Bullshit Shelter Taxpayers Continuing FOIA Litigation to Identify Informants Turning Them In to IRS (3/30/20)

FOIA requests and litigation have not been featured prominently on this blog.  For this entry, FOIA litigation is front and center, but interesting for a tax crimes blog because of what the FOIA requesters (in the role of taxpayers in this case) seek from the IRS – the identity of the whistleblower, if one exists, who turned them in for attempting a raid on Treasury via a bullshit tax shelter.  In United States v. Montgomery (D. D.C. No. 17-918 (JEB) Memo Op. Dtd 3/25/20), here, the Court starts:

This Freedom of Information Act dispute represents the latest round in Plaintiffs Thomas and Beth Montgomery’s never-ending heavyweight bout with the Internal Revenue Service over their multi-billion-dollar tax-shelter scheme. After settling various financial disputes with the agency, Plaintiffs submitted FOIA requests to Defendant in order to discern whether a whistleblower had incited the agency’s investigation. The Service’s responses, however, did not bring Plaintiffs any closer to discovering the source of their woes. Frustrated in their pursuit of this information, they filed suit in this Court. 

In response to the previous round of summary-judgment motions, the Court held that Defendant had appropriately invoked Glomar with respect to one category of Plaintiffs’ requests but had failed to conduct an adequate search as to the other. History repeats itself here in regard to the current dispositive Motions. Once again, Defendant has justified its invocation of  Glomar as to certain potential documents, but it has otherwise not conducted an adequate search. The Court will therefore grant in part and deny in part the parties’ Motions for Summary Judgment and direct the IRS to renew its search.

A Glomar response a FOIA response that “neither confirms nor denies the existence of documents responsive to the request” because it would cause cognizable harm under a FOIA exception.  E.g., Ctr. for Constitutional Rights v. C.I.A., 765 F.3d 161, 164 (2d Cir. 2014).  Obviously, the IRS does not either want to disclose that there was an informant or the name of the informant if there was an informant.

Then the Court recounts the facts:

The Court has recounted the facts surrounding this prolonged tax saga in several of its prior Opinions, but it will provide a brief recap here. See, e.g., Montgomery v. IRS, 292 F. Supp. 3d 391, 393–94 (D.D.C. 2018). In the early 2000s, Plaintiff Thomas Montgomery helped form several partnerships that were structured so as to facilitate the reporting of tax losses without those entities’ experiencing any real economic loss. Id. at 393. These “tax-friendly investment vehicles” allowed Thomas and his wife Beth, filing jointly, to report the entities’ alleged losses as part of their individual tax returns. Id. (alteration omitted). In other words, Plaintiffs were able to enjoy the tax benefits of experiencing an investment loss without shouldering the consequent burdens of such a loss. Somehow — and the Montgomerys are determined to learn exactly how — the IRS caught wind of their use of these vehicles, setting into motion over a decade of litigation on the issue. 

After examining the structure of the partnerships, the IRS issued “final partnership administrative adjustments” (FPAAs) as to two of them, which resulted in the agency’s imposing certain penalties and disallowing some of the losses the Montgomerys had claimed on their individual returns. Id. at 393–94. Next, the partnerships sued the Service in several separate actions, seeking a readjustment of the FPAAs (for those keeping score at home, this would amount to a readjustment of the adjustments). See Bemont Invs., LLC v. United States, 679 F.3d 339 (5th Cir. 2012); Southgate Master Fund, LLC v. United States, 659 F.3d 466, 475 (5th Cir. 2011). Ultimately, the Fifth Circuit affirmed the IRS’s determination that the partnerships had substantially understated their taxable incomes, Bemont, 679 F.3d at 346, but held that one transaction by the Southgate partnership had a legitimate investment purpose. Southgate, 659 F.3d at 483. With these mixed verdicts in hand, the Montgomerys and the partnerships pursued thirteen separate suits against the IRS, seeking, inter alia, a refund of assessed taxes and penalties. Montgomery, 292 F. Supp. 3d at 394. The cases were ultimately consolidated, and the parties reached a global settlement agreement in November 2014 that entitled the Montgomerys to more than $485,000. Id.

Thus, while the Montgomerys did get a substantial refund, it appears that they lost their claims to even more substantial refunds.  The Montgomerys walked away from the settlement of their tax liabilities with an ax to grind--with an informant causing their woe, if there was an informant.

The Court then addresses the particular skirmish in this long running saga, calling it "Another turn of the hamster wheel."

I don’t know that there is anything more to say about this continuing saga other than that the bullshit tax shelter abusers must have more money than they apparently need.

Cross posted on Federal Tax Procedure Blog, here.

District Court Muddles an FBAR Willful Penalty Case (3/21/20; 3/24/20)

I made a key revision on 3/24/20 at 4:00pm as indicated in red below to state with cites to the statute that the willful FBAR willful penalty limits (greater of $100,000 or 50% of unreported accounts) is a maximum penalty, thus giving the IRS authority to assert lesser FBAR penalty amounts than those maximums.  That reading of the willful penalty was implicit in the  rest of the discussion; I just thought it should be made explicit.  The changed language is marked in red below.

In United States v. Schwarzbaum (S.D. Fla. Dkt. 18-cv-81147, Order dated 3/20/20), here, in an FBAR collection suit, the court:

1. Held that Schwarzbaum was not liable for the FBAR willful penalty for 2006 but held open the possibility that the nonwillful penalty might apply. 

2. Held that Schwarzbaum was liable for the FBAR willful penalty for 2007, 2008 and 2009, but held that the IRS’s method of determining the penalty was arbitrary and capricious because it was not based on the June 30 values in the unreported offshore account, but the Court held that the parties were to confer to “in an effort to resolve the outstanding amount owed.”

The CourtListener docket for the case is here.

JAT Comments:

1.  I will not review the facts leading to the holding but will instead only deal with the legal issues in the opinion that I think are worthy of comment.

Fifth Circuit Erroneously Describes Defraud Conspiracy as Conspiracy to Commit Tax Fraud (3/19/20)

In United States v. Scully, ___ F.3d ___ (5th Cir. 3/4/20), here, the Fifth Circuit affirmed Scully’s convictin for “(1) conspiracy to defraud the United States, (2) conspiracy to commit wire fraud, and (3) three individual counts of wire fraud.” (Scully was acquitted of “preparing false tax returns,” § 7206(2).)  The district court had sentence Scully to “concurrent, below-guidelines sentences of 180 months on the wire-fraud counts and 50 months on the tax-conspiracy count.”  The CourtListener docket entries are here.

In very broad strokes, Scully was in a business with two others that imported shrimp for use in frozen meals the business sold.  He cheated his partners and, in the process, apparently he or related parties reported and paid less tax than they should have.  One of his partners turned him into the IRS.  IRS CI investigated.  Scully was indicted, and was tried on the second superseding indictment, here.  The jury verdict is here.

The arguments Scully raised on appeal do not directly implicate the tax related charge on which he was convicted (Count One, conspiracy to defraud).  Scully does raise a Fourth Amendment argument to suppress the results of the search warrant obtained and conducted incident to the IRS CI investigation.  Nothing particularly unique there.  The Court rejects this and Scully’s other arguments.

The case is not particularly noteworthy, but I posted it principally to complain about the Court's loose language in describing the defraud conspiracy.  Count 1 of the superseding indictment (incorporated from the original indictment) was a conspiracy to defraud under 18 USC § 371.  Section 371actually describes two type of conspiracy: (i) an offense conspiracy, “to commit any offense against the United States;” and (ii) a defraud conspiracy, “to defraud the United States, or any agency thereof.”  The Court of Appeals describes the charged defraud conspiracy in two different ways: “conspiracy to commit tax fraud” (Slip Op. 6); and “conspiracy to defraud the United States.” (Slip Op. 9.)  The correct description is the latter rather than the former.

Swiss Bank Account Records as Business Records for Hearsay Exception (3/18/20)

In a designated order, Tax Court Judge Lauber rejected taxpayer objections to the introduction of records obtained by the IRS pursuant to the DOJ and Swiss government agreement to provide information from Swiss banks concerning "accounts of interest.”  Harrington v. Commissioner (Designated Order 2/7/20), here.  This seems to be a resolution of a hearsay objection by applying the exception for business records.

The order is very short, so I will excerpt only part of it, mostly as a teaser to read the whole order.

In 2009 the U.S. Department of Justice reached an agreement with the Swiss Government concerning "accounts of interest" held by U.S. citizens and residents. Pursuant to this agreement the Internal Revenue Service (IRS) submitted to the Swiss Government, under the bilateral income tax treaty between the two nations, a request for information concerning specific accounts believed to be beneficially owned by U.S. taxpayers. The Swiss Government directed UBS to initiate procedures that would lead to turning over to the IRS information in UBS files concerning bank-only accounts, custody accounts in which securities or other investment assets were held, and offshore nominee accounts beneficially owned indirectly by U.S. persons. See U.S. Department of Justice, Press Release, U.S. Discloses Terms of Agreement with Swiss Government Regarding UBS (Aug. 19, 2009), at http://www.usdoj.gov/opa/pr/2009/August/09-tax-818.html. The parties acknowledged that the Swiss Federal Office of Justice would oversee UBS' compliance with its commitments.
- 2 -
Pursuant to this agreement the U.S. Competent Authority received from the Swiss Government information concerning numerous U.S. taxpayers. In September 2011 the IRS received 844 pages of information concerning UBS accounts held by or associated with petitioner. This material includes bank records, investment account statements, letters, emails between petitioner and UBS bankers, summaries of telephone calls, and documentation concerning entities through which assets were held.
Respondent has submitted with the UBS documents a "Certification of Business Records" executed by Britta Delmas, legal counsel for UBS. Ms. Delmas attached to her certification an index listing 844 Bates-numbered pages as UBS records associated with petitioner. Ms. Delmas avers that these records are original records or true copies of records that: (1) were made at or near the time of the occurrence of the matters set forth therein by persons with knowledge of those matters; (2) were kept in the course of UBS' regularly conducted business activity; and (3) were "made by the said business activity as a regular practice." At the bottom of her certification Ms. Delmas "declares under penalty of perjury under the laws of Switzerland that the foregoing is true and correct."
Having considered the origin and nature of the UBS records along with the certification of Ms. Delmas, we are satisfied that the records are authentic business records of UBS and that they were used and kept in the course of UBS' regularly conducted business activities. Respondent provided fair notice to petitioner of his intent to introduce them as such. See Fed. R. Evid. 901(11). And Ms. Delmas signed the records "in a manner that, if falsely made, would subject [her] to a criminal penalty in the country where the certification is signed." Fed. R. Evid. 902(12). Accordingly, we will admit the documents into evidence as self-authenticating foreign business records. See Fed. R. Evid. 801(d)(2), 803(6), 902(11), (12). n1
   n1 It is significant that the UBS records were provided pursuant to an agreement between the United States and a foreign government. See United States v. Johnson, 971 F.2d 562, 571 (10th Cir. 1992) ("A foundation for admissibility may at times be predicated on judicial notice of the nature ofthe business and the nature of the records as observed by the court, particularly in the case of bank and similar statements.") (quoting Federal Deposit Ins. Corp. v. Staudinger, 797 F.2d 908, 910 (10th Cir. 1986)).

DOJ Tax Announces Convictions in Massive Biodiesel Tax Fraud (3/16/20)

This DOJ Tax announcement is noteworthy even though it does not involve one of the Title 26 crimes or a conspiracy to commit a Title 26 offense or an offense conspiracy to defraud the IRS:  Jury Finds Los Angeles Businessman Guilty in $1 Billion Biodiesel Tax Fraud Scheme: Four Members of Kingston Family, including the CEO and CFO of Washakie Renewable Energy, Previously Pleaded Guilty (3/16/20), here.

Key excerpts (with bold-face added by JAT):

According to evidence presented at a seven-week trial, Dermen was the owner and operator of Noil Energy Group, a California-based fuel company; SBK Holdings USA, a Beverly Hills real estate investment company; and Viscon International, a Nevada fuel additive corporation.  From 2010 to 2016, Dermen conspired with the owners and operators of Washakie Renewable Energy (Washakie), a Utah-based biodiesel company, including its Chief Executive Officer Jacob Kingston, his brother, Chief Financial Officer Isaiah Kingston, and others, including their mother, Rachel Kingston, and Jacob Kingston’s wife, Sally, to fraudulently claim more than $1 billion in renewable fuel tax credits from the IRS. 

The IRS administers refundable federal tax credits designed to increase the amount of renewable fuel used and produced in the United States. As part of their scheme, Dermen and Jacob Kingston shipped millions of gallons of biodiesel within the U.S. and from the U.S. to foreign countries and back again to create the appearance that qualifying renewable fuel was being produced and sold.  They also doctored production and transportation records to substantiate Washakie’s fraudulent claims for more than $1 billion in IRS renewable fuel tax credits and credits related to the EPA renewable fuel standard. To further create the appearance they were buying and selling qualifying fuel, the coconspirators cycled more than $3 billion through multiple bank accounts.
As a result of the fraudulent claims, the IRS paid more than $511 million to Washakie and the Kingstons that was distributed between them and Dermen. Jacob and Isaiah Kingston sent more than $21 million in fraudulent proceeds to SBK Holdings USA, Inc., Dermen’s California-based company, and sent $11 million to an associate of Dermen’s at his request. Jacob Kingston used $1.8 million of the fraud proceeds to buy Dermen a 2010 Bugatti Veyron, and they exchanged gifts including a chrome Lamborghini and a gold Ferrari.  

Dermen and Jacob Kingston also laundered $3 million through Dermen’s company, Noil Energy Group, to purchase a mansion in Sandy, Utah for Jacob Kingston and his wife Sally.  Dermen also laundered $3.5 million through his California company, SBK Holdings USA, Inc., to purchase a mansion in Huntington Beach, California.   

Throughout the scheme, Dermen assured Jacob Kingston that he and the Kingstons would be immune from criminal prosecution because they would be protected by Dermen’s “umbrella” of corrupt law enforcement personnel. Jacob and Isaiah Kingston transferred over $134 million in fraudulent proceeds to companies in Turkey and Luxembourg at Dermen’s direction, in purported payment for protection. 

The jury found Dermen guilty of conspiracy to commit mail fraud, conspiracy to commit money laundering, and money laundering concealment money laundering, and expenditure money laundering. 

Another Plea Related to Offshore Accounts (3/9/20)

DOJ Tax issued this press release:  Alabama Salesman Pleads Guilty to Tax Evasion: Defendant Used Offshore Insurance Wrapper Accounts to Conceal Assets, here.  The criminal information and plea agreement are here and here.

Key excerpts are:

According to court documents and statements made in court, Ivan Scott “Scott” Butler was an automobile industry consultant and sold automobile warranties as an independent salesman. In 1993, Butler stopped filing tax returns and attended tax defier meetings and purchased tax defier materials. Starting in 1998, Butler used several Nevada nominee corporations to receive his income. In around 1999, Butler moved hundreds of thousands of dollars, some in precious metals, to bank accounts in Switzerland and concealed his assets in offshore insurance policies held in the name of non-U.S. insurance providers, disguising his ownership of the funds. Such accounts, which generally are used as investment vehicles, are commonly known as “insurance wrappers.”
In 2014, Butler converted some of his insurance annuities into precious metals, which were shipped to Butler and another individual in the United States. Some of those precious metals were given to friends and family for safekeeping. In total, Butler caused a tax loss to the Internal Revenue Service (IRS) of $1,093,400.
* * * *
At sentencing, Butler faces a maximum sentence of five years. Butler also faces a period of supervised release, restitution, and monetary penalties.

JAT Comments:

1.  The statement of facts is just a variation on a theme of the pattern of offshore account evasion.  The big twist here is that Butler coupled the offshore evasion failure to file tax returns.

2.  Obviously, this pattern of conduct involved a lot more potential crimes than Butler pled to.  Pleading permits a conviction on fewer counts.  But, the Sentencing Guidelines permits consideration of relevant conduct but assuming that the object of the crimes (pled and relevant conduct) is tax evasion, then the tax loss for all of them will be the critical component in the Guidelines calculation.  It is unlikely that the failure to get a plea to more counts will affect the sentence Butler receives.

U.S. Accountant Enabler Connected with Panama Papers Pleads Guilty (3/1/20)

DOJ has this press release: U.S. Accountant Pleads Guilty in Panama Papers Investigation (2/28/20), here.  Key excerpts are:

A Massachusetts-based accountant who was charged along with three others in connection with a decades-long criminal scheme perpetrated by Mossack Fonseca & Co. (Mossack Fonseca), a Panamanian-based global law firm, and its related entities, pleaded guilty today to wire and tax fraud, money laundering, aggravated identity theft and other charges.  

Richard Gaffey, aka “Dick Gaffey,” 75, of Medfield, Massachusetts, pleaded guilty to one count of conspiracy to commit tax evasion and to defraud the United States, one count of wire fraud, one count of money laundering conspiracy, four counts of willful failure to file Reports of Foreign Bank and Financial Accounts (Financial Crimes Enforcement Network Reports 114), and one count of aggravated identity theft. 

* * * * 

According to the allegations contained in the indictments, other filings in this case, and statements during court proceedings, including Gaffey’s guilty plea hearing, since at least 2000 through 2018, Gaffey conspired with others to defraud the United States by concealing his clients’ assets and investments, and the income generated by those assets and investments, from the IRS through fraudulent, deceitful, and dishonest means. 

During all relevant times, while acting as an accountant, Gaffey assisted U.S. taxpayers who were required to report and pay income tax on worldwide income, including income and capital gains generated in domestic and foreign bank accounts.  Gaffey helped those U.S. taxpayers evade their tax reporting obligations in a variety of ways, including by hiding the beneficial ownership of his clients’ offshore shell companies and by setting up bank accounts for those shell companies.  These shell companies and bank accounts made and held investments totaling tens of millions of dollars.  For one U.S. taxpayer, Gaffey advised the taxpayer how to covertly repatriate approximately $3 million to the United States by reporting to the IRS a fictitious company sale  to thereby evade paying the full U.S. tax amount.  Gaffey was assisted in this scheme through the use of Mossack Fonseca law firm, including Ramses Owens, a Panamanian lawyer who previously worked at the Mossack Fonseca.

Gaffey was the U.S. accountant for co-defendant Harald Joachim von der Goltz.  From 2000 until 2017, von der Goltz was a U.S. resident and was subject to U.S. tax laws, which required him to report and pay income tax on worldwide income.  In furtherance of von der Goltz’s efforts to conceal his assets and income from the IRS, Gaffey falsely claimed that von der Goltz’s elderly mother was the sole beneficial owner of the shell companies and bank accounts at issue because, at all relevant times, she was a Guatemalan citizen and resident, and – unlike von der Goltz – was not a U.S. taxpayer.  In support of this fraudulent scheme, Gaffey submitted the name, date of birth, government passport number, address, and other means of identification of von der Goltz’s elderly mother to a U.S. bank in Manhattan. 

The press release does not state the maximum sentence based on the counts of conviction as is often stated in press releases.  Stating the maximum sentence is often misleading because sentences, particularly in tax crimes cases, are often well below the maximums based on the counts of conviction.  The sheer range of crimes to which he pled and is thus convicted would make a statement of the "stacked" maximum so great that, probably, merely stating the maximum would be misleading to the uninitiated.  Although the stacked maximum sentence is surely well in excess of 15 years, the likely sentence given his age is probably in 3-4 year range.

District Court Sustains FBAR Civil Willful Penalty (2/28/20)

In United States v. Ott (E.D. Mich. Dkt. 2:18-cv-12174 2/26/20), here, the district court sustained the IRS assertion of willful FBAR penalties.  The CourtListener docket entries are here:

In material part, the court held:

1. The preponderance of the evidence standard applied to the FBAR willful civil penalty.

2. The definition of willfulness includes recklessness and willful blindness.  (Note the caption for that holding is: “Willfulness Definition for Civil Tax Liability.”)

3. FBAR willfulness can be shown by inference from the facts.

None of this is particularly new, and follows a line of cases over the past few years.

One point of interest is that the IRS asserted tax and civil fraud penalties under § 6663 for 2006, 2007 and 2008.  (See the Tax Court Docket Entries here.)  The taxpayer petitioned the Tax Court and the case was settled for penalties and the accuracy related penalty in § 6662.  See the decision document here (Dkt 45).  Of course, the IRS' burden to prove civil fraud for the civil fraud penalty is the clear and convincing standard, whereas, the trend in cases is that proving willfulness for the FBAR civil willful penalty is preponderance and the definition of willfulness may be looser than civil fraud.  So, the two outcomes are not inconsistent on their face.

Disqus Comment Problems - Hopefully Resolved (2/21/20)

I just realized late last week that there were some disqus comment problems that have apparently been going on for at least a couple of months.  I have not received an email alert of new comments.  And then when I tried to go to the moderation  page in disqus, I could not do so.  I finally got through to the moderation page and there were a number of old comments.  I have approved those comments and hopefully they now show up, albeit belatedly.  I will work through them and see if I should make any replies to the comments.

I am sorry about the problem and will be more diligent in the future.

Two Articles on Swiss Banks (2/19/20)

This is just a miscellaneous post on Swiss Banks to report two recent articles on two different topics.

• Samuel Gerber, U.S. Tax Dispute: Swiss Banks in for More Fines? (Finews.com 2/19/20), here. The article reports on recent addenda by two Category 2 banks who reached NonProsecution Agreements (“NPAs”) under the DOJ Swiss Bank Program.  I recently reported on two incidents:  Union Bancaire Privée, UBP SA ("UBP") Enters an Addendum to its Swiss Bank Program Category 2 NPA (Federal Tax Crimes Blog 2/5/20), here; and Coutts & Co. Ltd. Enters an Addendum to its Swiss Bank Program Category 2 NPA (Federal Tax Crimes Blog 12/20/19), here.  The article speculates that there may be more to come, concluding that: “The Swiss banking industry doesn’t know how far the U.S. authorities intend to go but one observer noted that the proverbial lemon has been squeezed dry already.”  That’s their story and they are sticking to it.
• Switzerland still a hot spot to hide money, but getting better (SWI Swissinfo.ch 2/19/20), here. This article reports (excerpted from the start of the article):

The biennial Financial Secrecy Index ranks each country based on how intensely the country’s legal and financial system allows wealthy individuals and criminals to hide and launder money from around the world. The index bases each country’s secrecy score on 20 indicators, each of which is scored out of 100.  

For the first time Switzerland isn't the worst offender in the Financial Secrecy Index, which was first published in 2011. The current Financial Secrecy Indexexternal link, released by the Tax Justice Network on Tuesday, found that overall financial secrecy around the world is decreasing due to a push for more transparency. On average, countries on the index reduced their contribution to global financial secrecy by 7% since the last index in 2018. 

The Cayman Islands took the top spot followed by the US, which posted a worse score than the previous year partly because it has yet to sign up to the Common Reporting Standardsexternal link for automatic exchange. 

Switzerland’s expansion of the automatic exchange of information on clients to include over 100 countries helped the country move from first to third when it comes to opacity. According to the ranking, Switzerland reduced the risk of acting as an offshore haven by 12% from 2018. 

However, wealthy people from countries not on the list, many of which are in the developing world, can still hide their money virtually risk-free from the tax authorities in their home country by using the offshore services of banks and other financial service providers in Switzerland.

D.C. Circuit Rejects Claim that Admissions were Coerced (2/12/2020)

In United States v. Cooper, ___ F.3d ___, 2020 U.S. App. LEXIS 4153 (D.C. Cir. 2020), here, two defendants, along with another (described as the hub in the wheel in this conspiracy), orchestrated a tax refund scheme and were convicted of theft of public money and conspiracy to defraud the United States. See 18 U.S.C. §§ 641, 371.  One was also convicted of aggravated identity theft, 18 U.S.C. § 1028A.  On appeal, they urged: (i) one asserted a Miranda failure from an interview at the time of executing a search warrant; (ii) that the court erred in allowing IRS agent summary witness testimony and (iii) miscellaneous other arguments that the court deemed insubstantial warranting only summary discussion.

I don’t think there is anything exceptional in the case.  But the first issue (the Miranda issue) is a reminder because it does come up often.

First, the particular fraud involved was tax fraud via erroneous refunds.  The Court describes the fraud as follows:

Several individuals in the District of Columbia acted together to steal millions of dollars from the Federal Treasury. Their method of operation was this. First beg, steal, purchase or borrow other people’s identities including, most importantly, their Social Security numbers. Then file false income tax returns seeking refunds in their names. Keep the refund requests relatively small. List on the tax returns the addresses, not of the purported filers, but of one or another co-conspirator. Then, when the refund checks from the Treasury arrive, compromise bank tellers, negotiate the checks, and deposit the proceeds in the conspirators’ personal accounts. This multi-year conspiracy netted a total of nearly $5 million in tax refunds from the Treasury.

Second, Notwithstanding the tax focus of the fraud, the investigation was started by a Postal Inspector “after detecting what appeared to be fraudulent tax returns being sent through the mail.”

Ninth Circuit Botches Evasion of Assessment Statute of Limitations (2/12/20)

In United States v. Galloway, 2020 U.S. App. LEXIS 3976 (9th Cir. 2020) (unpublished), here, Galloway was convicted of four counts of tax evasion.  On appeal, Galloway made several arguments.  I focus here only on his argument that the statute of limitations foreclosed his convictions on three counts of tax evasion (evasion of assessment).  I think the Court erred.

Here is the panel’s discussion of that issue:

1. Galloway argues that the district court erred in not dismissing Counts 1–3 on statute-of-limitations grounds because the indictment was brought more than six years after Galloway filed his 2003, 2004, and 2005 tax returns. We review the district court’s decision de novo. United States v. Sure Chief, 438 F.3d 920, 922 (9th Cir. 2006). 

The six-year statute of limitations for tax evasion, 26 U.S.C. § 6531(2), begins to run in evasion of assessment cases “from the occurrence of the last act necessary to complete the offense.” n1 United States v. Carlson, 235 F.3d 466, 470 (9th Cir. 2000).n2  Because tax evasion “is not a continuing offense” for statute of [*3] limitations purposes, Cohen v. United States, 297 F.2d 760, 770 (9th Cir. 1962) (quoting Norwitt v. United States, 195 F.2d 127, 133 (9th Cir. 1952)), the offense of tax evasion “is complete as soon as every element in the crime occurs,” see United States v. Musacchio, 968 F.2d 782, 790 (9th Cir. 1991). The elements of tax evasion under § 7201 are: (a) “willfulness”; n3  (b) “the existence of a tax deficiency”; and (c) “an affirmative act constituting an evasion or attempted evasion of the tax.” United States v. Kayser, 488 F.3d 1070, 1073 (9th Cir. 2007).
   n1  Both parties agree that Counts 1–3 charge Galloway with committing tax evasion only by evading the assessment of taxes, and not by evading the payment of taxes.
   n2  The Government’s contention that Counts 1–3 are timely because the statute of limitations began to run, not from the filing of the false tax returns, but from the date Galloway lied to the IRS agents about his taxable income—i.e., the last act of evasion—is squarely foreclosed by Carlson’s clear language. See 235 F.3d at 470.
   n3  The parties do not dispute that Galloway willfully filed his false tax returns.  

  When Galloway late-filed his 2003, 2004, and 2005 tax returns, he had already incurred a tax deficiency for each year. See United States v. Voorhies, 658 F.2d 710, 714 (9th Cir. 1981) (“A tax deficiency exists [by operation of law] from the date a return is due to be filed . . . .”). Therefore, each offense of tax evasion charged in Counts 1–3 was complete when Galloway willfully filed his false tax returns (i.e., each element of tax evasion was thereby satisfied). Because the indictment was brought more than six years after Galloway filed his 2003, 2004, and 2005 tax returns, Counts 1–3 are barred by the statute of limitations. We therefore reverse the district court’s denial of Galloway’s motion to dismiss and vacate his convictions as to Counts 1–3. 

The panel’s reasoning is that the crime of tax evasion (of assessment) was complete upon filing fraudulent returns underreporting the tax liability.  However, my understanding is that the crime of evasion of assessment can be committed by later acts such as lying with the intent to evade assessment of the tax liability.  The lying or other act of evasion of assessment can be a separate act of evasion if it is intended to evade an assessment.  See United States v. Beacon Brass Co., Inc., 344 U.S. 43 (1952), here (holding inter alia (p. 46), with respect to the statute of limitations "We do not believe that Congress intended to require the tax-enforcement authorities to deal differently with false statements than with other methods of tax evasion.")

Eighth Circuit Affirms Tax Preparer Conviction, Rejecting Argument for Search Warrant Suppression (2/12/20)

In United States v. Keleta, ___ F.3d ___, 2020 U.S. App. LEXIS 3566 (8th Cir. 2020), here, the court sustained Keleta’s conviction for “conspiring to defraud the United States and willfully aiding and assisting in the filing of a false tax return” but remanded for resentencing.  This case seems to be a garden variety case of tax preparer fraud.  The issues on appeal were: (i) whether the trial court erred in denying a motion to suppress evidence seized by search warrant; (ii) whether the prosecutor committed misconduct in certain statements before the jury; and (iii) whether the trial court erred in applying a four-level enhancement under S.G. § 3B1.1(a) as organizer or leader of a criminal activity involving five or more participants.  Issues (ii) and (iii) are fairly routine (although issue (ii) is likely a one-off occurrence, unlikely to appear in future trials).  I will address only issue (i)

The motion to suppress was based on a search warrant.  Here are key excerpts for issue (i) (Slip Op. 2-3, 7-8):

Asmerom “Ace” Keleta owned Eriace Enterprise, LLC (Eriace), which operated several tax-preparation businesses in the St. Louis metropolitan area under the names U-City Tax Service and Ace Express Tax Service. In 2012, the IRS’s Scheme Development Center (SDC) forwarded information about Eriace to the IRS’s Criminal Investigation Division. After reviewing the information, investigators noted that a high percentage of tax returns prepared by Eriace claimed certain tax credits.  They also found that much of the information used to seek these tax credits “was not verifiable by other information filed with the IRS” and that the unverifiable information was often combined with verifiable information in ways that made the taxpayer eligible for the maximum or near the maximum available tax credit. The personal tax returns for Keleta and U-City Tax Service employees Miyoshi Lewis and Teklom “Tek” Paulos fit this pattern.  

On February 27, 2013, IRS Special Agent Danette Coleman conducted an undercover operation at a U-City Tax Service branch in University City, Missouri. Lewis prepared a tax return for Coleman while Paulos helped another customer. Keleta was not present at the time. Lewis initially calculated a refund amount of $44 based on the information Coleman provided. When Coleman asked why the refund was so low, Lewis responded that she could “make it more, but the fee will go up.” Lewis then entered false information and calculated a refund of approximately $4,200. She charged Coleman $500 cash for obtaining this increased refund.  

The IRS also received three anonymous letters alleging tax fraud at that U-City Tax Service branch. The anonymous informant claimed that Keleta had sold the use of his preparer tax identification number (PTIN) and electronic filing identification [*3] number (EFIN) to several individuals, including Paulos, who used them to file tax returns containing fraudulent information. The IRS corroborated that Lewis, Paulos, and several other individuals named in the letters were “friends” on Facebook. The IRS also found that numerous withdrawals from Eriace’s business checking account appeared to be personal in nature. 

Based on this information, IRS Special Agent Nicholas Kenney obtained a warrant to search the U-City Tax Service branch and seize records found on the premises. The government executed the warrant on April 13, 2013. It seized computers, cell phones, client files, and other items, including a signature stamp with Keleta’s signature.

* * * *

Convicted Tax Protestor's Bid for Competency Hearing Fails on Appeal (2/10/20)

In United States v. DiMartino (2d Cir. No. 18-2053-cr 2/4/19), here, the Court of Appeals affirmed a tax protestor conviction described as follows:

Terry DiMartino appeals from a judgment of the United States District Court for the District of Connecticut (Thompson, J.) convicting him for his multi-year failure to pay taxes and for his deception and obstruction of the IRS—conduct inspired by the Sovereign Citizen movement, a loosely affiliated group who "`follow their own set of laws' and, accordingly, `do not recognize federal, state, or local laws, policies or regulations' as legitimate." United States v. McLaughlin, ___ F.3d ___, 2019 WL 7602324, at *1 n.1 (2d Cir. December 30, 2019) (quoting Sovereign Citizens: A growing Domestic Threat to Law Enforcement, FBI Law Enforcement Bulletin (2011)). 

DiMartino, a successful insurance agent, represented himself at trial and was convicted.
After trial and before sentencing, DiMartino retained counsel, who moved for a hearing to determine whether DiMartino had been competent to stand trial. Counsel argued that DiMartino's bizarre conduct before and during trial raised a series of red flags impugning his mental fitness, and submitted a psychological report from Dr. Andrew Meisler, who had interviewed DiMartino and examined part of the trial record.

Basically, on this point, the district court rejected the proffered expert testimony and sustained the denial of the request for a competency hearing based principally on a proffered expert report the district court found lacking.  The Second Circuit affirmed under an abuse of discretion standard.

Some interesting excepts (Slip Op. pp. 12-15):

[T]he district court reasonably inferred from DiMartino’s conduct at trial that he understood the proceedings against him and was capable of participating meaningfully in his defense. Among other things, DiMartino attempted to persuade the jury that he lacked the requisite criminal intent; he solicited the jury’s sympathy; and he made a bid for jury nullification. Lesser participation has sufficed to demonstrate competency. See U.S. v. Sovie, 122 F.3d 122, 128 (2d Cir. 1997) (noting that district court’s conclusion that defendant was a “knowing participant in his defense” was supported by the fact that the defendant “took notes, conversed with counsel, and reacted reasonably to the admission of evidence”). 

Crucially, nearly all the purported red flags concerning DiMartino’s competence relate in one way or another to his insistence on espousing or acting on views that are shared with other adherents to a political ideology, however marginal. At trial, the government presented evidence that the rhetoric DiMartino used in his correspondence with the IRS--and continued to espouse at trial--was typical of groups that resist the federal tax laws. Indeed, an undercover IRS agent observed DiMartino at a 2007 Sovereign Citizen convention in Las Vegas, where he expressed frustration at having to “pa[y] [his] ass up in taxes” and asked seminar participants for advice on how sovereign citizens “that have wealth . . . protect their wealth.” Ex. FBI-1A at 52-53, 86. 

U.S. Tax Attorney Denied Habeas Corpus in Extradition Proceeding Based on Netherlands Criminal Tax Conviction (2/10/20)

In Valentino v. United States Marshal (S.D. Tex. Civ. Action 4:20-CV-304 order dated 1/3/10), here, the court denied Valentino’s request for habeas corpus relief in an extradition proceeding.  Valentino is an attorney who practiced international tax law (see some bio information in JAT Comments below at #4).

The Court starts as follows:

I. Procedural Background 

This habeas case arises out of an extradition proceeding. Joseph Valentino was charged and convicted by the Kingdom of the Netherlands for participating in a criminal organization that intentionally filed false corporate tax returns. The Amsterdam district public prosecutor issued a summons for the criminal proceedings in the Netherlands on November 19, 2002. Trial was held in absentia and the judgment was rendered on February 24, 2004. After Valentino appealed his conviction and sentence to the Court of Appeals of Amsterdam, during which proceedings he was represented by counsel, the Court of Appeals rendered a new judgment finding Valentino guilty on two counts: Count One — "participation in an organization for the purpose of committing crimes" — and Count Two — "co-perpetration of intentionally incorrectly filing a tax return provided by tax law." He was sentenced to thirty-four months in prison. 

On February 2, 2018, the United States sought Valentino's extradition to the Kingdom of the Netherlands to execute a sentence on his conviction. Valentino was arrested around April 18, 2018. After holding a detention hearing, United States Magistrate Judge Stephen Wm. Smith ordered Valentino to be released on reasonable conditions pending his extradition hearing. United States v. Valentino, No. 18-mj-00146, 2018 WL 2187645, at *6 (S.D. Tex. May 11, 2018). Judge Smith found that Valentino did not pose a flight risk or a danger to the community and had a "reasonable likelihood" of prevailing on one or more issues at his extradition hearing. He found special circumstances supporting Valentino's release and ordered him released on bond pending the extradition hearing. He noted that "this is only a decision on whether to release Valentino pending the extradition hearing," which "placed [the court] in the difficult task of assessing Valentino's success on the merits" without "prejudging the claims or the evidence until both sides have had an opportunity to be fully heard. Further, the court may not have before it all of the evidence that will be presented in the extradition hearing." Id. at *5 (emphasis added). 

Valentino then moved to dismiss the extradition complaint. Magistrate Judge Peter Bray held a formal extradition proceeding on December 4, 2019, and on January 23, 2020, issued a thorough, 37-page opinion denying Valentino's Motion to Dismiss the United States' Extradition Complaint. Judge Bray certified Valentino as extraditable. 

The next day, Valentino filed a Petition for a Writ of Habeas Corpus under 28 U.S.C. section 2241, which currently is pending before this Court. Dkt. 1. Valentino asserts that the Court should grant the writ and hold that extradition must be denied because (1) all but two of the charges against Valentino were barred by the statute of limitations under United States law, (2) the fourteen-year delay between conviction and the extradition complaint violates Valentino's due process rights, and (3) the Netherlands failed to establish probable cause to believe that Valentino had the requisite knowledge to convict him of the charged offenses. These arguments were raised in the extradition proceedings and addressed in Judge Bray's opinion. Valentino asserts he has a high likelihood of success on these claims, and that he poses no flight risk or danger to the community. These factors, he argues, along with the Netherlands' fourteen-year delay between convicting him and seeking his extradition, establish "special circumstances" that warrant his release until determination of his habeas petition.

Follow Up on the Biggest Tax Heist Ever (1/30/20)

I wrote previously about an alleged scheme to steal revenue from various European countries based on claims for refund from so-called “cum-ex” trading.  NYT Article on Perhaps Biggest Tax Heist Ever (1/24/20), here.

I still don’t know the details of the precise scheme but have read in cases I cite at the end of this blog that it operated by having entities (retirement and pension plans) purportedly owning Danish stock on which Danish tax was withheld make claims for refund of the withheld tax under certain double tax treaties.  The cases I cite below involve the U.S. double tax treaty with Denmark.  In very high level summary, the basis for the claim for refund required, at a minimum, that the claimant own the stock that paid the dividend from which tax was withheld and paid over to the Danish tax authority (acronymed in the U.S. to SKAT).  SKAT came to believe that the claimants did not own the stock on which thy claimed the refund.  SKAT took steps under its tax procedures to recover the refunds; under those procedures pending in Denmark, SKAT claims that it is entitled to recover the erroneous refunds.  In addition, SKAT filed U.S. suits against the various U.S. entities causing the claims to be made.  In the U.S. suits, Denmark is not invoking its tax claims qua tax claims but is instead invoking “six common law claims against the defendants. Counts One and Two allege fraud and aiding and abetting fraud. Count Six alleges negligent misrepresentation. And Counts Three through Five allege payment by mistake, unjust enrichment, and money had and received.”  That U.S. litigation has been consolidated into a multi-district litigation (“MDL”) case being managed by Judge Lewis Kaplan of S.D.N.Y.  (Judge Kaplan, here, is one of the best trial judges I have appeared before in my career.)  The cases below were rendered in that MDL.

Here is a key allegation from In Re SKAT Tax Refund Scheme Litigation, 356 F. Supp. 3d 300, 309 (S.D. N.Y. 2019) (footnotes omitted):

SKAT alleges that these refund claims were fraudulent because the defendant plans did not own shares in the Danish companies that they purported to own.[12] It argues that it was not possible for the plans to have owned the shares they purported to own because many, including The Bradley London Pension Plan ("Bradley Plan"), were single-participant 401(k) plans limited to approximately $116,500 in contributions per year, yet they claimed to own millions of dollars of stock in Danish companies within the first year of their existence.[13] The numbers, the plaintiff argues, simply do not add up. The defendants therefore were not entitled to the dividends they claimed to have earned and were not entitled to the tax refunds they claimed under the U.S.-Denmark Treaty.[14] SKAT allegedly paid out approximately $2.1 billion as a result of this fraudulent tax refund scheme.[15]

I infer that the claim to have owned millions of dollars of stock when they had limited contributions must have require some "phony" loans of the type often see in bullshit tax shelters.

Excellent Decision for D.C. District Court on Brady Disclosures in Mass Document Dumps (1/24/20)

Some of the more high profile tax crimes cases, like the broader category of white collar crime, have large document sets that the Government must produce to the defense team.  This has led to mass document disclosures (sometimes open file discovery) which, the Government claims, includes all Brady and Giglio material, but the Government insists the defense team must ferret that out to make it useful.  Defense lawyers believe that mass disclosures in large data set cases violates the intent of Brady and Giglio.  I have written on this subject before, and include links in the Comments below.

In United States v. Saffarinia, 2020 U.S. Dist. LEXIS 6735 (D. D.C. 2020), CL here, the court dealt with that issue in a general white collar crime context (not a tax crime context).  (See Slip Op. 72-95.)  I include certain excerpts leading to the Court’s conclusion to order the Government to identify the known Brady material and then offer that conclusion (cleaned up):

[*74]
Between June and August 2019, the government made five productions of documents to Mr. Saffarinia, which included, among other things, nearly all of the FBI's investigative case file, interview reports (i.e. FD-302s), agent notes, and witnesses' statements pursuant to the Jencks Act, 18 U.S.C. § 3500. A large portion of the electronic data consists of electronic communications, including 264,800 e-mails and over 223,000 documents from the FBI's case file, that span roughly a four-year period. And the government's production includes hard drives from two different computers allegedly owned by Person B, which contain 394 [*75] gigabytes of data. . The discovery here, consisting of more than one million records and 3.5 million pages of documents, is massive. 

The government produced the documents to Mr. Saffarinia with production logs, Bates-stamping, and metadata in an electronic and searchable format that is accessible through "Relativity," an electronic database.  The government included a cover letter with each production and a basic, one to two page chart summarizing the Bates-stamped [*78]  numbers covered in each production. And the government represents that it explained its theory of the case to Mr. Saffarinia and defense counsel at two reverse proffer sessions. 

* * * *
[*76]

NYT Article on Perhaps Biggest Tax Heist Ever (1/24/20)

The NYT has this article:  David Segal, It May Be the Biggest Tax Heist Ever. And Europe Wants Justice (NYT 1/23/20), here.  I haven't yet figured out how the scam works, but it is a cum-ex deal.  The article says cryptically:

Through careful timing, and the coordination of a dozen different transactions, cum-ex trades produced two refunds for dividend tax paid on one basket of stocks. 

One basket of stocks. Abracadabra. Two refunds.

Another quote:

Before it all unraveled, the cum-ex ecosystem of lawyers, advisers and auditors enjoyed heady days. Last year, the lawyer who testified anonymously at the Bonn trial described the culture of the cum-ex world to Oliver Schröm and Christian Salewski, two reporters on the German television show “Panorama,” under disguising makeup. It was a realm beyond morality, he said: all male, supremely arrogant, and guided by the conviction that the German state is an enemy and German taxpayers are suckers.

And another quote:

American bankers didn’t try cum-ex at home because they feared domestic regulators. So they moved operations to London and treated the rest of Europe as an anything-goes frontier. Frank Tibo, a former chief tax officer at a bank where Mr. Shields and Mr. Mora worked, said American and British cum-ex traders regarded the Continent as a backwater of old economies ripe for swindling.

The article says that the traders were reluctant to pull the scam in the U.S., so did so in Europe.  One of the larger scammers is reported to tell his cohorts queasy about the scam:

“Whoever has a problem with the fact that because of our work there are fewer kindergartens being built,” Dr. Berger reportedly said, “here’s the door.”

As I read the article, I kept thinking about the Son-of-Boss bullshit tax shelters where lawyers, major law firms, accountants, major accounting firms, brokers, brokerage firms, financial and math gurus and others came together to create and implement raids on the U.S. Treasury.

JAT Comment: