Tuesday, August 15, 2017

Swiss Asset Manager and DOJ Enter Nonprosecution Agreement (8/15/17 8/18/17)

DOJ Tax and USAO SDNY announced here  and here that it has reached a nonprosecution agreement ("NPA") with Prime Partners SA (“Prime Partners”), a Swiss asset management firm,  The plea agreement and attached Statement of Facts ("SOF") are here.

The cost to Prime Partners is $5 million, consisting of $4.32 million in forfeiture (representing a portion of the gross revenue it earned with respect to the undeclared accounts for 2001-2010) and $0.068 million in restitution to the IRS (representing the approximate unpaid taxes from Prime Partners' clients).  Key excerpts from the press release are:
As part of the NPA, Prime Partners admitted various facts concerning its wrongful conduct and the remedial measures that it took to cease that conduct. Specifically, Prime Partners admitted that it knew certain U.S. taxpayers were maintaining undeclared foreign bank accounts with the assistance of Prime Partners in order to evade their U.S. tax obligations, in violation of U.S. law. Prime Partners acknowledged that it helped certain U.S. taxpayer-clients conceal from the IRS their beneficial ownership of undeclared assets maintained in foreign bank accounts by, among other things: (i) creating sham entities, which had no business purpose, that served as the nominal account holders for the accounts; (ii) advising U.S. taxpayer-clients not to retain their account statements, to call Prime Partners collect from pay phones, and to destroy any faxes they received from Prime Partners; (iii) providing U.S. taxpayer-clients with prepaid debit cards, which were funded with money from the clients’ undeclared accounts; and (iv) facilitating cash transfers in the United States between U.S. taxpayer-clients with undeclared accounts. 
The NPA recognizes that, in early 2009, Prime Partners voluntarily implemented a series of remedial measures to stop assisting U.S. taxpayers in evading federal income taxes. The NPA further recognizes the extraordinary cooperation of Prime Partners, including its voluntary production of approximately 175 client files for non-compliant U.S. taxpayers, which included the identities of those U.S. taxpayers.
This NPA is not part of the Swiss Bank Program.  So the question one must ask is why did DOJ even do this?  Well, the press release sets forth DOJ Tax's public explanation in the press release:

The U.S. Attorney’s Office entered into the NPA based on factors including:
  • Prime Partners’ voluntary and extraordinary cooperation, including its voluntary production of account files containing the identities of U.S. taxpayer-clients;
  • Prime Partners’ voluntary implementation of various remedial measures beginning in or around early 2009, before the investigation of its conduct began;
  • Prime Partners’ willingness to continue to cooperate to the extent permitted by applicable law; and
  • Prime Partners’ representation – based on an investigation by outside counsel, the results of which have been reviewed by the U.S. Attorney’s Office and the Tax Division – that the misconduct under investigation did not, and does not, extend beyond that described in the Statement of Facts.
The NPA requires Prime Partners to continue to cooperate with the United States for at least three years from the date of the agreement. In the event that Prime Partners violates the NPA, the U.S. Attorney’s Office may prosecute Prime Partners.
Addendum 8/18/17 10:30 am:

Monday, August 14, 2017

Indictment of Taxpayers for Evasion of Payment and Structuring Cash Withdrawals (8/14/17)

DOJ Tax announced here the indictment of two Virginia taxpayers -- husband and wife -- for evasion of payment, § 7201, and conspiracy to structure bank deposits to avoid the reporting requirements.

This is a pretty straight-forward, unexceptional indictment for Count One, evasion of payment.  They owed the tax, they reported the tax liabilities on their returns, the IRS assessed the tax as reported, and they took various actions affirmative acts to evade payment (transfer or assets to kin, signing and filing false Form 433-A, Collection Information Statement for Wage Earners and Self-Employed Individuals, and withdrawing cash from bank accounts (the actions asserted in the structuring conspiracy charge as the overt acts of the conspiracy)).

The structuring conspiracy charge is also unexceptional except for how sparse it is.  The overt acts of the conspiracy are the many cash withdrawals of less than $10,000.  These overt acts are presented in a spreadsheet table.  Often the overt acts of a conspiracy go on ad nauseum to conjure up the defendants as evil actors.  Here, by contrast, these overt acts are simply the list of cash withdrawals during a six month period in 2015.  That is all that is required to have the indictment pass muster as presenting fair notice to the defendants.  If the case goes to trial, however, I would expect the Government to enter into evidence additional acts that could reasonably be described as overt acts of the conspiracy and am surprised that the Government did not lard up the indictment to paint a more sinister picture than presented by the list of withdrawals.

One technical quibble. The indictment refers to the tax liability as "self-assessed."  There is no such concept as a self-assessed tax.  The taxpayer reports -- self-reports, if you will -- tax liability on a return; the IRS assesses the tax liability accordingly.  Section 6201(a)(1) ("The Secretary shall assess all taxes determined by the taxpayer or by the Secretary as to which returns or lists are made under this title").  The act of assessment is  the recording by the IRS of the liability (whether self-reported or not) on the books of the IRS as an assessment.  As I note in my tax procedure book:
Our tax system is described as a “self-assessment” system.  This means that the taxpayer reports the amount of the tax obligation via a tax return.  The IRS must assess the tax reported on the return.  § 6201(a)(1). The taxes thus reported are often referred to colloquially as “self-assessed” which is probably a fair characterization since the statutory requirement that the IRS assess the amount reported is mandatory, making the IRS’s formal assessment a ministerial act.  
And then, elsewhere in the book later, I use the short-hand self-assessed or some variation.

Wednesday, August 9, 2017

Court Sustains $10,000 Per Year § 6038(b) Penalty for Form 5471 Noncompliance for Taxpayer Who Withdrew from 2009 OVDP (8/9/17)

In Dewees v. United States, 2017 U.S. Dist. LEXIS 124989 (D.C. D.C. 2017), here, Dewees, a U.S. citizen residing in Canada, was fined $120,000 -- $10,000 per years for From 5471 noncompliance.  After assessment of that penalty, Dewees declined to pay.  He lived in Canada and apparently felt he was outside the IRS's ability to compel  payment.  Pursuant to the U.S. Canada tax treaty, however, the U.S. enlisted the Canadian tax authority to withhold a Canadian tax refund due Dewees.  At that point, Dewees paid the penalty and brought this suit to have his payments refunded on various constitutional grounds -- Eighth Amendment, Due Process and Equal Protection.  On motion of the U.S., the court dismissed the complaint.

I link the following documents:
  • Complaint, here.
  • U.S. Motion, here.
  • Dewees' Opposition, here.
  • U.S. reply, here.
  • Docket Entries as of 8/9/17, here.
The key timeline that I derive from the opinion and the foregoing documents are:

1. Dewees successfully joined OVDP in 2009.  The 2009 iteration of OVDP had the following requirements:  (i) filing income tax returns for 6 years; (ii) paying income tax, 20% accuracy related penalty, and interest on both; (iii) filing FBARs for 6 years; (iii) paying an IRS penalty now called a miscellaneous offshore penalty in lieu of all other penalties, including the FBAR penalty and Form 5471 penalties.

2. It is not clear from what I saw (I did not study the documents carefully for nuance) whether Dewees completed the package including the Forms 1040 or 1040X, the 5471s, and the FBARs.  It appears that there was some commotion between the IRS and Dewees as to whether he had submitted all information.

3.  On May 26, 2010, the IRS notified Dewees that he would be "terminated from the OVDP for failure to furnish the requested 1040s and FBAR forms (for the years 2003-2008).

4.  "In June 2010, the filings requested in the correspondence dated May 19, 2010 were resent."

5.  On October 28, 2010, a $252,480 penalty assessment was made against Dewees.  Dewees alleges that the penalty assessment was "relating to FBAR non-compliance."  The Government states that it was assessed "under the terms of the OVDP."  If the Government's statement is correct, the penalty assessment was the MOP assessment in lieu of all penalties other than the income tax penalty; in Dewees case, the MOP penalty would have been in lieu of the FBAR penalty and the Form 5471 penalty.  [JAT comment:  a question I have is how the MOP could have moved to assessment without the taxpayer having signed a closing agreement inside the OVDP penalty structure, but I could not find the answer to that question.]

6.  "On November 19, 2010 the penalty assessed is reduced to $185,862, as some accounts had been double counted by the IRS."

7.  "On January 13, 2011 Mr. Dewees receives notification that he is at risk of being terminated from the OVDP program because of his failure to pay the assessed penalty."

8.  "On June 9, 2011, Mr. Dewees received a letter from Mr. Harrington [IRS Agent] requesting confirmation of his intent to no longer participate in the OVDP."

9.  "On June 16, 2011 Mr. Dewees confirms his withdrawal from the OVDP based on the excessive amount of penalties owing. The penalties were removed from his account."  [JAT comment:  this would be consistent with the penalties being MOP rather than FBAR because the MOP could not be assessed unless he completed OVDP without opting out or being removed.]

10.  "On September 20, 2011 Mr. Dewees receives a letter from Mr. Harrington dated September 9, 2011, imposing a new $120,000 of penalties for the late filing of Form 5471. The letter indicates that reasonable cause for failure to file will be considered."  [JAT Comment:  This is consistent with Dewees being removed from OVDP because he would have lost his Form 5471 penalty protection.]

11.  Now, if the taxpayer truly were removed from OVDP, he should have been subject to risk of assessment of FBAR penalties.  From what I have seen, it is not clear that FBAR penalties were imposed.  I infer from the IRS's imposition of maximum Form 5471 penalties that the IRS did not think he was a nonwillful actor, but still there is no indication what, if anything, happened on the FBAR penalties.

Tuesday, August 8, 2017

USSC Practitioners Advisory Group Recommendations on Sentencing Commission Priorities (8/8/17)

The Practitioners Advisory Group ("PAG"), here, A Standing Advisory Group of the United States Sentencing Commission ("USSC"), here, has written a letter, here, to the Chair of the USSC commenting on the USSC's proposed 2017-2018 priorities.  There is no priority relating to tax and thus no comments related to tax.  However, the PAG does recommend one priority that is in a general category that tax defense attorneys should pay close attention to -- Examination of Collateral Consequences.  I have written on collateral consequences in Chapter 12: Criminal Penalties and the Investigation Function, of Michael Saltzman and Leslie Book, IRS Practice and Procedure (Thomsen Reuters 2015), here, ¶ 12.06 Collateral Consequences.

The PAG addresses a subset of the general subject, particularly related to the duties and priorities of the USSC.  The discussion is very good, so I cut and paste relevant excerpts:
I. PAG Proposed Priority- Examination of Collateral Consequences 
As in prior years, the PAG urges the Commission to consider as a proposed priority the examination of the impact of the collateral consequences of convictions. Collateral consequences - the legal penalties and restrictions that take effect automatically without regard to whether they are included in the court's judgment - are frequently the most important aspect of punishment from a defendant's perspective. Convicted individuals face reduced employment and housing opportunities, legal barriers to occupational and business licensure, driver's license suspensions, voting restrictions, and many other collateral consequences that make successful reentry more difficult. Some states still have full or partial bans on welfare and food stamps for people who have felony drug convictions. Such limitations can have a crippling effect on the individual, who may have to support a family, yet is unable to rely on any of these important programs.
In a number of recent cases, federal courts have imposed more lenient sentences in consideration of the severe collateral consequences a defendant would experience. In other cases, courts have sought creative ways to relieve defendants from the effect of collateral consequences long after the court's sentence has been fully served.
We briefly describe below the ways in which collateral consequences affect the work of sentencing courts. The PAG urges the Commission to take this matter under advisement and to consider scheduling hearings on this issue. 
1. Understanding Collateral Consequences and Ensuring that a Defendant has been Notified about Them 
In general, the constitutional obligation of advisement is defense counsel's under the Sixth Amendment, not the court's. The one situation in which judicial advisement is required under the Federal Rules of Criminal Procedure is where a defendant considering a guilty plea is not a citizen. n82 That said, a federal court is permitted to inform itself about the collateral consequences that may apply in a particular case in order to decide whether to take such consequences into account when fashioning a sentence. The court may ask the probation office, which is part of the judicial branch, for information about collateral consequences, and probation ought to be informed about collateral consequences in any event so that it can assist defendants with reentry and reintegration. Similarly, the court may ask defense counsel for reassurance that counsel has advised the defendant about applicable collateral consequences before accepting a guilty plea or imposing a sentence, if only as a prophylactic measure to guard against subsequent claims of ineffective assistance. n83
   n82 See Fed. R. Crim. P. 11(b)(l)(O).
   n83 Just last month, the Supreme Court reaffirmed a defense lawyer's obligation to warn defendants about immigration consequences of conviction. See US. v. Jae Lee, 137 S. Ct. 1958 (20 17). In state courts, the judicial advisement obligation may be more robust, both under the state constitution and applicable court rule, such as where sex offender registration or firearms dispossession may result from conviction. However, such notice has generally not been required in the federal system. Case law developments, notably in the past few years since the Supreme Court's decision in Padilla v. Kentucky, 559 U.S. 356 (2010), are described in Chapters 4 and 8 of Love, Roberts and Klingele, COLLATERAL CONSEQUENCES OF CRJMlNAL CONVICTION: LAW POLICY AND PRACTICE (West/NACDL, 2016 ed.). 
While judicial notice about collateral consequences may not be mandated in the federal system outside the immigration context, either by counsel or court, such notice has been recognized as sound practice by the major national law reform and professional organizations of lawyers. n84 The Model Penal Code gives the sentencing commission responsibility for collecting collateral consequences and providing guidance to sentencing courts relating to their consideration of collateral consequences at and after sentencing. 85 The PAG believes that the Commission could usefully consider what if any role it might play in this regard.
   n84 The Uniform Law Commission and the American Law Institute have both proposed that sentencing courts should ensure that a defendant has been informed about collateral consequences that might affect willingness to plead, and at sentencing. See Model Penal Code: Sentencing,§ 6x.04(1); Uniform Collateral Consequences of Conviction Act§§ 5, 6 (2010). The ABA Standards for Criminal Justice also impose this requirement. See Collateral Sanctions and Discretionary Disqualification of Convicted Persons, Standards 19-2.3, 19-2.4(b) (2003).
   n85 See Model Penal Code: Sentencing § 6x.02. 

2017 Editions to Townsend on Federal Tax Procedure Available for Download (8/8/17)

My 2017 editions of my Federal Tax Procedure Book are now posted on SSRN and available for download as follows:
I offer these for all to use.  I originally prepared this for students in my Federal Tax Procedure class at the University of Houston Law School.  I have now retired from teaching that class (last semester was Fall 2015).  But, I keep these editions up with annual publications in August.  I have tried to include in the text the substantive materials for a law school class in tax procedure.  The Practitioner Edition is the same as the Student Edition except that it contains footnotes that, I hope in most cases, support or expand on what is in the text, with some flights of fancy.  The Student Edition strips out the footnotes so that students do not get bogged down in minutia and irrelevances.

I would appreciate hearing from readers about things that need correction or improvement (either in substance or presentation).  I am constantly revising the editions in advance of the next publication (August 2018) and readers can materially help in making that next edition better.

Also, I will be posting material updates, corrections and other matters related to both Editions on my Federal Tax Procedure Blog.

Monday, August 7, 2017

Tax Practitioners' Advice to Clients About the Audit Profile/Risk (8/7/17)

I thought readers might be interested in this recent article:  Michael B. Lang and Jay A. Soled, Disclosing Audit Risk to Taxpayers, 36 Va. Tax Rev. 423 (2017) (no link available).  The issue is whether tax professionals may advise clients as to their audit profile -- risk of audit.  There has been some confusion among practitioners about that issue because of the prohibition on considering risk of audit in assessing the merits of a tax return position.  The following is from the Highlight for the article:
When taxpayers file their tax returns, they are often worried about the prospect of an Internal Revenue Service (Service) audit. To date, the position of the Service and of professional organizations has been that tax return preparers cannot take into account audit risk in evaluating the merits of a return position. Some practitioners have broadly - and incorrectly - interpreted this regulation as a mandate against talking about audit risk with their clients. Taxpayers therefore often make their own assessment of their audit risk, relying on information sources such as the Internet and tax return preparation software. Given the uncertain reliability of such sources, it is appropriate to encourage more communication between tax return preparers and taxpayers on the subject of audit risk. 
This article argues that the Treasury Department and professional organizations should make it clear that tax return preparers may make full disclosure of Service audit risks to the extent this information is known. While this information cannot be used to evaluate the substantive merit of a particular tax return position, readily dispensing it would be emblematic of a transparent tax system and satisfy taxpayers' quest to more fully understand the tax return filing process. As such, the availability of Service audit risk information would be a marked improvement over the existing status quo.
Some key excerpts from the article (pp. 430-433 & 445-446, footnotes omitted):
III. Why Audit Risk Disclosure Makes Sense Today 
Outside the realm of calibrating potential penalty exposure, nothing in the Code, regulations, or professional standards precludes candid conversations on the topic of audit risk. Nevertheless, the myth of a universal prohibition of Service audit risk disclosure endures, making some tax professionals hesitate to provide audit risk projections. Aside from the myth itself, sometimes tax preparers' hesitancy reflects their lack of knowledge of the audit risk; in other instances, tax practitioners fear that aggressive clients might take untenable positions on their returns if they knew the unlikelihood of an audit. 
Notwithstanding this reluctance to disclose audit risk, legal and accounting ethical standards require the free flow of information between practitioners and their clients. n28 Cultural, technological, and social developments have also changed the tax preparation field, bolstering support for the proposition that tax practitioners should disclose audit risk to their clients. These developments, explored below, are threefold: (A) the availability of audit risk information, (B) more rigorous tax return submission and practice standards, and (C) more prevalent professional malpractice litigation. 
A. Ready Availability of Audit Risk Information 
Whether or not the tax profession or the Service cares to admit it, the availability of tax audit risk information is ubiquitous. Individuals can commonly find this information through the Internet and tax preparation software.  
As the Internet has evolved, it has become the primary source of information for many people, particularly the nation's youth. Within milliseconds, entry of a query can retrieve thousands of relevant documents that are directly on point. For example, a Google search of the phrase "IRS audit risk" delivers numerous articles on the topic. Some of the articles are informative; other articles are even interactive, allowing viewers to enter information and, in response, get individualized feedback based upon their personal circumstances. 
Another source of audit risk disclosure is tax software preparation packages such as TurboTax and H&R Block. These tax software preparation packages are widely used by the general public. In addition to helping taxpayers compute their tax liabilities, they all appear to offer another service: upon completion of the tax return preparation process, they assess Service audit risk and present this information to the taxpayer. For example, upon tax return completion, TurboTax sets forth a range from dark green to bright red with an indicator arrow; depending upon the data entered, this arrow will appear somewhere along this range, indicating the taxpayer's supposed audit risk.  
Whether the audit risk information that the Internet and tax software companies provide is accurate is an entirely different issue. Years ago, the Service developed computer algorithms, the Discriminant Function System, which produced a DIF score for a tax return. The DIF score is used to determine whether the tax return should be audited. To date, the Service has kept this information a closely guarded agency secret. The lack of  public accessibility to this vital information means that whatever is published on the Internet or presented to tax preparation software users is suspect, based entirely upon conjecture and speculation, rather than the Service's actual guidelines. 

Saturday, August 5, 2017

Taxpayer Successfully Shows NonPossession and Control to Avoid Summons and Successfully in Most Part Asserted Fifth Amendment (8/5/17)

In United States v. Lui, 2017 U.S. Dist. LEXIS 119953 (N.D. Cal. 2017), here, the court granted in part and denied in part the IRS petition to enforce the summons to the taxpayer.  The time line of events pieced together from the opinion and the parties' key submissions (Liu's amended memo here, the Gov't's response here,and Lui's Sur-reply here) is:
  • 9/??/13 IRS starts audit for 2010 year
  • 1/29/14 IRS issues IDR 001 requesting "copies of all delinquent FBARs"
  • 2/11/4 "Lui submitted FBAR filings for years 2008, 2009, 2010, 2011 and 2012." [There is some commotion as to whether the 2012 FBAR had been timely filed]
  • 7/8/14 first summons issue for testimony
  • 8/4/14 Lui responds to summons and invokes Fifth Amendment in Q&A.
  • 8/??/14 IRS expands audit to include 2005-2009 and 2011-2012
  • 7/29/15 IRS issues second summons for documents related to offshore activity, related to foreign entities.
  • 8/10/15 IRS issued IDR 13 and an Foreign Document Request ("FDR" pursuant to 26 U.S.C. § 982. The FDR, with IDR 13, sought records from foreign companies. Id.  [JAT Note, the opinion mentions the FDR but says almost nothing about why that is an issue, since it was not part of the summons enforcement proceeding except as background.]
  • 10/14/16 Lui produces some documents but not others.  In his submission, the allegation is made that "Lui fully and timely responded to the IDRs, the FDR, and the both summonses, except that Lui could not provide all documents related to Netfinity and WG. " As to the FDR, "Lui provided certain documents pursuant to the FDR that were not in his possession or control, specifically the limited documents his family in Hong Kong chose to provide him in response to his requests."
  • 2/26/16 IRS petitions to enforce summons (I think it may be both summonses)
  • 3/16/16 Court approves summons on prima facie basis and issues Lui show cause order
  • At some point apparently in 2016, Lui served on Government request for admissions and for documents.
  • 12/15/16 Hearing on show cause order
  • 7/31/17 Order Issued
Decisions as to Document Production

Lui's defense to the petition to enforce was that he had produced the documents he could but that he did not have possession or control or ability to obtain the documents.  The Court hold that the summonsed party asserting this defense must make a credible showing of lack of possession and control as of the date the summons was issued.  As to what the summonsed party must show, the Court adopted the sliding scale test of United States v. Malhas, 2015 U.S. Dist. LEXIS 151990, 2015 WL 6955496, at *4, which it describes as "the more the Government's evidence suggests the defendant possesses the documents at issue, the heavier the defendant's burden to successfully demonstrate that he does not."  Based on that Court's application of the Malhas test, the Court holds that (one footnote omitted):

Saturday, July 29, 2017

Another Plea Agreement for Offshore Account (7/29/17; 7/30/17)

USAO CD CA announced here the plea by a plastic surgeon to one FBAR criminal count.  The relevant excerpts from the announcement are:
          According to the plea agreement filed in this case, while working as a plastic surgeon in Beverly Hills, Mani began to travel to Dubai in 2011 to perform plastic surgery for a foreign medical center. Mani’s accountant, who was aware that Mani was earning foreign income, informed him that he would be required to report any foreign bank accounts under his ownership or control to the IRS. 
          In 2012, Mani opened a bank account with a financial institution based in Dubai and began depositing income he earned from abroad into this account. By February 2013, Mani’s foreign bank account held more than $400,000. However, Mani willfully failed to file a FBAR to disclose his foreign bank account for the calendar years 2012 and 2013. 
          In addition to failing to disclose his interest in his foreign bank account, Mani also failed to report on his federal income tax returns the vast majority of the approximately $1.28 million in foreign income he earned in Dubai for the years 2012, 2013 and 2014.
The plea agreement is here.

JAT comments:

1.  The gravamen of the offenses outlined in the plea agreement and statement of facts is really tax crimes with the FBAR crime facilitating the tax crime.  For this reason, I am surprised that DOJ Tax would approve the FBAR plea.

2.  The plea agreement requires two FBAR penalties of $100,000 (pars. 5(f) and 5(g)).  (Note: I had initially missed one of the penalties and revised this comment accordingly because a reader named Kneave Riggall brought the extra FBAR penalty to my attention; thanks to Mr. Riggall.)

Monday, July 24, 2017

Peter Reilly on Conservation Easement Donations as Bullshit Tax Shelters (7/24/17)

Peter Reilly has a great write up on the conservation easement tax scam -- aka bullshit tax shelter (my description, not his) -- that has featured prominently in many recent cases and is the subject of Notice 2017-10, here.  Peter's write up is New IRS Scandal - Syndication Of Conservation Easement Deductions (Forbes/Taxes 7/24/17), here.  And  I have previously written on Notice 2017-10 in IRS Designates Syndications Exploiting Improper Valuations for Conservation Easement Deductions (Federal Tax Crimes Blog 1/2/17), here.

Bullshit tax shelters are built on one or two foundations (sometimes both) -- fake law and fake facts.  The bullshit conservation easement shelters often get the law right, but fail on the facts -- particularly the valuations.  I encourage readers to review Peter's article and then read the extra materials I offer below.

I particularly like Peter's Accounting View -- balancing of the books analysis -- to show the problem with the bullshit conservation easement shelters.  

I extend Peter's analysis because many bullshit tax shelters suffer that basic problem.  The seminal balancing of the books case is Commissioner v. Tufts, 461 U.S. 300 (1983).  The taxpayer acquired basis in property via a nonrecourse loan, used the basis for depreciation tax benefit, then surrendered the property and walked away from the nonrecourse loan.  Had that been a recourse loan, the taxpayer would have had to recognize cancellation of indebtedness income, thereby balancing his books for the deductions funded by the recourse loan.  But, the taxpayer argued, because it was a nonrecourse loan, he received no benefit from the the "relief" from  the nonrecourse loan and thus had no offsetting income entry from COD or otherwise.  In effect, the taxpayer was arguing for free deductions with no balancing of his books.  The Supreme Court in Tufts rejected the argument, but took an intermediate position that the nonrecourse loan was includible as an amount realized on a deemed sale of the property securing the nonrecourse loan.  So, the taxpayer could get a combination of deferral from the nonrecourse loan (based on the interim depreciation deductions) and conversion to capital gains.  That is not a bad tax shelter.  But, at least the Supreme Court required a balancing of the books, albeit at capital gains rates.

I am not certain whether Tufts was an overvaluation case in its inception -- i.e., the property securing the nonrecourse loan was overvalued and thus the nonrecourse loan was underwater all along, serving only to generate deductions that the taxpayer in Tufts tried to shelter by not balancing his tax books at the end.  But, many taxpayers before and after Tufts tried that gambit of the overvaluation of the property secured by nonrecourse loans.  At least Tufts required a balancing of the books.

Having been deeply involved in the BLIPS shelters (not as promoter or adviser or taxpayer but as litigator), I always thought that, even if one accepted the aggressive legal position taken about contingent debt when contributed to the partnership, there was a balancing of the books problem akin to what the Supreme Court required in Tufts.  Thus, having achieved the basis benefit fueled by the loan, albeit recourse, that ultimately went "poof," the taxpayer should have to balance his books with the offsetting taxable income.  The shelter opinions that I saw either ignored that or dissembled on it.  Of course, there was a problem at the inception of the analysis on contingent debt, but assuming that problem was cleared, then the back-end issue balancing issue was a problem.

At any rate, thanks to Peter Reilly for his analysis.

Saturday, July 22, 2017

DC Circuit Reverses Preparer Conviction for Prosecutorial Misconduct (7/22/17)

I do not spend much time on this blog on return preparer fraud (or stolen identity refund fraud).  But, this case caught my attention United States v. Davis, ___ F.3d ___, 2017 U.S. App. LEXIS 13109 (DC Cir. 2017), here.  The reason it caught my attention was that the Court of Appeals found prosecutorial misconduct in the prosecutors' closing argument.  The prosecution was of a mother and a son involved in the return preparation business.

Here is the key part of the discussion:
To set the context for assessing Andre's contention that the court must reverse his convictions on both counts because of prosecutorial misconduct during closing arguments, we summarize the relevant evidence, and this necessarily entails some overlap with our consideration of Andre's sufficiency challenge. The government's case against Andre as to both Count 1 and Count 19 was thin. See Part II.B, infra. Although the evidence established that Andre began working with his mother after graduating from college and that false tax returns were filed under the Davis Financial Services EFIN during this period, the evidence of Andre's knowing participation in Sherri's tax fraud scheme was equivocal, at best. LaDonna testified that she cautioned Andre against working for Sherri, but she did not specify why she thought doing so "wasn't a good idea." Trial Tr. 81 (Jan. 20, 2015 (pm)). Thomas Jaycox testified on direct examination that Andre had prepared his 2012 tax return, but qualified his testimony on cross-examination and redirect by clarifying that Sherri had, in fact, also "put[] information on" and "finalize[d]" his return after Andre had worked on it. Trial Tr. 47, 80 (Jan. 22, 2015 (am)). The evidence thus failed to establish who entered the false deductions into Jaycox's return; Sherri was just as, if not more, likely to have done so than Andre. The remaining evidence against Andre, such as Andre's name on the EFIN application and other documents, at most confirms only that he was engaged in operating a tax-preparation business, not that he had the specific intent to file false returns or otherwise knowingly joined Sherri's conspiracy to defraud the United States. 
Examination of the prosecutor's closing arguments reveals multiple misstatements of this evidence and, given the gaps in the government's evidentiary case, their prejudicial effect is readily apparent. For instance, the prosecutor told the jury that Andre personally designated the bank account into which tax preparation fees were deposited in 2013 and that Andre and Sherri made a "staggering amount of money" but failed to report such income in their individual tax returns. Trial Tr. 170 (Jan. 28, 2015). Even assuming that the first point is not false, because Andre's designation of the bank account might be viewed as a reasonable inference from the TaxWise evidence, there is no evidentiary basis for the second, nor does the government point to any on appeal. The evidence of earnings and income reporting related only to Sherri's receipt of fees and failure to accurately report her individual income to the IRS. There was no comparable evidence as to Andre. Not only was there no direct evidence Andre received fees for preparing and filing false returns, much less in "staggering amounts," as the prosecutor told the jury, Trial Tr. 170 (Jan. 28, 2015), there was no evidence Andre under-reported his individual income on his tax returns. Lumping Andre together with Sherri in this manner was clearly prejudicial to Andre. The prosecutor also misleadingly minimized Sherri's role in completing Jaycox's 2012 return, telling the jury that Sherri only "came over to make sure it was okay, or something to that effect," id. at 88, when Jaycox testified that Sherri "finalize[d]" his taxes and "finished everything else out" on his 2012 return. Trial Tr. 47, 80 (Jan. 22, 2015 (am)). 
Even more critically, the prosecutor blatantly misrepresented the evidence regarding Andre's mens rea. First, in the opening portion of his closing argument after asking the jury, "how do we know that the Defendant Andre Davis acted willfully," the prosecutor told the jury that LaDonna had told Andre about the criminal charges she was facing and that Andre had reassured her by saying, "Don't worry. I know what I'm doing." Trial Tr. 96 (Jan. 28, 2015). The prosecutor then told the jury: "So he knows. He knows that 2FT is under criminal investigation, but yet he continues to file. . . . He acted willfully with the specific intent to violate the law." Id. at 97. But this did not accurately recount LaDonna's testimony. Even now, the government's brief misstates that there was evidence LaDonna had told Andre about the criminal nature of the investigation in which she was involved. See Appellee Br. 17. In fact, LaDonna's account of the conversation never indicated that she had told Andre or that he was otherwise aware of the criminal nature of the IRS investigation of 2FT or that Sherri, rather than LaDonna alone, was implicated in it. Second, in rebuttal closing argument, the prosecutor again asked "how do we know that these defendants were trying to commit fraud," and this time told the jury that it's because "[t]hey're photocopying Goodwill receipts and whiting them out . . . to have back-up documents to support the $47,000 and $50,000 deductions for Thomas Jaycox[.]" Id. at 170. But the evidence regarding the business providing clients with blank Goodwill or other charitable receipts pertained only to years prior to the time when Andre began working with his mother and his tenure at Davis Financial Services. Jaycox brought his own receipts in 2012. The government's response on appeal, that the "Sherri or Andre" statement is technically true, because Sherri provided blank Goodwill receipts, rings hollow; the government tarred Andre with evidence that it implicitly acknowledges had nothing to do with him. See Appellee Br. 46. 

Thursday, July 20, 2017

Another Person Indicted for Offshore Accounts (7/20/17)

DOJ Tax has announced here the indictment of Teymour Khoubian for tax obstruction, tax perjury, false FBARs and false statements.  The description of the allegations from news release is:
The indictment charges that from 2006 through 2014, Teymour Khoubian impeded the administration of the internal revenue laws. According to the indictment, Khoubian filed false individual tax returns with the Internal Revenue Service (IRS) for tax years 2005 through 2010 that did not report his financial interest in multiple Israeli and German bank accounts or the interest income that he earned from those accounts. He also allegedly falsely claimed refundable tax credits to which he was not entitled, including the Earned Income Tax Credit, which is intended for low-to moderate-income working individuals. In 2008, Khoubian is alleged to have held approximately $20 million in assets in his undisclosed accounts. The indictment charges that Khoubian also filed a false 2011 tax return that underreported the interest income he earned from his Israeli accounts and continued to fail to disclose that he held an account in Germany. Khoubian is also alleged to have filed false 2012 and 2013 Reports of Foreign Bank and Financial Accounts forms (FBARs) with the U.S. Department of Treasury that concealed his German account. U.S. citizens, resident aliens, and permanent legal residents with a foreign financial interest in or signatory authority over a foreign financial account worth more than $10,000 are required to file an FBAR disclosing the account. 
In addition to filing false tax returns and FBARs, Khoubian allegedly provided his German bank with a copy of his Iranian passport and a residential address located in Israel to prevent the bank from disclosing the account to the IRS. He also allegedly sent a letter to Bank Leumi falsely claiming he was living in Iran when, in fact, he resided in Beverly Hills, California. 
Khoubian is also charged with making false statements to an IRS Criminal Investigation (CI) special agent – denying that he owned an account in Germany between 2005 and 2010, stating that the German account was closed, when it was in fact still open, and stating that the funds had been transferred to the United States, when Khoubian had allegedly transferred over $600,000 from his German account to his accounts in Israel.
If convicted, Khoubian faces a statutory maximum sentence of three years in prison for corruptly endeavoring to impede the internal revenue laws and each count of filing a false return and five years in prison for each count of filing a false FBAR and making a false statement. He also faces a period of supervised release, restitution and monetary penalties.
 My only reaction is that, assuming the truth of allegation of the size of the accounts, this guy had real chutzpah to claim the Earned Income Tax Credit.

Court Dismisses Claims Where IRS Issued JDS Without Required Court Approval for JDS (7/20/17)

In Hohman v. United States, 2017 U.S. Dist. LEXIS 106439 (ED MI 2017), here, the district court finally dismissed a case where the plaintiffs sued on various claims arising from the IRS's service of John Doe Summonses on a bank.  The thing that caught my attention was that, prior to serving the JDSs on the bank, the IRS did not obtain the predicate court order required by § 7609(f), here.   The summonses are here and here.

My reaction was: "Wow!"

So, I pulled up some of the documents from Pacer, the online system to review and download court documents.  I have limited time that I can devote to these interesting issues, so here is what I picked up in the time allowed.  The documents reviewed are:

1.  The docket entries (as of today), here.
2.  Government Brief on Motion to Dismiss (Dkt. 12), here.
3.  IRS Agent Affidavit (Exhibit to Government Brief (Dkt.12 Exh), here.
4.  Order (Dkt27), here.
5.  Final Order (Dkt45), here.

I could not find quickly an adequate explanation for why the IRS agents involved issued the two JDSs without court approval.  I could only find that they did.   On the face of the summonses, they were issued by a revenue agent and approved by a group manager.  The revenue agent's affidavit did not explain why the summonses were issued without court approval, but did say that the limited production was not reviewed because, by the time of delivery, the IRS was aware of a problem.

The following is what the Government said in an early brief in the case:
The first John Doe summons was issued on September 25, 2015. ¶ 34. The second John Doe summons was issued on September 30, 2015. ¶ 54. Copies of the two summonses are attached hereto as Exhibits 1 and 2.2 
The summonses requested signature cards, monthly checking account statements, and cancelled checks for specified account numbers (which have been redacted). Exs. 1, 2. Both summonses were issued “in the matter of John Doe,” id., and neither identified any “person with respect to whose liability” it was issued, § 7609(f). In keeping with John Doe summons procedures, the IRS did not give notice to the then-unknown account holders, which turned out to be plaintiffs. Nonetheless, Ms. Hohman and Jhoman learned about the summons of September 25, 2015, from the bank (Compl. ¶ 38) and filed a petition to quash the summons in this court on November 25, 2015 (¶ 51), see Case No. 2:15-mc-51669-VAR-APP.  
To address concerns raised in the petition, the IRS agent who had issued both summonses gave a sworn declaration to counsel for Ms. Hohman and Jhohman (Complaint ¶ 52) dated January 4, 2016, a copy of which is attached as Exhibit 3.4 The declaration stated that the agent withdrew both summonses via letters dated December 17, 2015 (Ex. 3 ¶¶ 9, 13), copies of which were attached to the declaration and are also attached hereto as Exhibits 4 and 5. The declaration added that none of the materials received in response to the first summons were reviewed by the IRS (Ex. 3 ¶¶ 5-8). The IRS never received any materials in response to the second summons. Id. ¶ 13. Apparently satisfied, Ms. Hohman and Jhoman voluntarily dismissed their petition the next day on January 5, 2016. 
Nonetheless, three months later plaintiffs filed the instant four-count complaint against the United States5, the IRS agent who issued the summonses (C. Mei Chung), and her manager (Maurice Eadie). Count One seeks damages under the Right to Financial Privacy Act (RFPA), 12 U.S.C. § 3401 et seq. Count Two seeks damages under the Privacy Act, 5 U.S.C. § 552a. Count Three seeks damages, as well as injunctive and declaratory relief, against both the individual IRS employees named as defendants and the United States for alleged constitutional violations. Count Four seeks damages under 26 U.S.C. § 7431.
The Court ultimately dismissed all counts.  The principal issue thrashed around by the court related to Right to Financial Privacy Act (RFPA), 12 U.S.C. § 3401, et seq.  I am not particularly interested in that issue, so I refer readers who are to the court orders for its analysis.  I am interested in the IRS's failure to obtain court orders for the JDSs.  What is the story there?  I am not sure that I have an adequate answer to that broad question.  I do have some more specific questions. I will just list them below and provide some answers if I can give them or reasonably speculate about them.

Credit Suisse Banker Pleads Guilty to Conspiracy (7/20/17)

DOJ Tax announced here the guilty plea by Susanne D. Rüegg Meier, a former Credit Suisse AG banker, for conspiracy.  I link the Plea Agreement here, the Statement of Facts here and the docket entries as of today here.  I previously reported on the indictment here:  Criminal Charges for More Swiss Bank Enablers (Federal Tax Crimes Blog 7/21/11), here.  It is unclear where she has been in the meantime, but my spreadsheet indicates (accurately or not) that she was a fugitive, presumably because a Swiss citizen and resident who chose to stay away from the U.S. after the indictment.  There is no indication as to why she returned now

The key parts of the announcement are:
According to the statement of facts and the plea agreement, Susanne D. Rüegg Meier, admitted that from 2002 through 2011, while working as the team head of the Zurich Team of Credit Suisse’s North American desk in Switzerland, she participated in a wide-ranging conspiracy to aid and assist U.S. taxpayers in evading their income taxes by concealing assets and income in secret Swiss bank accounts. Rüegg Meier was responsible for supervising the servicing of accounts involving over 1,000 to 1,500 client relationships. She was also personally responsible for handling the accounts of approximately 140 to 150 clients, about 95 percent of whom were U.S. persons residing primarily in New York, Chicago and Florida, which held assets under management totaling approximately $400 million. Rüegg Meier admitted that the tax loss associated with her criminal conduct was between $3.5 and $9.5 million. 
Rüegg Meier assisted many U.S. clients in utilizing their Credit Suisse accounts to evade their U.S. income taxes and to facilitate concealment of their undeclared financial accounts from the U.S. Department of the Treasury and the Internal Revenue Service (IRS). She took the following steps to assist clients in hiding their Swiss accounts: retaining in Switzerland all mail related to the account; structuring withdrawals in the forms of multiple checks each payable in amounts less than $10,000 that were sent by courier to clients in the United States and arranging for U.S. customers to withdraw cash from their Credit Suisse accounts at Credit Suisse locations outside Switzerland, such as the Bahamas. Moreover, Rüegg Meier admitted that approximately 20 to 30 of her U.S. clients concealed their ownership and control of foreign financial accounts by holding those accounts in the names of nominee tax haven entities or other structures that were frequently created in the form of foreign partnerships, trusts, corporations or foundations. 
Between 2002 and 2008, Rüegg Meier traveled approximately twice per year to the United States to meet with clients. Among other places, Rüegg Meier met clients in the Credit Suisse New York representative office. To prepare for the trips, Rüegg Meier would obtain “travel” account statements that contained no Credit Suisse logos or customer information, as well as business cards that bore no Credit Suisse logos and had an alternative street address for her office, in order to assist her in concealing the nature and purpose of her business. 
After Credit Suisse began closing U.S. customers’ accounts in 2008, Rüegg Meier assisted the clients in keeping their assets concealed. For example, when one U.S. customer was informed that the bank planned to close his account, Rüegg Meier assisted the customer in closing the account by withdrawing approximately $1 million in cash. Rüegg Meier advised the client to find another bank simply by walking along the street in Zurich and locating a bank that would be willing to open an account for the client. The customer placed the cash into a paper bag and exited the bank. Rüegg Meier also recommended that a few U.S. clients open new accounts at other specific banks, such as Bank Frey and Wegelin & Co., and transfer their assets from their Credit Suisse accounts to the new accounts. 
Credit Suisse pleaded guilty in May 2014 for conspiring to aid and assist taxpayers in filing false returns, and was sentenced in November 2014 to pay more than $2 billion in fines and restitution.
JAT comments:

Wednesday, July 19, 2017

Second Circuit Decision Applying Fifth Amendment to Foreign Compelled Testimony (7/19/17)

The Second Circuit issued an important decision today dealing with the use -- directly or indirectly -- of testimony compelled by a foreign government in a U.S. criminal case.  United States v. Allen, ___ F.3d ___ (2017), here. This is not a tax prosecution, but the holding could apply in all U.S. prosecutions, tax or otherwise, where foreign compelled testimony is used.

The opinion is very long and very good.  The Court's summary of the opinion is:
 This case—the first criminal appeal related to the London Interbank Offered Rate (“LIBOR”) to reach this (or any) Court of Appeals—presents the question, among others, whether testimony given by an individual involuntarily under the legal compulsion of a foreign power may be used against that individual in a criminal case in an American court. As employees in the London office of Coöperatieve Centrale Raiffeisen‐Boerenleenbank B.A. in the 2000s, defendants‐appellants Anthony Allen and Anthony Conti (“Defendants”) played roles in that bank’s LIBOR submission process  during the now‐well‐documented heyday of the rate’s manipulation. Defendants, each a resident and citizen of the United Kingdom, and both of whom had earlier given compelled testimony in that country, were tried and convicted in the United States before the United States District Court for the Southern District of New York (Jed S. Rakoff, Judge) for wire fraud and conspiracy to commit wire fraud and bank fraud.
While this appeal raises a number of substantial issues, we address only the Fifth Amendment issue, and conclude as follows.   
First, the Fifth Amendment’s prohibition on the use of compelled testimony in American criminal proceedings applies even when a foreign sovereign has compelled the testimony.    
Second, when the government makes use of a witness who had substantial exposure to a defendant’s compelled testimony, it is required under Kastigar v. United States, 406 U.S. 441 (1972), to prove, at a minimum, that the witness’s review of the compelled testimony did not shape, alter, or affect the evidence used by the government.   
Third, a bare, generalized denial of taint from a witness who has materially altered his or her testimony after being substantially exposed to a defendant’s compelled testimony is insufficient as a matter of law to sustain the prosecution’s burden of proof. 
Fourth, in this prosecution, Defendants’ compelled testimony was “used” against them, and this impermissible use before the petit and grand juries was not harmless beyond a resonable doubt. 
Accordingly, we REVERSE the judgments of conviction and hereby DISMISS the indictment

Offshore Account Tax and Bank Fraud Conspiracy Sentencing (7/19/17)

USAO MDFL announced here the sentencing of a Florida businessman, Casey Padula, for conspiring to commit tax and bank fraud.  The sentence is 57 months in prison.  I previously reported on the guilty plea here.  The pattern is a familiar one.  Padula conspired with others to divert money from his U.S. business, thus avoiding tax, into foreign accounts.  The foreign accounts were in Belize and were owned by two nominal foreign corporations.  Padula also conspired with with investment advisors Joshua VanDyk and Eric St-Cyr, who helped them establish a numbered account.  In addition to the tax fraud, Padula committed bank fraud along with another who made a sham purchase of his home secured by a mortgage allegedly under water.  For previous posts mentioning VanDyk and St-Cyr, see here.  The co-conspirator on the bank fraud conspiracy was sentenced to five years probation.

There is no indication in the press release about any potential FBAR penalty.

Friday, July 14, 2017

D.C. Circuit Rejects Injunction End-Run by OVDP Taxpayers Seeking Streamlined Procedures Relief (7/14/17)

The DC Circuit Court of Appeals dismissed an attempt by participants in OVDP before the more robust Streamlined Procedures opportunity was announced in 2014.  Maze v. United States, ___ F.3d ___ (D.C. Cir. 2017), here.  They were relegated to the transition relief which, if nonwillful, would have qualified them for transition treatment reducing the miscellaneous offshore penalty ("MOP"), but would not relieve them from the eight years of income tax, penalty and interest on both required by OVDP.  By contrast, the new Streamlined Procedures would have require only 3 years of income tax and interest, with no accuracy related penalties.

I always thought the transition opportunity was unfair to those who got into OVDP rather than waited.  Taxpayers were rewarded for holding out.  But often life is unfair and taxes are not fair.

The plaintiffs in this action thought this was unfair as well and brought suit to compel the IRS to treat them under the Streamlined Procedures.  They ran squarely into the prohibition against injunctions in § 7421(a), often called the Anti-Injunction Act ("AIA").  Basically, the AIA prevents suits in any form which have the effect of enjoining the IRS in its tax enforcement and collection activities.  This particular suit failed for that reason.

I don't know that there is anything else to really say about this, except, if the taxpayers involved in the suit really were nonwillful, they could opt out of OVDP, take the audit and get an appropriate civil cost (tax, penalty and interest) result that way.  All of their income tax years would be subject to the normal statute of limitations (usually three years, with an exception for substantial omission or fraud (with the fraud unlmited statute not apply if they were nonwillful)).

Indeed, the design of the Streamlined Procedures, as I understand it, was to roughly give nonwillful taxpayers the result they could obtain by joining OVDP and opting out.  True, joining OVDP and opting out of the OVDP penalty structure involves commotion not encountered in Streamlined Procedures but, if taxpayers with a good story to tell (which is a requirement for Streamlined Procedures) can tell the good story in the opt out of OVDP penalty structure and achieve, in broad strokes, a more or  less similar result.  (Note there is some fuzziness there.) And, by staying in OVDP and just opting out of the OVDP penalty structure they get some marginal assurance of no criminal prosecution.

This story reminded me about Jesus' parable of the workers.  The taxpayers in Maze got what they bargained for -- the OVDP and the opportunity to opt out if dissatisfied.  So, too, the workers in Jesus' parable which can be read in Matthew 20:1-16, here.  In the parable, it is an equal reward that causes the problem for the early workers as compared to the late workers, but on an hourly basis, the late workers get paid a lot more for waiting than the early workers.  In the Streamlined Procedures, the late joiners get benefits not allowed the early joiners.  But, in both cases, they get what they bargained for.  (Actually, the early OVDP joiners got the benefit of Streamlined MOP by transitioning.)  What is the complaint?  (Having said that, I have already said that I thought excluding people in OVDP from the Streamlined Procedures benefits -- both income tax and MOP -- is unfair for reasons other than that the OVDP participants shut out of Streamlined Procedures did not get the deal -- even better deal -- they accepted in joining OVDP.)

Thursday, July 13, 2017

Klein Conspiracy in the NonTax Crimes News (7/13/17)

I don't see the Klein conspiracy raised often in the popular press.  So, I was surprised to see it here.   Spencer Ackerman and Betsy Woodruff, ‘Dopey’ Donald Trump Jr. Just Might Be Saved by His Own Ignorance (DailyBeast 7/11/17), here.  And, Another article taking off the Daily Beast article is TRUE BLUE REPORT: I learned a new term today—Republicons are the KLEIN CONSPIRACY PARTY, here.

I assume most readers are now aware about the news buzz of an additional Russian off-the-radar screen connection for the Trump Administrations -- Donald Trump Jr.'s emails and meeting with a Russian Lawyer allegedly close to the Putin Kremlin.  So, what does the known information mean in the real world.  Well, on its face, perhaps not much in a traditional crimes sense (for the crimes commonly known).  But that is where the broad sweep of the defraud conspiracy under 18 USC § 371 comes in.  The Klein conspiracy is often a shorthand for the defraud conspiracy, but I use the term in a narrower sense to mean the defraud conspiracy related to impairing or impeding the lawful function of the IRS.  Klein was a tax defraud conspiracy case.  United States v. Klein, 247 F.2d 908 (2d Cir. 1957).  For any readers that my be interested in my views on my concerns with the potential scope of the defraud conspiracy in a tax setting and its companion tax obstruction crime, § 7212(a), much in the tax crimes news lately, see:  John A. Townsend, Tax Obstruction Crimes: Is Making the IRS's Job Harder Enough, 9 Hous. Bus. & Tax. L.J. 255, 334-335 (2009)).

At any rate, back to DJT, Jr.  Here is the relevant portion of the Daily Beast article referring to Barbara McQuade, who, until Trump took office, was the U.S. attorney for Eastern Michigan:
McQuade, however, thinks the emails indicate that the younger Trump could be guilty of a so-called “Klein conspiracy,” which makes it a crime to “defraud the United States.” 
“It doesn’t have to any monetary value,” McQuade said. “It could be defrauding the U.S. government in honest elections.” 
But then comes another twist. The younger Trump would have to “knowingly and wilfully violate” a known legal duty, and “his lawyer will say he had no idea” the intended transaction – which Donald Trump Junior thus far denies actually occurred – was illegal. In this case, Mariotti said, ignorance of the law can be an excuse.
This Klein conspiracy and the tax obstruction counterpart has been much addressed on this blog and in my article linked above.  The Government's imagination -- at least claims -- about the defraud conspiracy is that it is broader than the tax crimes requiring willfulness -- specific intent to violate a known legal duty, the Cheek test of willfulness.  All the defendant has to do, in the Government narrative, is to impair or impede the lawful function of the Government agency.  And the list of things that can do that -- thus criminalized -- is virtually anything the  mind can imagine that would have a likely effect of ever so slightly impairing a Government agency in whatever it is doing within the scope of its responsibility.

Focusing on the DJT, Jr., episode as reported in the credible press I read -- DJT, Sr. would say the fake press -- does not clearly indicate that the emails in question and the meeting in question would rise to the level of a defraud conspiracy.  But we know only part of the story.  And, if there were any agreement among the Trump affiliated persons attending or aware of the meeting to keep it quiet from relevant Government agencies (say FBI and the agencies vetting the security clearances of the attendees), well, there we have the elements of the defraud conspiracy.

But, the saving grace in terms of ultimately knowing what happened and its legality is that we have a cop on the beat -- Mueller who has integrity and determination to get to the bottom and prosecute those who may have violated the law.  Let's trust the integrity of the process.

In the meantime, I do have concerns about the defraud / Klein conspiracy as I note in  my article and its solo companion, tax obstruction under § 7212(a), that the Supreme Court will address in the case it accepted for certiorari in Marinello.  We all just need to stay tuned.

Bench Trial Convictions on Offshore Business Insurance Scams (7/13/17)

Duane Crithfield and Stephen Donaldson, Sr., promoters of a bogus insurance tax evasion scheme commonly referred to as BPP, have been convicted after a bench trial in Florida.  I attach here the order of the judge's Foreword, Findings of Fact and Conclusions of Law.

I have previously written on this prosecution in Two Tax Crimes Cases on Plea Rejections After Previously Accepted (Federal Tax Crimes Blog 6/10/16), here.  That describes a detour in the case as the parties dispute the components of the tax loss based on the guilty plea to one count.  The defendants' lawyers apparently did not understand the notion of relevant conduct, which includes all relevant conduct whether from a convicted count or not.  So the plea was rejected and the parties went to trial.

I will not get into the details of the scam they promoted, because the judge lays all of that out in the order.  I do think it helpful to for flavor to offer the judge's Foreword:

FOREWORD
The United States accuses two men, along with several unindicted conspirators, of hatching and implementing a plot to convert into an intoxicating profit for themselves the aspirations of their high-income customers to protect that high income from federal taxation. So far as the evidence shows, the taxpayers in this venture were mostly honest, educated, and experienced professionals and entrepreneurs, who retained lawyers, accountants, and other skilled advisers to ensure both the effectiveness and the lawfulness of the taxpayers’ management of money. Consistent with the considered judgment of their advisers, these taxpayers purchased at a steep cost a set of fantastical and superfluous “insurance” policies and in return re-captured control of cash equal to about 85% of the premium paid for each policy. In other words, the taxpayers accepted the notion that they could reduce the effective, maximum, marginal-income tax rate from about 40% to about 15% by signing a few papers and moving money from here to there, from there to who knows where, and then back again. 
That these mostly honest, educated, and experienced taxpayers and their savvy advisers believed in, and committed money to, this criminal scam presents an irrefutable and deafening reminder of the extent of the public’s cynicism toward the federal income tax code — a bloated and opaque monstrosity. In other words, as the present episode evidences, almost no financial scheme is so suspicious or so implausible that a good salesman cannot convince an honest and vigilant taxpayer that the Internal Revenue Service is prepared to award tax relief to a participant. But for the adulteration of the public’s regard for the Internal Revenue Code, the charged crime might have been impractical for the compelling reason that no fair-minded and honorable person would have thought for a moment that the scheme would succeed.  
Apparently, when the subject under consideration is the federal income tax code, no enormity is unthinkable and no promise is unutterable.
JAT Comments:

1.  From my prior blog linked above, it appears clear the defendants through their counsel made, in hindsight, a bad call to spat about whether relevant conduct is included in the Guidelines tax loss calculation.  The Guidelines loss for all relevant counts of conviction is not provided, but the maximum sentence for the counts of conviction is 11 years -- 5 years for conspiracy and 6 years for aiding and assisting (two counts for 3 year felonies).  My sense is that the tax loss including relevant conduct may be pretty high and will likely exceed three years, so that the sentencing exposure almost surely will exceed the maximum three years they could have achieved under the negotiated plea.  But, the defendants and their lawyers chose to assert -- inadvisedly, against the clear law -- that relevant conduct could not be included in the Guidelines calculation.  (Students and practitioners should note that this the inclusion of unconvicted relevant conduct is the reason the Government will sometimes agree to drop counts in a plea bargain.)

Saturday, July 1, 2017

On Conflicts, Certiorari and Marinello (7/1/17)

I posted a blog entry Tuesday on the Supreme Court’s grant of the petition for writ of certiorari in  United States v. Marinello, 839 F.3d 209, 218 (2d Cir. 2016).  See Supreme Court Grants Certiorari in Marinello Involving Whether § 7212(a)'s Omnibus Clause Requires Knowledge of Pending Investigation (6/27/17), here.

I thought some readers might want some more discussion of intercircuit conflicts as a basis for certiorari.  From my personal observation standpoint (originally with DOJ Tax Appellate Section and then in the Trial Section and thereafter in private practice and as an academic on tax crimes keenly interested in Supreme Court practice), an intercircuit conflict is, as noted in the article below, the "best predictor of Supreme Court review."  The immediate context is, of course, the conflict between the Second Circuit in Marinello and the Sixth Circuit in  United States v. Kassouf, 144 F.3d 952 (1998).  The other Circuits deciding the issue have sided with the reasoning of the Second Circuit in Marinello and rejected the reasoning in Kassouf.  Kassouf is a lone-wolf holding. Since Kassouf was decided in 1998, the Sixth Circuit has narrowed its apparent scope but has not reversed it or cast serious doubt other than what might be inferred from its narrowing of Kassouf, to join with the other Circuits deciding the issue.  So, at this time, on this issue, the law in the Sixth Circuit is different than in the other Circuits that have addressed the issue.

Often, when the consensus of other Circuits moves against a holding in one Circuit, the outlier Circuit will reverse course, thereby assuring uniformity among the Circuits and avoiding the need for the Supreme Court to resolve the conflict.  The process of allowing other Circuits to speak to the issue (referred to in the excerpts below as “percolating”) allows the issue to be fully vetted by the time the Supreme Court does have to resolve by certiorari if the conflict persists.  But the Sixth Circuit has had several opportunities to reverse course or at least indicate disapproval or concern with the Kassouf holding and, while narrowing the potential scope of Kassouf, has declined to reverse course.

Here is what the Government said on that issue in opposing certiorari by holding out the possibility that the Sixth Circuit itself will fix the problem:
The court of appeals’ decision is consistent with the interpretation of Section 7212(a) adopted by most other courts of appeals and does not conflict with any decision of this Court. Although the Sixth Circuit reached a different conclusion in United States v. Kassouf, 144 F.3d 952 (1998), that court has vacillated in its approach to Section 7212(a) over the years and has not yet had an appropriate opportunity to reconsider Kassouf ’s holding in an en banc proceeding. This  Court has repeatedly denied other petitions raising the same issue. Nothing supports a different result in this case. 
Well, nothing except the persistence of the Sixth Circuit decision as an outlier so that the law is different in the Sixth Circuit than in the other Circuits.  (And perhaps a side note, the Government could have forced the issue by bringing an indictment on the same basis it indicts in other Circuits, which the district court would dismiss on the authority of Kassouf, the Government could appeal, the panel on appeal would affirm dismissal on the authority of Kassouf, and the Government could then ask for en banc review, whereupon the Sixth Circuit could resolve the conflict by overturning Kassouf or, if the Sixth Circuit persisted by denying en banc review or, on en banc review, affirming its holding in Kassouf, asking the Supreme Court to resolve the then clearly persistent conflict; there might be some prudential reasons to avoid bringing a single count indictment like that, so perhaps it a really bad-actor case could be chosen with several counts, which would slow down the issue getting to the Sixth Circuit.)

I thought readers who are interested might benefit from this recent scholarly article analyzing a significant original dataset of Circuit Court conflicts and the issue of whether and when Supreme Court review to resolve the conflicts is appropriate.

Deborah Beim and Kelly Rader, Evolution of Conflict in the Federal Circuit Courts (Yale University 3/19/15), here.  Here are some excerpts (footnotes omitted):

Tuesday, June 27, 2017

Supreme Court Grants Certiorari in Marinello Involving Whether § 7212(a)'s Omnibus Clause Requires Knowledge of Pending Investigation (6/27/17)

By order dated 6/27/17, here, the Supreme Court granted certiorari in Marinello v. United States (Sup. Ct. Dkt. No. 16-1144).   The panel opinion of the Second Circuit is United States v. Marinello, 839 F.3d 209 (2d Cir. 2016), here (official) and here (Casetext).  The denial of petition for rehearing en banc is here.  (Note  that the denial of petition for rehearing en banc has a great dissent by Judge Jacobs (see my blog entry below).)

  • The petition is here.  The petition states the issue as:
Section 7212(a) of the Internal Revenue Code includes the following provision:
Whoever corruptly or by force … endeavors to intimidate or impede any officer … of the United States acting in an official capacity under this title, or in any other way corruptly or by force … endeavors to obstruct or impede[] the due administration of this title, shall, upon conviction thereof, be fined not more than $5,000, or imprisoned not more than 3 years, or both . . . . 
26 U.S.C. § 7212(a) (emphasis added). 
The question presented is whether § 7212(a)’s residual clause, italicized above, requires that there was a pending IRS action or proceeding, such as an investigation or audit, of which the defendant was aware when he engaged in the purportedly obstructive conduct
  • The Government's Brief in Opposition is here.  The Government states the issue as:
Whether a conviction under 26 U.S.C. 7212(a) for corruptly endeavoring to obstruct or impede the due administration of the tax laws requires proof that the defendant acted with knowledge of a pending Internal Revenue Service action.
  • The petitioner's reply is here.
  • The Amicus Brief of the American College of Tax Counsel in favor of granting the petition is here.
  • The Amicus Brief for the Cause of Action Institute and the NACDL is here.
  • The docket entries are here.
  • The Scotusblog page for the case (with docket entries) is here.
My previous blogs on Marinello or prominently mentioning Marinello are:
  • Second Circuit Rejects Aberrational Sixth Circuit Opinion in Kassouf on Requirements for § 7212(a) Tax Obstruction (Federal Tax Crimes Blog 10/15/16), here.
  • Great Second Circuit Dissent on Potential Overreach in Tax Obstruction (Federal Tax Crimes Blog 2/28/17), here.
  • Fifth Circuit Joins Majority Decisions that § 7212(a) Requires No Pending Investigation (Federal Tax Crimes Blog 5/28/17), here.
JAT Comments:

1.  Although there is a circuit split, the one case creating the split -- Kassouf in the Sixth Circuit -- has been so narrowed by subsequent cases in the Sixth Circuit that I am a bit surprised the Court would take the case.  Nevertheless, although narrowing Kassouf, the Sixth Circuit has not overturned it, thereby causing the split to linger.

2.  Given the limited number of tax cases accepted for certiorari, this probably does not bode well for Daugerdas' Petition.  See Daugerdas Grasps for the Supreme Court (Federal Tax Crimes Blog 6/26/17), here.

3.  I am not sure that a Government loss would do anything other than encourage it to charge the pattern affected as a defraud / Klein conspiracy.  See Court Rejects Dismissal of Superseding Indictment and Defraud Conspiracy Count As Substitute for Dismissed Tax Obstruction Count (Federal Tax Crimes Blog 4/13/17), here.  The CTM used to say that tax obstruction under § 7212(a) was a one-person defraud / Klein conspiracy.  For most significant tax crimes, there will be at least one person close enough to be a co-conspirator, since only a slight connection is required.  See Ninth Circuit Affirmance in Tax Convictions; Comments on Slight Evidence Formulation (Federal Tax Crimes Blog 6/20/17), here.  This calls to mind Judge Easterbrook's famous lament that "prosecutors seem to have conspiracy on their word processors as Count I; rare is the case omitting such a charge."  United States v . Reynolds, 919 F.2d 435, 439 (7th Cir. 1990).  Another sound-bite from  Judge Learned Hand:  conspiracy is "the darling of the modern prosecutor's nursery."  Harrison v. United States, 7 F.2d 259, 263 (2d Cir. 1925).  And, even where a conspiracy cannot be charged because there really is a lone-wolf actor, almost invariably there will be an investigation of some sort in most of the cases that have been charged as tax obstruction.  So, only a smaller subset of cases will be affected, and undoubtedly some other charge can be made -- for example, evasion with the obstructive acts being treated as affirmative acts of evasion.

Monday, June 26, 2017

Requirements for the Reasonable Cause to Avoid the FBAR Nonwillful Penalty (6/26/17)

The statutory text for the nonwillful penalty says that the penalty does not apply if the violation "was due to reasonable cause" (reasonable cause prong) and "the amount of the transaction or the balance in the account at the time of the transaction was properly reported" (reporting prong)  31 U.S.C. § 5321(a)(5)(B)(ii), here.  In the case of a failure to report (either no FBAR filed or an FBAR filed with the account omitted), the failure to report or report properly is, of course, the act that causes the filer/non-filer to be at risk for the penalty in the first place.  Surely, if that means that proper FBAR reporting in the first instance, the issue of the nonwillful penalty never arises and a supposed reasonable cause escape is meaningless.  What does this mean?

Prior to November 2015, the IRM sensibly provided that meaning with respect to failure to file the FBAR as follows: "This means that the examiner must receive the delinquent FBARs from the non-filer in order to avoid application of the non-willfulness penalty.” IRM 4.26, 16.4.4.2 (07-01-2008), Non-Willfulness Penalty.  Basically, as stated, this permitted a delinquent filing of the FBAR during the audit that might lead to the penalty, then permitting the reasonable cause defense if it applied.

This specific language has been eliminated from the IRM by changes made in November 2015.  The IRM currently says for the reporting component that “The person files any delinquent FBARs and properly reports the previously unreported account.”  IRM 4.26.16.6.4 (11-06-2015), Penalty for Nonwillful FBAR Violations, here.  Like the statute, the description of the reporting prong is not as clear as it should be.  Does it mean that the person must file delinquent FBARs and, on those delinquent FBARs properly report the previously unreported account?  The use of present tense verbs might suggest that.  If that is what it means, the change to the IRM would not appear to be material and the taxpayer perfects his right to claim reasonable cause by filing delinquent FBARs.  However, the statutory text uses past tense for the reporting prong -- that the amount "was properly reported."  The Government now takes the position that the "reporting prong" requires the taxpayer to have made the U.S. aware of the account by proper reporting of the account on Form 1040 (citing legislative history to that effect).  See Jarnagin v. United States (Fed. Cl. No. 15-1534 T).  (The Government does note, in the alternative, that, even if filing a delinquent FBAR reporting the account(s) could alone solve the problem, the Jarnagans have not done so; I will not speculate as to the reason for this failure which would best situate their reasonable cause defense.)  The reply brief in the case was filed June 16, 2017, so presumably when the decision on the parties' cross-motions is rendered, we will have more learning on this issue and perhaps even more questions.

In the meantime, I offer the following:
  • U.S. Motion for Summary Judgment, here.
  • Jarnagin's Answer and Cross-Motion, here.
  • U.S. Reply and Answer to Cross-Motion, here.
  • Docket Entries as of today, here.

Daugerdas Grasps for the Supreme Court (6/26/17)

Paul Daugerdas, a prominent topic of this blog since he was the king of bullshit tax shelters, was convicted and his conviction affirmed on appeal.  I reported on the much of his trial and appeal.  The blogs mentioning Daugerdas are here and the blog on the appeal is Daugerdas Conviction and Sentencing Affirmed by Second Circuit Court of Appeals (Federal Tax Crimes Blog 9/21/16), here.

On 3/20/17 Daugerdas filed a petition for writ of certiorari.  The petition for the writ is here.  According to the docket entries, here:

Mar 20 2017 Petition for a writ of certiorari filed. (Response due April 21, 2017)
Mar 31 2017 Waiver of right of respondent United States to respond filed.
Apr 5 2017 DISTRIBUTED for Conference of April 21, 2017.
Apr 17 2017 Response Requested . (Due May 17, 2017)
* * * *
Jun 23 2017 Brief of respondent United States in opposition filed.

The Government's brief in opposition is here.

Now, what to make of all this?  The starting point is the issue presented.

Daugerdas prefaces his statement of the issue with a summary of facts apparently believed necessary to understand the issue.  The Government does not agree with some of the nuances in the facts, so just keep that in mind.  So, I cut and paste the preface and the issue Daugerdas presents:
Petitioner Paul Daugerdas, a tax attorney, was tried by a jury for a “scheme to defraud” and obstruct the Internal Revenue Service (“IRS”) for the design, marketing and implementation of fraudulent financial tax shelters. At trial and during summations, the government presented two separate “schemes”: the first alleged that Daugerdas intentionally orchestrated a massive tax shelter fraud causing losses in excess of $1.6 billion by advising hundreds of clients to report tax losses based on financial transactions that lacked “economic substance”; the second scheme alleged that he conspired with other members of his law firm to intentionally backdate financial transactions on three or four client tax returns to fraudulently reduce their taxes owed, causing losses of approximately $2.2 million. During summations, the government urged the jury to convict Daugerdas of conspiracy, mail fraud, obstruction and relevant tax evasion counts based on the $2.2 million scheme. The jury agreed, acquitting him on six other tax evasion counts unrelated to the $2.2 million scheme. The government then asked the district court to sentence Daugerdas based on the greater $1.6 billion tax shelter scheme. As a result, the district court sentenced him to 180 months, as opposed to the 41–51 month Guidelines range for the backdating scheme, despite the government’s contrary argument to the jury and the jury’s ultimate verdict. 
The question presented is: 
Whether Petitioner’s sentence violated his rights under the Sixth Amendment and the Due Process Clause of the Fifth Amendment when a judge imposed a sentence based on an alleged greater “offense” than the government urged the jury to convict at trial, and after the jury convicted based on the lesser “offense” presented to them during the government’s summation?
In its brief in opposition, the Government goes straight to the issue (without engaging on predicate facts or even believing a statement of facts is necessary to the issue as it presents the issue):
Whether petitioner’s sentence was substantively unreasonable on the ground that the district court imposed a sentence based on judicial fact-finding regarding conduct of which petitioner was acquitted by the jury.
Basically, the issue is whether conduct in counts for which the jury acquitted can be considered in the tax loss calculation (or can be considered at all) in sentencing.  I thought that issue was long since settled and not particularly controversial which, I presume, is why the Government initially waived its right to respond.

Interested readers of this blog can pore over the submissions as their time and interests permit.  I just make the following quick comments about the Government's brief (after far less than a detailed study):

Tuesday, June 20, 2017

Ninth Circuit Affirmance in Tax Convictions; Comments on Slight Evidence Formulation (6/20/17)

In United States v. Rodrigues, 2017 U.S. App. LEXIS 10556 (9th Cir. 2017) (unpublished), here, the Ninth Circuit affirmed Rodriguez's "convictions for (1) conspiracy to defraud the United States by impairing and impeding the Internal Revenue Service ("IRS"), in violation of 18 U.S.C. § 371; (2) mail fraud, in violation of 18 U.S.C. § 1341; and (3) aiding in the preparation of materially false income tax returns, in violation of 26 U.S.C. § 7206(2)."  Rodrigues' scam was National
Audit Defense Network's sale of Tax Break 2000.  The opinion is short and fairly straight-forward.

I address only one issue.  The Court said:
2. Although Rodrigues does not dispute that NADN's sale of Tax Break constituted a conspiracy to defraud the United States, he argues that the government failed to meet its burden of proving that he became a member of this conspiracy. "Once the existence of a conspiracy is established, evidence establishing beyond a reasonable doubt a connection of a defendant with the conspiracy, even though the connection is slight, is sufficient to convict him with knowing participation." United States v. Lane, 765 F.2d 1376, 1381 (9th Cir. 1985).
The highlighted sentence reminded me of the now discredited formulation of what is known as the "slight evidence" rule.  Here is a problematic example:  "Once a  conspiracy  is established, even slight evidence connecting a defendant to the  conspiracy  may be sufficient to prove the defendant's involvement." United States v. Pullman, 187 F.3d 816, 820 (8th Cir. 1999); see also United States v. Wright, 215 F.3d 1020, 1028 (9th Cir. 2000).  The proper statement of the rule would include the requirement included in the 9th Circuit quote that the defendant's connection be proved beyond a reasonable doubt.   In  other words, the connection may even be marginal or not central, but the connection and the conspiracy still must be proved beyond a reasonable doubt.  See The "Slight Evidence" and Similar Formulations for Connection to a Conspiracy (Federal Tax Crimes Blog 2/19/11), here.

I note that the current version of the DOJ CTM says (23.05[2] Proof of Membership, here):
Although the government must prove that a defendant was a member of a conspiracy, this requirement may be satisfied by a showing of even a "slight connection" to the conspiracy, so long as the connection is proven beyond a reasonable doubt. [citations omitted]

Submissions in Advance of Sentencing for Former Tax Court Judge Kroupa (6/20/17; 6/22/17)

I provide an update that Kroupa received a sentence of 34 months and her husband received a sentence of 24 months.  See here.  I will have more comment in a new blog when I have examined the underlying documents and more reports.  The USAO press release is here; the summary from the press release is:

DIANE L. KROUPA, 61

Minnetonka, Minn.
Convicted:Conspiracy to Defraud the United States, 1 count Sentenced:34 months in prisonThree years of supervised release$457,104 joint restitution
ROBERT E. FACKLER, 63
Minnetonka, Minn.
Convicted:Obstruction of an IRS audit, 1 count Sentenced:24 months in prisonOne year of supervised release$457,104 joint restitution


At the Procedurally Taxing Blog, Keith Fogg has a very good update on the sentencing process for former U.S. Tax Court Judge Diane Kroupa.  Sentencing Fight in Former Judge Kroupa’s Criminal Case (Procedurally Taxing Blog 6/20/17), here.  As I read the docket entries, here, the sentencing is set for June 22, 2017 at 10 am.  Keith provides links to the Government submission, here , and to Kroupa's submission,here.  I will  post again when I get information about the sentencing.

JAT comments:

1.  Kroupa's submission calculates the Guidelines range at 30 to 37 months based on the following:
Ms. Kroupa pled guilty to conspiracy to defraud the United States beginning in or before 2004 and continuing at least through in or about 2012, in violation of 18 U.S.C. § 371. Pursuant to the plea agreement, the base offense level is 18. A 2-level increase applies for abuse of position of public trust. An additional 2-level increase applies for obstruction to justice. The Government recommends a 3-level reduction for acceptance of responsibility. Based on the total offense level of 19 and a criminal history category of I, the guideline range of imprisonment is 30 to 37 months. Ms. Kroupa asks the Court to vary from the Sentencing Guidelines for a sentence of 20 months.
2.  The Government defers recommending a sentence until it has reviewed Kroupa's submissions.  The docket entries do not reflect that the Government has yet made its recommendation.

3.  As one would expect, Kroupa's submission plays up the factors that could cause a sentencing judge to make a variance.  There is considerable discussion of a long history of psychological and emotional issues.  This is, of course, standard fare in appealing to the considerable variance discretion that a sentencing judge has under 18 USC § 3553(a) and United States v. Booker, 543 U.S. 220  (2005).  Some other interesting points in the submission are:
On June 14, 2014, she retired as a Tax Court Judge due to a permanent disability. Attached are her letter and the letter of Dr. Pak supporting her resignation due to a permanent disability. All this took place after the search warrants were executed and it became apparent Ms. Kroupa was a target of the criminal investigation. This understandably caused extreme and additional stress. It exacerbated her long-standing psychological and emotional issues for which she has sought treatment.
* * * *