precisely what that means.  I presume that the use of out of district U.S. Attorney and other attorneys is because the defendant may have worked with AUSAs in ED CA as a special agent assigned to grand jury investigations or in other capacities.

2. The original indictment, here, charging only theft of public money relating to the fraudulently causing the IRS to issue an IRS Tuition Assistance Reimbursement payment was filed on 7/28/16.  The original indictment was sealed and unsealed today, along with the filing of the superseding indictment.

3.  According to the superseding indictment, Aleykina "worked for Internal Revenue Service Criminal Investigation ("IRS-CI") as a Special Agent from approximately 2006 to 2014."

4.  The allegations are:

  • Counts One through Six  - tax perjury, subscribing to a false return (§ 7206(1), here)
  • Count Seven - tax obstruction (§ 7212(a), here)
  • Count Eight - theft of public money or property (18 USC § 641, here)
  • Count Nine - destruction alteration or falsification of records in Federal Investigation (18 USC § 1519, here)

Saturday, October 15, 2016

Second Circuit Rejects Aberrational Sixth Circuit Opinion in Kassouf on Requirements for § 7212(a) Tax Obstruction (10/15/16)

In United States v. Marinello, ___ F.3d ___, 2016 U.S. App. LEXIS 18498 (2d Cir. 2016), here, the Second Circuit held, as it states in its summary at the beginning of the opinion:
Defendant-appellant Carlo J. Marinello, II appeals from an amended judgment of conviction entered against him on July 14, 2015 by the United States District Court for the Western District of New York (William M. Skretny, J.). One of the counts of conviction alleged a violation of 26 U.S.C. § 7212(a)'s "omnibus clause," which criminally penalizes one who "corruptly . . . obstructs or impedes, or endeavors to obstruct or impede, the due administration of" the Internal Revenue Code in ways not addressed by other specific provisions of the statute. The district court denied Marinello's motion for an acquittal or a new trial on this count, concluding that the government was not required to establish a pending Internal Revenue Service action and a defendant's knowledge thereof as part of its burden of proof. We agree and conclude that these criteria are not offense elements under the omnibus clause. We further conclude that a violation of this provision may be predicated on an omission, and that the district court did not procedurally err in determining Marinello's sentence. The judgment of the district court is therefore.
The opinion is a worthy read.  I will just provide a few comments that may help the reader decide whether to read the entire opinion (44 pages in the slip opinion format):

1. In terms of federal tax crimes, the principal issue resolved in the case is that United States v. Kassouf, 144 F.3d 952 (6th Cir. 1998) is not binding or, more importantly, even persuasive authority for its holding that the actor's obstruction of an active IRS investigation is required.  The issue exists only because of the common statutory language in 26 USC 7212(a), the tax obstructions statute, here, and 18 USC 1503, here, the obstruction statute titled "Influencing or injuring officer or juror generally."  The issue arises because the language of the two statutory provisions is very similar; indeed, it is fair to say that the language of the tax obstruction statute was drawn from or, at least inspired, by the obstruction statute in 18 USC § 1503.

I think that presenting the statutory text will be helpful in developing the principal issue (I present the portions of the text or the relevant statutes I think relevant to the issue):

§ 7212(a) provides (in relevant part):
Whoever corruptly * * * * endeavors to intimidate or impede any officer or employee of the United States acting in an official capacity under this title, or in any other way corruptly * * * obstructs or impedes, or endeavors to obstruct or impede, the due administration of this title, shall, upon conviction thereof, be [punished].  
18 USC § 1503 provides (in relevant part):
Whoever corruptly, or by threats or force, * * * * endeavors to influence, intimidate, or impede any grand or petit juror, or officer in or of any court of the United States * * * in the discharge of his duty * * * or corruptly or by threats or force, * * * * obstructs, or impedes, or endeavors to influence, obstruct, or impede, the due administration of justice, shall be punished * * *.
In United States v. Aguilar, 515 U.S. 593 (1995), the Supreme Court interpreted § 1503 to require that the actor, the defendant in the case, know of a pending grand jury or other investigation that his actions obstructed.  In United States v. Kassouf, 144 F.3d 952 (6th Cir. 1998), interpreting from the common language in the two provisions (§ 7212(a) was drawn from 18 USC § 1503), the Sixth Circuit interpreted § 7212(a) to require that the defendant know of a pending IRS investigation that his actions were intended to obstruct.  If there were no pending IRS investigation, the taxpayer could not have requisite intent to obstruct.

Friday, October 7, 2016

Another Plea to Offshore Account Tax Crimes (10/7/16)

DOJ Tax announced here a new guilty plea, here, to tax obstruction, § 7206(1), a three year felony.  Excerpts:
Bernhard Rumbold, a resident of Clarkston, Michigan, and owner of several mining-related businesses in Michigan and Ontario, Canada, pleaded guilty to filing a false amended 2008 individual income tax return.  According to the information and the plea agreement, in approximately November 2004, Rumbold transferred more than approximately $2.6 million from his parents’ trust account, which he managed, into a bank account at Credit Suisse Bank AG in Switzerland.  Rumbold arranged for the Credit Suisse bank account to be in the name of Wisdom City Limited, a Hong Kong company whose sole purpose was to be the named account holder on foreign bank accounts.  Rumbold, who was the beneficial owner of the account, transferred control of the account to a relative in December 2008.    
On his 2006 through 2008 individual income tax returns, Rumbold falsely stated that he had no interest in a foreign financial account, and failed to report the interest, dividends and capital gains generated by the Swiss bank account as income.  In October 2010, Rumbold signed and filed an amended 2008 individual income tax return in which he again failed to report the interest, dividends and capital gains generated by the Swiss bank account as income. 
* * * * 
The plea agreement requires Rumbold to pay restitution for his unpaid tax liabilities for the years 2006 through 2008.  [There is no indication that he will be required to pay an FBAR penalty.]
I note in this regard that the DOJ Tax's advertised policies for plea deals are (DOJ Tax CTM 5.01[1] Offense of Conviction — The Major Count Policy, here):  (i) "tax evasion counts (26 U.S.C. § 7201) take priority over other substantive tax counts;" and "the count charged in the indictment or information that carries the longest prison sentence is the major count."

Thursday, October 6, 2016

Creative But Unsuccessful 2255 Proceeding with Interesting, but Unproven, Allegations (10/6/16)

I offer today an opinion in a Hail Mary habeas corpus-like proceeding under 28 USC 2255 after conviction and appeal.  United States v. Bertram, 2016 U.S. Dist. LEXIS 126906 (D DC 2016)  The opinion is here and the petition addressed in the opinion is here.  These proceedings are very common, particularly federal prisoners who have some time on their hands and can proceed pro se. Bertram proceeded pro se, but the petition reflects a lot of research and creativity.  The opinion offers no new law, but, although the petition was unsuccessful, the opinion does have some interesting aspects.  Readers should look for the following:

1. The petitioner argues that his conviction should be reversed because he was selectively prosecuted.  The claim was that
he was the victim of selective prosecution because his work during President Obama's administration was for the GOP.1 See, e.g., Def.'s Mem. at 8. In support of this claim, defendant provides the court with seven anecdotal examples of prominent Democratic figures who allegedly committed similar offenses but were not prosecuted. See Def.'s Mem. at 5-6. He also provides statistics in an effort to show that the felony charged in this case - 26 U.S.C. § 7202 - is "infrequently charged." See U.S. Sentencing Comm'n Guidelines Manual, Ex. 1 to Def.'s Mot. [Dkt. # 24-1]; see also Emp't Tax Evasion Statistical Data, Ex. 10 to Def.'s Mot. [Dkt. # 24-1] at 50 (providing statistics showing the relative infrequency of prosecution). Finally, he contends that the prosecution was permeated with "bad intent" because an IRS agent allegedly inquired as to the political motivations behind defendant's work. See Aff. of Kevin Duane Bertram, Ex. 14 to Def.'s Mot. [Dkt. # 24-2] ¶¶ 10-15.
For his statistical presentation, see the petition linked above.

2.   The petitioner made the standard 2255 claim of ineffective assistance of counsel.  His particular focus was upon Cono Namorato, here, a giant of the tax crimes bar, who had represented him during the criminal investigation but did not enter an appearance for him in the criminal case or represent him in the plea agreement and plea hearing.  The petitioner argued that nevertheless Namorato had failed in his due diligence, infected by a conflict of interest by his nomination to be AAG of the Tax Division while representing him.  The Court''s resolution of the conflict issue is:
B. Defendant has not shown that Mr. Namorato had a conflict of interest. 
Defendant complains that Mr. Namorato was nominated by President Obama to serve as Assistant Attorney General for the Tax Division of the Justice Department while he was still engaged as a member of the defense team. See Def.'s Mem. at 12-13. Defendant insists "that a lawyer attempting to become the head prosecutor of an agency would not want to risk his chance of that desired position by zealously representing his defendant-client who is at odds with the agency." Id. at 13. Whatever truth there might be to this statement as a general principle, the record does not indicate that the nomination posed an actual conflict in this case — in which, it bears repeating, another attorney was counsel of record — or that defendant was adversely affected in any way. n14
   n14 Defendant seems determined to deflect responsibility for his own wrongdoing onto Mr. Namorato, but the last time he invoked Mr. Namorato's name in these proceedings, he sought to benefit from the attorney's recent nomination and cloak himself in his lawyer's fame and reputation. In the sentencing memorandum filed on April 29, 2015, defendant informed the Court that at one time, defendant had retained Caplin & Drysdale to represent him in the criminal investigation. Def.'s Mem. in Aid of Sentencing [Dkt. # 12] at 11. After touting Mr. Namorato's qualifications and specifically mentioning his recent nomination to the Tax Division post, defendant stated that he "believed that his attorneys were working to resolve the outstanding tax liabilities and that he should delay filing all outstanding Form 941s and pay all tax liabilities as part of a comprehensive settlement." Id. at 11 & n.4. The next day, the defense filed a motion for leave to file a "corrected" memorandum that would "clarify" certain statements made in the memorandum, Mot. for Leave to File Corrected Def.'s Mem. in Aid of Sentencing [Dkt. # 14], and in the revised version, this reference to Mr. Namorato was completely excised. See Def.'s Mem. in Aid of Sentencing at 11. 
"Conflict of interest claims ...are a 'specific genre' of ineffective assistance of counsel claim." United States v. Wright, 745 F.3d 1231, 1233, 409 U.S. App. D.C. 63 (D.C. Cir. 2014), quoting United States v. Bruce, 89 F.3d 886, 893, 319 U.S. App. D.C. 245 (D.C. Cir. 1996). "[A] defendant who asserts a conflict of interest habeas proceedings generally must demonstrate only that an actual conflict of interest adversely affected his lawyer's performance." Id., citing Cuyler v. Sullivan, 446 U.S. 335, 348, 100 S. Ct. 1708, 64 L. Ed. 2d 333 (1980). "An actual conflict of interest exists where a lawyer is 'required to make a choice advancing his own . . . interests to the detriment of his client's interest.'" United States v. Thomas, 114 F.3d 228, 252, 324 U.S. App. D.C. 374 (D.C. Cir. 1997), quoting Bruce, 89 F.3d at 893. If a defendant can show an actual conflict that adversely affected his attorney's performance, he "typically need not demonstrate the second prong of the Strickland test — that the lawyer's deficient performance affected the outcome of the case." Wright, 745 F.3d at 1233, citing Cuyler, 446 U.S. at 349-50. 
First, the timeline does not support defendant's claim. Defendant retained Mr. Namorato and Caplin & Drysdale to deal with the tax matter on May 30, 2012. Aff. of Kevin Duane Bertram, Ex. 17 to Def's Mot. [Dkt. # 24-2] ¶ 1; see also Engagement Letter, Ex. 1 to Def.'s Reply [Dkt. # 27] at 1. Defendant avers that "sometime in 2013," he noticed a "marked decrease in Mr. Namorato's performance." Ex. 17 to Def.'s Mot. ¶ 6. According to defendant's own account, he "became so concerned about Mr. Namorato's decrease in representation, that [he] retained attorneys Thomas Perrelli and Jessie Liu of the firm Jenner & Block to assist [him]." Id. ¶ 13. Defendant retained Jenner & Block on February 10, 2014. Ex. 1 to Def.'s Suppl. The prosecutor sent the formal [*36]  plea offer letter to Ms. Liu on January 13, 2015, and she entered her appearance in the case at the arraignment and plea hearing on February 10, 2015. She was also the lone counsel for the sentencing on May 5, 2015. n15
   n15 Caplin & Drysdale formally concluded its representation of the defendant in a letter dated June 8, 2015. Ex. 2 to Def.'s Reply [Dkt. # 27].  

Tuesday, October 4, 2016

District Court Rejects Suppression for Interview of Target of Grand Jury Investigation Without Notifying His Counsel (10/4/16)

In United States v. Sabean, 2016 U.S. Dist. LEXIS 136658 (D ME 2016), here, the district court declined to suppress made by the target of a grand jury investigation to IRS agents when the agents knew that he was represented by an attorney on tax matters without going through the the attorney.  The facts are unusual, so I will just summarize the key facts.

First, the indictment, here, that was ultimately handed down in October 2015 charged tax evasion (Counts 1-5) and Unlawful Distribution of Controlled Substances (Counts 6-57).  I don't know what inferences might be drawn from the tax charged appearing first in the indictment.

Now, turning to the key facts.

The grand jury investigation in which Dr. Sabean was targeted had commenced prior to January 15, 2014.  The scope of the grand jury investigation as of that date is not stated.  IRS agents had been assigned to assist the grand jury.  From the tax charges in the ultimate indictment and the presence of IRS agents, it might be inferred that tax crimes were among those being considered by the grand jury.  But, that is an inference and not a compelled inference because IRS agents are used in some nontax grand jury investigations.  At any rate, whether the scope of the grand jury investigation included tax crimes at the key times here relevant does not appear to be important.

The interview in question was conducted on January 29, 2014 by IRS agents assigned to assist the grand jury.  This is the key interview in issue.

Before that interview, on January 15, 2014, the agents had appeared at the residence of owners of a bookkeeping company used by Dr. Sabean,  to serve a grand jury subpoena.  They advised the owners of the company that "they were conducting an investigation of Dr. Sabean and had questions for the Kuhls [the owners of the bookkeeping service] in this regard." They then interviewed the Kuhls for about 2 hours.  No indication came up in the interview that Dr. Sabean was represented on his tax matters.  They left with some boxes of documents and requested that the Kuhls not advise Dr. Sabean of the visit and grand jury subpoena.

The IRS agents determined on preliminary review of the documents that some of the documents might be subject to privilege as to Dr. Sabean with an attorney named Sheehan, a tax attorney, who had engaged a private investigator on Dr. Sabean's tax matters.  As typical, an AUSA taint team was created to review the documents potentially subject to privilege.

On January 21, 2014, the IRS agents conducted another interview of the Kuhls and obtained additional documents  responsive to the subpoena.  They discussed the attorney and the hiring of the investigator.  In obtaining the additional documents, the IRS agents asked the Kuhls to segregate out items potentially privileged so that they could then be submitted to the taint team.

On January 29, 2014, the IRS agents went to Dr. Sabean's offices to interview him.  The opinion suggests, but does not state, that Dr. Sabean was not aware of the investigation until the agents showed up.  The agents did not advise Dr. Sabean of any rights he might have.  Readers of this blog know that IRS agents conducting CI administrative investigations are required by the IRM to give the noncustodial statement of rights.  See the IRM provisions quoted and linked at the bottom of this blog entry.  The reason was that they were not conducting a CI administrative investigation.  The AUSA had advised them that they were not subject to that requirement because they were conducting the interview pursuant to a grand jury investigation.  (See IRM provision cited and quoted at the end of this blog entry.)

The attorney then advised the agents that further communications should be through him rather than through Dr. Sabean.

In ensuing criminal case then brought by indictment in October 2015, Dr. Sabean moved to suppress any statements he had made in the January 29 interview.  The issue was whether the agents' interview of Dr. Sabean on January 29, 2014 had violated the Maine Rules of Professional Conduct, made potentially applicable by the Citizens Protection Act, 28 U.S.C. § 530B(a) (referred to as the “McDade Amendment”).  The applicable Maine Rule 4.2 was:

Thursday, September 29, 2016

Update on Judge Kroupa Prosecution - Kroupa's Change of Plea Hearing Set for 10/21/16 (9/29/16)

The docket entries in the prosecution of former Tax Court Judge Diane Kroupa indicate:
09/29/2016 49 TEXT ONLY ENTRY: NOTICE OF SETTING CHANGE OF PLEA as to Diane L Kroupa. Change of Plea Hearing set for 10/21/2016 01:30 PM in Courtroom 3B (STP) before Judge Wilhelmina M. Wright. (TJB) (Entered: 09/29/2016)
This usually signals a change of plea to guilty to a more limited set of charges than in the indictment, but the prosecutors, as in the case of her husband, will likely want a plea to one or more counts that will permit the judge to impose a sentence consistent with the Sentencing Guidelines range driven principally by the tax loss.  We just have to wait and see.  As best I see it, she had little choice given what her husband admitted in his plea agreement and apparently would have testified to in the trial proceeding, which along with other evidence presumably available would have been quite damning.  See Update on Judge Kroupa Prosecution - Her Husband Pleads Guilty (Federal Tax Crimes Blog 9/26/16; 9/27/16), here.

Sentencing has not yet occurred for Fackler and Kroupa and will likely not occur for either for several months as the Probation Officer prepares the Presentence Report ("PSR") presenting facts and analysis regarding potential sentencing options for the judge.  The big unknown for both of them is what the judge will do after he gets the PSR plus such supplemental sentencing evidence and arguments as the parties present in response to the PSR.  I speculate that the sentencing judge may perceive that a below Guidelines sentence, particularly in her case, may not be warranted without an incredible showing of some sort as yet unknown.  Still, the sentencing judge has substantial discretion under Booker to vary downward from the Guidelines range.

Wednesday, September 28, 2016

Another Plea to Offshore Account Tax Crimes (9/28/16; 9/29/16)

DOJ Tax announced here a new information, here, and guilty plea today.  Excerpts:
New York City Resident Pleads Guilty to Using Sham Foreign Entity and Secret Foreign Accounts in Switzerland and Israel to Evade Taxes 
Used Secret Foreign Accounts to Hide over $7 Million in Funds and Evade Taxes
A New York City man pleaded guilty today to a criminal information charging him with tax evasion for tax years 2003 through 2005 and 2007 through 2010, announced Principal Deputy Assistant Attorney General Caroline D. Ciraolo, head of the Justice Department’s Tax Division, and U.S. Attorney Robert L. Capers of the Eastern District of New York. 
“Mr. Hager concealed over $7.3 million in undeclared foreign accounts in Switzerland and Israel and used a sham British Virgin Island entity in order to evade over $650,000 in U.S. taxes,” said Principal Deputy Assistant Attorney General Ciraolo. “As this case demonstrates, the Department and the Internal Revenue Service (IRS), together with our global partners, are successfully working on a daily basis to locate such undeclared accounts, identify those responsible and hold them accountable.” 
According to information presented in court, between 1987 through 2011, Markus Hager, 68, utilized a series of undeclared foreign financial accounts to evade his individual income taxes by concealing assets and income from the IRS in those accounts.  Between 1987 and 2008, Hager maintained several undeclared accounts at UBS, including two numbered accounts and an account held in the name of Contactus Partnership Associated S.A. (Contactus), a sham British Virgin Islands entity.  By the close of 2004, the value of Hager’s undeclared accounts at UBS exceeded $7.3 million.  
Hager closed the UBS accounts in 2008 and transferred the assets to a newly opened account at Clariden Leu, which he controlled and held in the name of Contactus.  Shortly thereafter, Hager closed the Contactus account at Clariden Leu and transferred the assets to a newly opened account held in the name of the same sham entity at a different Swiss bank.  Hager caused that Swiss bank to falsely record Hager’s Belgian cousin as the owner of the assets in the Contactus account.  Approximately six months later, Hager closed the Contactus account at the Swiss bank and transferred the assets to an account at a bank in Israel that Hager caused to be opened in the name of a different Belgian cousin.
From 2005 to 2011, Hager also controlled an undeclared account at Bank Leumi in Israel, which he falsely held under the name of a relative who was not a U.S. person and who resided outside the United States.  In February 2010, after obtaining an Israeli Identity Card, Hager opened an account in his own name at Bank Leumi in Israel but falsely reported that he lived in the United Kingdom and signed a document, under the penalties of perjury, on which he falsely claimed that he was not a U.S. citizen.
According to the information filed, Hager repatriated funds from his undeclared foreign financial accounts by having an attorney draft a sham loan agreement between himself and Contactus and wiring funds from some of his undeclared foreign financial accounts into his attorney’s escrow account. 
According to the information filed, Hager filed false federal and New York State income tax returns on which he failed to report the income from his foreign financial accounts and failed to pay tax on that income.  According to the information, Hager evaded approximately $652,580 in federal taxes for tax years 2003 through 2005 and 2007 through 2010.  Hager also failed to report his ownership and control of his foreign financial accounts to the Department of the Treasury on a Report of Foreign Bank and Financial Account even though an accounting firm had informed Hager of his obligation to do so and advised him of the civil and criminal penalties he could suffer for the failure to do so. 
* * * * 
Sentencing has been set for ­Jan. 4, 2017.  Hager faces a statutory maximum sentence of five years in prison, as well as a term of supervised release and monetary penalties.  According to the plea agreement, Hager agreed to pay restitution to the IRS.
JAT Comments (as amended 9/29/15 12:00pm):

1.  The information to which Hager pled, here, shows a single count.  After reciting the facts, the single charge is
15. The allegations contained in paragraphs one through 14 are realleged and incorporated as if fully set forth in this paragraph. 
16. On or about and between January 1, 2003, and April 20, 2012, both dates being approximate and inclusive, within the Eastern District of New York and elsewhere, the defendant MARKUS HAGER did knowingly and willfully attempt to evade and defeat substantial income tax due and owing by him to the United States of America for the tax years 2003 through 2005 and 2007 through 2010, to wit: approximately $652,580, by various means, including, among others, concealing assets and income in foreign financial accounts, concealing assets and income in the names of nominees and sham corporations, filing and causing to be filed U.S. Individual Income Tax Returns, Forms 1040, for himself and his spouse with the IRS for the calendar years 2003 through 2005 and 2007 through 2010, that falsely and fraudulently omitted income generated by assets concealed in foreign financial accounts, and causing false statements to be made to an Internal Revenue Service Revenue Agent.
Note that Hager is subject to a single 5 year penalty that the multi-year charge of tax evasion was packed into a single count.  Most often, when evasion charges are made for multiple years, each year is charged as a separate count.  I have seen multi-year single counts of evasion, but there is usually a story behind that type of charge.  One thing that strikes me is the statute of limitations.  Are statute issues avoided by packing all years into a single count where some of the years might be outside the statute?  More likely, his actions, such as false statements to a revenue agent, after the years that appear to be outside the 6-year statute of limitations (e.g., 2003) may have refreshed the statute of limitations so that all years would be within the statute of limitations.  See United States v. Beacon Brass Co., Inc., 344 U.S. 43 (1952).  Of course, the single five-year count will likely permit the judge sufficient leeway under the Sentencing Guidelines to impose an appropriate Guidelines sentence, whether or not a Booker variance is made.

2. There is no indication that the FBAR penalty has been resolved by the plea.  (Caveat, I don't have the plea agreement; that plea agreement apparently is not available through Pacer, so I have made a request to the prosecutor for it; whether I will get it is another thing.)  However, the press release does state one high amount of over $7.3 million, which would mean that the usual plea requirement of a 50% penalty would require a $3.65 penalty and that would be the penalty normally required for the willful FBAR penalty in audits pursuant to the recent guidance now contained in the IRM.  But, that is the penalty normally applied and the IRS can go higher.  His conduct is pretty egregious, but I think his lawyers would have pressed as a condition of the plea agreement that the penalty not exceed 50% of the high amount.  I will also update this comment based on subsequent information.

Monday, September 26, 2016

Update on Judge Kroupa Prosecution - Her Husband Pleads Guilty (9/26/16; 9/27/16)

This blog entry has been substantially revised and enhanced on 9/27/26 around 4:15pm because of my obtaining and analyzying the plea agreement, here.  I have therefore eliminated some preliminary discussion, such as preliminary sentencing calculations, in the original draft because the plea agreement provides more detail that I discuss below.

I have blogged previously on the indictment of former U.S. Tax Court Judge Diane Kroupa and her husband.  See Former US Tax Court Judge Kroupa Indicted (Federal Tax Crimes Blog 4/4/16; 4/5/16), here; and Former Tax Court Judge Kroupa Indictment - Part I - Conspiracy (Federal Tax Crimes Blog 4/5/16; 4/6/16), here. The change of plea minutes indicates that the husband has now pled guilty to Count 6 of the indictment which charges tax obstruction, § 7212(a), here.  The plea agreement is here; the indictment is here.

I picked up this news item from the Tax Prof Blog entry, Husband Of Retired Tax Court Judge Pleads Guilty To Taking $1 Million In Fraudulent Deductions (Tax Prof Blog 9/26/16), here, which linked to a newspaper report, Paul Walsh, Twin Cities husband of ex-tax judge admits duping IRS; charges against her pending (Star Tribune 9/26/16), here.

The plea is solely to Count 6 of the indictment, which alleges tax obstruction, I don't have the plea colloquy so don't know what Fackler said other than guilty to the plea of tax obstruction, § 7212(a), here. Count 6.  Often in plea agreements and colloquies, the defendant is required to or does admit his pattern of conduct which would include closely related offenses.  In this case, there is a parallel between tax obstruction in § 7212(a) and the defraud / Klein conspiracy in 18 USC § 371, here.  The defraud / Klein conspiracy is generally formulated as a conspiracy to impair or impede the lawful functions of the IRS, which is basically what tax obstruction is (and, for that reason, tax obstruction has been described as a one person defraud / Klein conspiracy).  The key difference is that tax obstruction can be charged without regard to whether there was a conspiracy and has a 3-year maximum sentence rather than 5-years for the defraud / Klein conspiracy.  As noted below, in the plea agreement, Fackler does admit to conspiratorial conduct with Kroupa.  The conspiracy was charged, but he does not agree to plea to the conspiracy count.

Here are my excerpts from and comments on the plea agreement, here, which I have just obtained from Pacer.

Suffice it to say as the introduction that Fackler does admit facts constituting the crime of conspiracy, although he does not formally plead to the conspiracy count.  What this means is that Fackler is admitting criminal conduct in which former Judge Tax Court Kroupa was a co-conspirator and, in the course of the conspiratorial conduct, committed other crimes (such as evasion, obstruction, etc.)

First, the plea agreement provides the following factual bases supporting the plea to Count 6:
2. Factual Basis. The Defendant admits the following facts and, where the defendant lacks direct knowledge, the defendant acknowledges that the. government has sufficient evidence to establish beyond a reasonable doubt the following facts, all of which constitute the factual basis for this plea. Furthermore, on the basis of the following facts, the defendant stipulates to having committed the additional offense of conspiring with Diane Kroupa to defraud the United States for the purpose of impeding, impairing, obstructing, and defeating the lawful functions of the Intemal Revenue Service of the United States Department of the Treasury in the ascertainment and computation of income taxes in violation of Title 18, United States Code, Sections 371 and 2: 
Conspiracy to Evade the Ascertainmentand Computation of Income Taxes 
Beginning no later. than in or about 2002 and continuing through 2012, the defendant conspired with his wife, Diane Kroupa, to impede, impair, and obstruct the Internal Revenue Service from correctly ascertaining and computing their joint income
* * * * 
FACKLER did not withhold or otherwise save any of the income he earned through Grassroots Consulting in 2002 to make tax payments to the Internal Revenue Service. As a result, in or about early 2003, when FACKLER and Kroupa began to organize their tax information, they did not have sufficient funds to pay their tax obligations for the previous year. When FACKLER and Kroupa discussed this problem, Kroupa told FACKLER that it was "his problem" and that FACKLER needed to fmd as many deductions as possible. FACKLER understood that Kroupa was instructing him to include personal expenses on Grassroots Consulting's Schedule C as business expenses in order to reduce their joint tax burden. FACKLER collected numerous personal expenses paid through his credit cards and Grassroots Consulting's bank account, and included them along with his legitimate business deductions on a spreadsheet that purported to summarize ·his Schedule C business expenses. Kroupa collected additional personal expenses from their joint bank account, and hand wrote them onto the spreadsheet FACKLER prepared. FACKLER and Kroupa then input the total expense figures-which included numerous personal expenses-onto a tax organizer that they provided to their tax preparer. FACKLER and Kroupa thereby significantly and fraudulently increased Grassroots Consulting's business expenses and reduced the amount of taxes they jointly owed to the IRS. 
Thereafter, each year from 2003 through 2011, FACKLER and Kroupa falsely reported a significant amount of personal expenses as Grassroots Consulting business deductions. For example, FACKLER and Kroupa fraudulently claimed the following personal expenses as Schedule C business expenses associated with the operation of Gras~roots Consulting: 
[Various and numbers enumerated personal expenses omitted] 
The method by which FACKLER and Kroupa compiled personal expenses to be inserted into Grassroots Consulting's Schedule C evolved as time went on. However, each year FACKLER generally reviewed business bank records, credit card records, and receipts to compile his business expenses, as well as numerous personal expenses, into a spreadsheet. The spreadsheet listed certain categories of expenses and the total amount of expenses purportedly incurred under each category. Kroupa typically prepared handwritten summaries of additional personal expenses from their joint personal bank account, and categorized them falsely according to Grassroots Consulting Schedule C's business expense categories. FACKLER either added the amoUnts from Kroupa's handwritten summaries to his spreadsheet and provided the totals to their tax preparer, or else provided the spreadsheet to Kroupa, who added personal expenses to the totals listed in FACKLER's spreadsheet and provided the combined amounts to their tax preparer. In some years, FACKLER and/or Kroupa wrote the inflated totals into a tax organizer that they then gave to their tax preparer, and in other years they simply provided the summary spreadsheet to the tax preparer. Neither FACKLER nor Kroupa revealed to the tax preparer that the amounts reflected in the spreadsheet and tax organizer included personal expenses disguised as business expenses. 
In total, from 2004 through 2010, the defendants fraudulently deducted at least $500,000 of personal expenses as purported Schedule C business expenses. As a result, the defendants caused the amount of adjusted gross income, taxable income, and total tax shown on their income tax returns to be falsely and significantly understated. 
Concealment of Reimbursed Expenses for Grassroots Consulting 
As part of the conspiracy, FACKLER also purposely caused the gross receipts attributable to Grassroots Consulting to be falsely understated by fraudulently deducting purported business expenses, such as travel and meals, for which F ACK.LER had previously received reimbursement from his clients. In total, FACKLER understated Grassroots Consulting's gross receipts by approximately $450,000. As a result, the defendants caused the amount of adjusted gross income, taxable income, and total tax shown on their income tax returns to be falsely understated. 
 Deduction of Personal Expenses as Unreimbursed Employee Expenses 
As part of the conspiracy, Kroupa falsely reported certain personal expenses as "Unreimbursed Employee Expenses" incurred in connection with her employment as a United States Tax Court Judge. For example, Kroupa fraudulently claimed the following personal expenses as Unreimbursed Employee Expenses:  
[Various and numbers enumerated personal expenses omitted] 
As a result, the defendants caused and attempted to cause the amount of taxable income and total tax shown on certain of their tax returns to be falsely understated.

Saturday, September 24, 2016

Faulty Tax Shelter Opinions and Appraisals and Resulting Civil Penalties (9/24/15)

Two recent cases highlight the role of the tax professionals' legal opinions in so-called tax shelters.  During the abusive tax shelter proliferation in the late 1990s and early 2000s, the linchpin to abusive tax shelters was tax professionals' opinion letters pronouncing that the tax benefits were "more likely than not" to be sustained if the IRS contested.  Those opinion letters -- being just tax professionals' opinions -- did not affect how courts would resolve the issue of whether the tax shelters worked.  They served solely to give the tax shelter "player" some basis to claim exemption from the penalties that might otherwise apply to aggressive tax reporting positions.  Relying on tax professionals' opinions might permit the taxpayers to claim § 6664(c)'s "reasonable cause" and "good faith" exception to the penalties in § 6664(c), here, or, possibly, a reduction in the penalty base for the substantial understatement penalty in § 6662(d), here (in an earlier iteration).  Many of the tax shelter players did not in the final analysis actually rely upon the promoted tax shelter professionals' opinions, but rather discretely had their own independent counsel advise them on the shelter.  As I understand it, many of these independent advisers gave roughly the following advice:  "No way the shelter will be sustained if contested, but at least the promoted tax professionals' opinions will give the taxpayers a pretty good shot at avoiding the penalty."  (Of course, for this to work, the taxpayer would have to successfully keep from the IRS or ultimately the courts, the substance of the independent adviser's opinion.)

I discussed United States v. Daugerdas, ___ F.3d ___, 2016 U.S. App. LEXIS 17219 (2d Cir. 2016), here, recently, Daugerdas Conviction and Sentencing Affirmed by Second Circuit Court of Appeals (Federal Tax Crimes Blog 9/21/16), here.  I quoted the part of the opinion relevant to today's discussion, but will present the quote again here:
As an essential part of the marketing of all the tax shelters, Daugerdas and his colleagues issued "more-likely-than-not" opinion letters to clients who purchased the shelters. Such letters state that "under current U.S. federal income tax law it is more likely than not that" the transactions comprising the shelters are legal and will have the effect sought by the clients. They protect clients from the IRS's imposition of a financial penalty in the event that the IRS [6]  does not permit the losses generated by the shelter to reduce the client's tax liability. Paralegals or attorneys who worked for Daugerdas generated these letters and Daugerdas often reviewed and signed them himself. The letters stated that the clients had knowledge of the particular transactions underlying the shelter and that the clients were entering into the shelter for non-tax business reasons. Multiple clients testified that they never made representations of knowledge to Daugerdas or his associates and that, in any event, these representations were false because the clients knew little or nothing about the underlying transactions and entered into the shelters only to reduce their tax liability.
Daugerdas' shelters were clearly of the abusive -- aka bullshit -- variety.  In essence, for the tax shelters Daugerdaus and his partners in crime hawked, the play in the shelter gave the taxpayer a shot at the audit lottery and some way potentially to mitigate the penalty damage if he did not win the audit lottery.  But, as it turns out, these shelters were so bad, that they did not really offer much in the way of penalty mitigation except, sometimes, through IRS amnesty programs.  In essence, most of the taxpayers -- certainly the more sophisticated taxpayers who had millions and millions of income to shelter -- got into the shelter on a wink and a nod, hoping for the best with some downside protection.

In Exelon Corp. v. Commissioner, 147 T.C. ___, No. 9 (2016), here, the taxpayer had $1.6 billion in gain that it perceived a need to shelter -- i.e., avoid paying tax on.  The transactions are convoluted (as in the case of many tax shelters where the convolutions masks lack of substance).  (The complexity of the opinion is suggested by the fact that the substantive discussion concludes on p. 161 of the slip opinion.)  The details of the transactions are not important for purposes of this blog, but they are variations on leveraged leases with their own acronym that is familiar to affionados of bullshit tax shelters -- SILOs (to be contrasted from related tax shelters called LILOs).  In the opinion, Judge Laro offers the following "Primer on Leveraged Leases, LILOs, and SILOs:"

Wednesday, September 21, 2016

Daugerdas Conviction and Sentencing Affirmed by Second Circuit Court of Appeals (9/21/16)

The Second Circuit affirmed today the conviction and sentencing of Paul M. Daugerdas, promoter en mass of bullshit tax shelters.  United States v. Daugerdas, ___ F.3d ___, 2016 U.S. App. LEXIS 17219 (2d Cir. 2016). The opinion is here.

The opinion, by Judge John M. Walker, starts with a summary of the convictions:
(1) one count of conspiracy to defraud the Internal Revenue Service (“IRS”) in violation of 18 U.S.C. § 371; see 26 U.S.C. § 7201 and 18 U.S.C. § 1343; (2) four counts of client tax evasion in violation of 26 U.S.C. § 7201 and 18 U.S.C. § 2; (3) one count of IRS obstruction in violation of 26 U.S.C. § 7212(a); and (4) one count of mail fraud in violation of 18 U.S.C. §§ 1341 and 1342.  
He was then "sentenced principally to 180 months’ imprisonment, three years’ supervised release, $164,737,500 in forfeiture, and $371,006,397 in restitution."

Then, he argued on appeal that
(I) the evidence was insufficient to support his convictions; (II) the indictment was constructively amended; (III) the indictment was duplicitous; (IV) the accumulation of errors at trial violated his due process right to a fair trial; (V) the district court’s supplemental instruction on the Annual Accounting Rule misled the jury; (VI) his sentence was procedurally and substantively unreasonable; and (VII) the government failed to establish the requisite nexus between his crimes and the property sought in forfeiture. 
The Court of Appeals rejects all arguments and affirms.

The opinion is 37 pages long and is fairly straight-forward.

Basically, Daugerdas designed and participated, directly and through others, in the implementation the some variation of the bullshit shelters based on an aggressiv, too aggressive, interpretation of various strategies promoted by prominent law and accounting firms in the late 1990s and early 2000s.   He did this for his or his firm's clients and also did some of them for himself to shelter the large amount of income that he was earning.  As the Court notes,
As an essential part of the marketing of all the tax shelters, Daugerdas and his colleagues issued “more‐likely‐than‐not” opinion letters to clients who purchased the shelters.  Such letters state that “under current U.S. federal income tax law it is more likely than not that” the transactions comprising the shelters are legal and will have the effect sought by the clients.  They protect clients from the IRS’s imposition of a financial penalty in the event that the IRS does not permit the losses generated by the shelter to reduce the client’s tax liability.    Paralegals or attorneys who worked for Daugerdas generated these letters and Daugerdas often reviewed and signed them himself.  The letters stated that the clients had knowledge of the particular transactions underlying the shelter and that the clients were entering into the shelter for non‐tax business reasons.  Multiple clients testified that they never made representations of knowledge to Daugerdas or his associates and that, in any event, these representations were false because the clients knew little or nothing about the underlying transactions and entered into the shelters only to reduce their tax liability.   
Because Daugerdas and his colleagues designed the transactions with a focus on their tax consequences rather than their profitability, they generally did not generate meaningful returns.  [Examples omitted]  Nevertheless, Daugerdas chose to proceed and even issued “more‐likely‐than‐not” opinion letters falsely stating that some of the transactions had a 15 reasonable possibility of producing a profit.  Moreover, the already‐ 16 low profit potential of all the shelters disappeared entirely when the 17 fees charged by J&G, BDO, and DB for the shelters were taken into account.  
Then, there was some backdating of transactions and documents to correct errors in the implementation.

Another Plea to Offshore Account Tax Crimes (9/21/16)

DOJ Tax announced here another conviction related to an offshore account.  The title of the press release is:  "DOJ Tax Press Release, Connecticut Man Pleads Guilty to Concealing Income from Undeclared Panamanian Bank Account."

Key Excerpts from the press release:
A Weston, Connecticut man, who used a Panamanian bank account to conceal over $1.5 million in income from the sale of duty-free alcohol and tobacco products pleaded guilty today to one count of conspiring to conceal assets and income from the Internal Revenue Service (IRS) * * * * 
Saul Hyatt, 53, pleaded guilty today before U.S. District Judge Freda L. Wolfson of the District of New Jersey to an Information charging him with conspiracy to conceal assets in an undeclared bank account held in Panama for his benefit.  According to documents filed with the court, Hyatt conspired with another individual in the United States and others to conceal his assets and income derived from the sale of duty-free alcohol and tobacco products.  To execute the scheme, Hyatt used a registered Panamanian corporation, Centennial Group, to buy and sell the duty-free products.  The alcohol shipped through a customs-bonded warehouse in the Foreign Trade Zone in Fort Lauderdale, Florida.  The tobacco products, Chinese-brand cigarettes sold under the names “Chung Hwa” and “Double Happiness,” passed through a customs-bonded warehouse in North Bergen, New Jersey.  From 2006 to 2012, Hyatt directed that $1,627,832 in profits from the sale of duty-free alcohol and tobacco products be wired to his undeclared bank account in Panama.  Hyatt repatriated money from the Panamanian bank account to buy a Mercedes Benz SL 550R automobile and to pay for $19,000 in interior design goods and services.  
* * * * 
Hyatt failed to report income earned on his Panamanian account, and failed to file an FBAR for the years at issue.  Hyatt admitted that this scheme resulted in a tax loss of $521,986. 
* * * * 
Hyatt faces a statutory maximum sentence of five years in prison, as well as a term of supervised release and monetary penalties. Hyatt has agreed to file true and accurate tax returns and to pay the IRS all taxes and penalties owed, in addition to paying an $854,465.50 penalty for failure to disclose his foreign accounts.
JAT Comments:

  1. The Panamanian bank is not named.
  2. The bank account appears to represent untaxed income that, in the resolution, will be fully taxed.  Often in these resolutions to the extent that proceeds were deposited many years ago, they may not be taxed.  The statute would still be open if fraud were involved.  See § 6501(c)(1), here.  But developing the information to assert the tax on the original deposits may be difficult.  Hence, the resolution oft the tax in many cases relates only to later years where the income involved is the income on the earlier deposits without regard to whether the original earlier deposits were of untaxed income.

 Here are some of my compiled statistics.  I have not recently reviewed the spreadsheet in detail to make sure that all formulas work as they should.  I will try to do that soon.  But, with that caveat, here are some of them now.

# Uncertain
Charges (Indictments, Information, Complaint)

Charges with Taxpayer Entities Involved
Guilty Pleas

Guilty Verdicts



Cases Sentenced (Total)

Cases Pending (All Prior to Sentencing, incl. Fugitives)

Cases Pending (without Fugitives)

Cases Pending (Fugitives Only)