Tuesday, October 21, 2014

Pretrial Skirmishing in Weil - the Coplan Issue of Improper Expansion of the Defraud / Klein Conspiracy (10/21/14)

As readers know, Raoul Weil, a former high ranking UBS official in charge of its U.S. tax evasion shenanigans, is being tried for tax conspiracy. United States v. Weil (SD FL No. 08-60322-CR-COHN). (See also blog entry links below.)  Before trial, Weil sought dismissal on the basis asserted the issue asserted in United States v. Coplan, et al., 703 F.3d 46 (2d Cir. 11/29/12), here.  That issue is whether the formulation of the defraud conspiracy in Hammerschmidt v. United States, 265 U.S. 182 (1924) more broadly than the scope of the word "defraud" meant at common law and thus means in other criminal statutes improperly expands the scope of the defraud conspiracy.  See the links to the Coplan issue below.  As expanded, the application in the tax context is generally referred to as a Klein conspiracy, after the leading case employing the expanded definition in a tax setting, United States v. Klein, 247 F.2d 908 (2d Cir. 1957).

In a short order, here, the Weil Court denied Weil's motion to dismiss because it was untimely and, in any event, fails on the merits of the motion.  The critical excerpts from the Court's short order are:
However, a review of the Motion demonstrates that it also fails on its merits. Weil was indicted under 18 U.S.C. § 371, which prohibits conspiracies to defraud the United States and its agencies. Indictment ¶¶ 11–13. Weil contends that the common-law definition of "defraud" is to "deprive[] another of property rights by dishonest means." Motion at 2 (quoting United States v. Coplan, 703 F.3d 46, 59 (2d Cir. 2012), cert. denied, 134 S. Ct. 71 (2013)). Weil notes that the Government does not allege that he deprived the IRS of property rights by dishonest means, and thus he is not accused of having conspired to defraud the IRS in the traditional sense. "Instead, the Indictment relies on a judicially and specially crafted definition of 'defraud' that includes 'interfer[ing] with or obstruct[ing] one of the [U.S. government's] lawful . . . functions by deceit, craft or trickery, or at least by means that are dishonest.'" Id. (quoting United States v. Klein, 247 F.2d 908, 916 (2d Cir. 1957)). This specific theory of fraud against the United States and its agencies—involving not the deprivation of property but instead the obstruction of governmental functions—has come to be known as the "Klein conspiracy." See United States v. Adkinson, 158 F.3d 1147, 1154–55 (11th Cir. 1998). 
Weil argues that the Klein conspiracy violates a prohibition on judge-made, common-law crimes. Weil also argues that any ambiguity in the text of section 371 should be interpreted in favor of defendants under the rule of lenity, and the broad interpretation of the term "defraud" that gives life to the Klein conspiracy violates this rule. Motion at 4. Finally, Weil argues that recent Supreme Court precedent rejecting a broad interpretation of honest-services fraud robs the Klein conspiracy of any remaining viability. Id. at 2–3 (citing Skilling v. United States, 561 U.S. 358 (2010)).\ 
In the Motion, Weil leans heavily upon the Second Circuit's criticisms of the Klein conspiracy in Coplan, 703 F.3d 46, to support his argument that the theory must fail as a judge-made basis for criminal liability without a foundation in the text of the criminal statutes. But in Coplan, the Second Circuit ultimately held that the Klein conspiracy was firmly entrenched in the Supreme Court's and the Second Circuit's precedents, and remained viable notwithstanding the Supreme Court's recent decision in Skilling. 703 F.3d at 61–62. Shortly thereafter, the Supreme Court declined to hear an appeal from the Second Circuit's decision. Coplan, 134 S. Ct. 71. 
Like the Second Circuit, the Eleventh Circuit has recognized the Klein conspiracy as a basis for criminal liability subsequent to the Supreme Court's holding in Skilling. See United States v. Kottwitz, 614 F.3d 1241, 1264–66 (11th Cir.), modified on other grounds, 627 F.3d 1383 (11th Cir. 2010). Therefore, though Weil may have a non-frivolous argument for the rejection of the Klein conspiracy, this Court agrees with the holding of the Second Circuit in Coplan: "such arguments are properly directed to a higher authority." 703 F.3d at 62. It is accordingly 
ORDERED AND ADJUDGED that Defendant Raoul Weil's Motion to Dismiss Indictment Pursuant to Federal Rule of Criminal Procedure 12(b)(3)(B) for Failing to State an Offense [DE 148] is DENIED both as untimely and on its merits. 
For further background on the order, Weil's motion is here and the Government's response is here (the attachment to the Government's response (the brief in opposition to certiorari in Coplan, is here).

Blog Entries on the Weil Prosecution

  • Raoul Weil Has First U.S. Court Appearance (Federal Tax Crimes Blog 12/17/13), here.
  • Raoul Weil Pleads Not Guilty: Thoughts and Speculations (Federal Tax Crimes Blog 1/8/14), here.
  • Raoul Weil Trial Begins Next Week; Some Items for the Run-Up (Federal Tax Crimes Blog 10/9/14), here.
Blog Entries on the Coplan Issue

  • Coplan #1 - Panel Questions Validity of Klein Conspiracy (Federal Tax Crimes Blog 12/1/12), here.
  • Further on the Second Circuit Detour on the Interpretation of the Defraud / Klein Conspiracy (Federal Tax Crimes Blog 12/18/12), here.

Monday, October 20, 2014

Offshore Depositor Pleads to Tax Perjury; Banks - UBS, Israeli Bank & Jersey Bank (10/20/14)

DOJ Tax announced, here, that another offshore bank depositor, Menashe Cohen, has pled guilty to one count of tax perjury, Section 7206(1). Key Excerpts
According to court documents, Menashe Cohen, an oriental carpet dealer, and his sister maintained an undeclared bank account at UBS in Switzerland that had a balance of approximately $1.3 million.  Cohen also maintained bank accounts in Israel and in Jersey, a British Crown dependency located in the Channel Islands off the coast of Normandy, France.  Although Cohen’s return for tax year 2009 reported that he had a financial interest in a bank account in Jersey, the return failed to report that he had financial interests in the accounts located in Switzerland and Israel.  In addition, Cohen’s return only reported $350 in interest income, when in fact he had received approximately $66,500 in interest income during 2009. 
In total, for tax years 2006 through 2009, Cohen failed to report approximately $170,000 in income earned from offshore bank accounts.  In addition, Cohen filed a false and fraudulent Report of Foreign Bank and Financial Accounts (FBAR) for 2009, wherein Cohen reported he had bank accounts in Israel and Jersey on the FBAR, but failed to report his financial interest in the UBS account in Switzerland. 
* * * *
Cohen faces a statutory potential maximum sentence of three years in prison and a maximum fine of $250,000 at his Jan. 26, 2015, sentencing.  In addition, Cohen has agreed to resolve his civil liability for failing to report his financial interest in the UBS account on a FBAR by paying a 50 percent civil penalty to the IRS based on the high balance of his one-half interest in the account.
JAT Comment:  Straightforward continuation of DOJ Tax's plea requirements.  However, the limitation of the FBAR penalty to his interest in the UBS account.  From the narrative, it would appear that he had FBAR and income tax delinquencies for other accounts in a period that would have been relevant to the prosecution.

Wednesday, October 15, 2014

Gary Stern Indictment (1015/14)

A reader just forwarded me the indictment titled United States v. Gary J. Stern (ND IL No. 14 CR 580), here.  (There is something curious about the indictment; the caption states the "Norther" District of Illinois; a typo certainly, but one would think that the word  processing template would /  should preclude such typos related to the identity of the court; oh well.)  The Counts:

  • Count One:  Section 7212(a), tax obstruction, count with a lot of allegations of "corrupt endeavor" conduct.  (Similar to what one sees in a defraud / Klein conspiracy count indictment; oh, but then section 7212(a) is a one person defraud / Klein conspiracy charge (at least until and unless the Supreme Court re-imagines what defraud means).)
  • Count Two: Section 7206(2), aiding and assisting, count with less flowery allegations related to "Taxpayer DJ."
  • Count Three: Section 7206(2), aiding and assisting, count with similarly less flowery allegations related to "Taxpayer PB."
  • Count Four: Section 7206(2), aiding and assisting, count with similarly less flowery allegations related to "Taxpayer SM."
  • Count Five: Section 7206(2), aiding and assisting, count with similarly less flowery allegations related to "Taxpayer RL."
  • Count Six: Section 7206(2), aiding and assisting, count with similarly less flowery allegations related to "Taxpayer BF."
  • Count Seven: Section 7206(2), aiding and assisting, count with similarly less flowery allegations related to "Taxpayer JK."
  • Count Eight: Section 7206(2), aiding and assisting, count with similarly less flowery allegations related to "Taxpayer SR."
I will add more on the indictment later.

I do note that the indictment designation sheet attached is signed by Stephen Heinze.  That is a name from my past, but that is another story (I doubt that I will write anything on it, but I can disclose that I was neither a target, subject, person of interest or otherwise of the earlier matter, although I did represent a client who allegedly fell into one of those categories until leveler heads prevailed).

For an earlier article in the proceedings against Mr. Stern, see Jared S. Hopkins, Feds: Lawyer helped clients claim $16 million in false tax credits (Chicago Tribune 11/6/13), here.  The complaint related to this earlier civil cases is here (from the Chicago Tribunes).

For an earlier blog on the civil proceeding, see Chicago Lawyer Enjoined From Promoting Fraudulent Tax Schemes (Federal Tax Crimes Blog 11/7/13), here.

Tuesday, October 14, 2014

An Example of the Difference Between Pleading and Not Pleading (10/14/14)

Over 95% of federal criminal cases are resolved by plea agreement.  One of the reasons is that, in the Sentencing Guidelines calculations, defendants who plead will usually qualify by the plea for the acceptance of responsibility two or three level decrease in the Guidelines calculation.  Moreover, by pleading, the defendant may make himself or herself more attractive for a Booker downward variance from the reduced Guidelines range already reduced for acceptance of responsibility.  Conversely, by going to trial, a defendant generally forgoes any realistic hope of an acceptance of responsibility adjustment or any favorable Booker downward adjustment and may behave at trial in a way that will not endear the sentencing judge to the defendant.

These dynamics played out in United States v. Morgan, 2014 U.S. App. LEXIS 19025 (11th Cir. 2014), here.  There the appellant, Morgan, and three others -- one her husband -- were indicted for one count of conspiracy (18 USC § 371), seven counts of funds taken by fraud (18 USC § 2314), six counts of money laundering (18 USC § 1957), and three counts of tax perjury (26 USC § 7206(1)).  Two of the other defendants each pled guilty to two nontax counts (one conspiracy count and one other); one was sentenced to 51 months and the other -- her husband -- was sentenced to 121 months.  There is no explanation for the differences in these two sentencings.  The third of the other indicted defendants resides in Denmark, has not been extradited and presumably is a fugitive from justice.

Morgan did not plead.  There is no indication that she was offered a plea, but defendants are usually offered a plea of some sort.  Sometimes the central person in a large crime with several counts will not be offered a plea, except on onerous terms.  At any rate, she went to trial.  Moreover, when she went to trial, she waived her Fifth Amendment privilege and testified.  That's bad enough, for the resulting cross-examination can make the defendant look very bad.  But, not only did she open herself to cross, she lied in her testimony.  Not good.  She was convicted on all counts.  The maximum possible punishment for the counts of conviction (stacked) was 264 years imprisonment.  The advisory calculated Guidelines range exceeded that maximum, so the Guidelines range became that maximum.  The judge sentenced her to 420 months (35 years), thus making a major Booker downward variance.  The sentencing was reversed on appeal.

On remand for sentencing, the sentencing judge "subtracted two levels from Morgan's offense level for the erroneous abuse-of-trust enhancement and determined Morgan's correct Guidelines range was 324 to 405 months of imprisonment."  The judge then sentenced her to 405 months imprisonment, stating that "nothing had changed in the case other than the enhancement for abuse of a position of trust."  (The judge could therefore have left the sentencing at 420 months, but did give her a 15 month lesser sentence.)  The judge stated that Morgan had not accepted responsibility and that "a 405-month sentence was appropriate, regardless of Morgan's life expectancy."

Monday, October 13, 2014

Chuck Rettig Article on Certification of Non-Willfulness (10/13/14)

Chuck Rettig, here, a major player in the criminal tax and offshore account arena, has published an article on the certification of non-willfulness in the recent Streamlined Procedures and the OVDI/P transition to partial Streamlined treatment.  Charles P. Rettig, OVDP and Streamlined Procedures: Am I Non-Willful?, J. Tax Prac. & Proc. 17 (August-September 2014), here.

Key excerpts:
Taxpayers and their representatives must be cautious when certifying non-willful status to the government. The vast majority of taxpayers having previously undisclosed interests in a foreign financial account or asset likely believe they are more “non-willful” than not. The issue at hand in the streamlined procedures is whether the IRS will agree. Feel lucky? 
* * * * 
How does a taxpayer actually provide “specific reasons” in his certification confirming that he did not know of the FBAR filing requirements? The ability to prove something that simply did not exist is difficult, at best. Will the government discount statements by the taxpayer attempting to disprove knowledge as self-serving unless accompanied by objective supporting evidence? What objective evidence might exist to appropriately demonstrate a lack of personal knowledge by the taxpayer about their foreign reporting requirements? 
* * * * 
Taxpayers recently attempting to transition from the OVDP into the streamlined procedures are receiving some degree of pushback from the government. Transitional treatment has been denied for many on the basis of “willful blindness” where the government believes the return preparer “likely” inquired about the existence of a foreign account or where the taxpayer simply failed to advise their return preparer of the existence of an interest in a foreign financial account (whether or not the preparer inquired about such an account). 
* * * * 

Saturday, October 11, 2014

Bitcoins Update (10/11/14)

I will summarize key points I found interesting from an article I just read on the tax treatment of Bitcoin and the IRS's response to it.  David D. Stewart, ABA Meeting: IRS Preps Bitcoin Investigators as Treatment Questions Remain, 2014 TNT 184-9 (9/23/14), no link available.  The article summarizes discussion at an ABA Tax Section meeting of the Civil and Criminal Tax Penalties Committee on 9/20.

1.  Use of bitcoin is not inherently illegal.  However, using bitcoin to skirt the U.S. tax law is illegal.  It's use can also be illegal under other laws such as money laundering.

2.  According to Bryan Skarlatos of Kostelantetz & Fink, Bitcoin is not as anonymous as cash, although in some cases its use may be more convenient.

3.  According to an IRS representative, "the government is getting more sophisticated in tracking transactions in which the currencies are used improperly."  The principal focus of the investigations is money laundering, but the IRS is gearing up for criminal tax investigations.

4.  The article reports on how the government traces:
"Sparkman noted that because bitcoin transactions are recorded in the public block chains, investigators have been able to trace them back all the way to their origins. She said that the one difficulty that remains is in breaking the passwords used to protect the private encryption keys that grant control over the coins themselves, but that it can be done, or the government may gain access through a cooperative party."
5.  The IRS/Treasury is getting suspicious activity reports on bitcoin activity.

6.  The substantive treatment is that bitcoins are treated as property rather than as currency.

7.  One participant said that, for underlying substantive tax treatment, the gain from realization of bitcoins would be taxable but the losses would not be deductible because bitcoin acquisitions are not entered for profit.

8.  On Bitcoin custodians:
"Bitcoin custodians that hold accounts are money transmitters under federal law, while foreign custodians could be foreign financial institutions. Asked whether virtual currency intermediaries should be subject to FATCA requirements, Keyso said the government is aware of the issue but does not yet have a "published position" on the question.
9.  On use of bitcoins as cash payments for CTRs/Forms 8300:  Uncertain.

Swiss Category 2 Banks Reportedly Get Draft of NPA Agreement (10/11/14; 10/14/14)

A reader forwarded me a link to an article in Neue Zürcher Zeitung, Zoé Baches, Schock für Schweizer Banken: USA fordern totale Kooperation (11/10/14), here.  The article is in German.  My German is rusty.  So I relied on a Google translation of the article which, I think, is not perfect but better than if I had tried to translate it (not sure how much better, since I did not try very hard).  The Google translation has the title of the article as follows:  Shock for Swiss banks: USA require total cooperation.

A Reuters article in English reports on the NZZ article, Alice Baghdjian, Draft US deal for Swiss banks in tax row seeks "total cooperation" - paper (Reuters 10/11/14), here.  I rely for the comments below principally because the Google translation is not clear on a lot of points, and my inference from it alone might not  be good.

Here is my summary:

1.  DOJ has emailed the banks participating as Category 2 banks in the DOJ Swiss bank program a "Model-NPA."  NPA is the acronym for nonprosecution agreement which is what the Category 2 banks seek in the program.

2.  DOJ demands "total cooperation."  The requirements "would also apply to parent companies, subsidiaries, management, workers and external advisors"

3. Quoting NZZ: ""This total cooperation would, in addition, not only apply with respect to the DOJ and the Internal Revenue Service, but also to anyone, even foreign law enforcement agencies, that the DOJ is supporting in its investigations," with "no end date."

4.  "It is also unclear whether the requested information would only need to be handed over when doing so complied with Swiss law, the paper said."

5.  "Failure to follow any one of the terms of the agreement would render it void, and the bank could risk prosecution from the DOJ."

Although, as noted the Google translation of the German is not perfect, I infer that it says also the following (which is not reported in the Reuters article):

6.  Either within the Model-NPA or separately, the banks must commit for the future to report about U.S. taxes -- presumably violations or suspected violations.

7.  Hardliners have taken over the leadership of DOJ, mentioning Tamara Ashford, Acting AAG Tax, who is awaiting confirmation to the U.S. Tax Court.  (I don't know what this means other than that DOJ Tax will continue to do what it was doing with respect to Category 2 banks; I am not aware that Ms. Ashford is tougher on the issues than the prior AAG.)

Addendum 10/14/14 10:00 AM:

A reader, Andre Watts, sent me the following and gave me permission to post it since, for some reason, he could not get it to post as a comment.  It adds considerable nuance to the article from the German rather than the rough translations:

Friday, October 10, 2014

Court Holds that a False Claim Crime Can Be Committed by Unsigned Claim for Refund on 1040 (10/10/14)

In United States v. Sroufe, 2014 U.S. App. LEXIS 18078 (11th Cir. 2014), here, unpublished, the Eleventh Circuit held that a claim for refund filed on a Form 1040 can be a false claim prosecutable as a false claim under 18 U.S.C. section 287, here.  

The unsigned 1040 would not be a return under the traditional Beard test.  Beard v. Commissioner, 82 T.C. 766, 777 (1984), affd. 793 F.2d 139 (6th Cir. 1986).  In relevant part, Beard held that a "return" for purposes of the penalty sections based on a return filing requires the following elements:
First, there must be sufficient data to calculate [the] tax liability; second, the document must purport to be a return; third, there must be an honest and reasonable attempt to satisfy the requirements of the tax law; and fourth, the taxpayer must execute the return under penalties of perjury. 
All of these elements are subject to interpretation, but the requirement that the taxpayer execute the return under penalty of perjury is fairly straight-forward.  If the taxpayer sends in an unsigned return claiming a refund (or even just misreporting the tax due), he cannot be prosecuted for penalties requiring a return, such as the accuracy related penalty (Section 6662, here), the civil fraud penalty (Section 6663, here), or tax perjury, Section 7206(1), here (which has its own penalty of perjury requirement).  Nor, from the sole act of filing an unsigned return, can he be tried for tax tax evasion, Section 7201, here.  The IRS could charge failure to file (Section 7203, here).  I suppose at the stretches, the IRS might be able to prosecute the filing of an unsigned return in egregious cases (Sroufe was one) under the tax obstruction provision, Section 7212(a), here; Sroufe was charged and convicted for tax obstruction but not failure to file..

But Sroufe was charged and convicted for making a false claim via the unsigned 1040.  That is troubling because an unsigned 1040 simply is not a valid claim via a return under the Beard test.

I wonder whether, if the defendant here had encountered the Commissioner on the street and asked for a refund in the amount claimed, that would be sufficient to make a false claim case?  There is no textual requirement in the statute that the claim be made in writing.  Or what if during an audit of why a taxpayer had not filed a return, the taxpayer asked the agent for the same amount as a refund.  Or what if the defendant encountered an IRS mail room clerk and requested the refund?  Or what if all of those requests were made by unsigned letter.  Could any of the instances be prosecuted as a false claim case.  Perhaps -- if this case and the Snipes lower court decision discussed below are correct.

As cited in the DOJ CTM, the false claim crime can be charged with a signed return claiming a refund.  See DOJ CTM 22.04 (2012 ed.), here, citing "United States v. Drape, 668 F.2d 22, 26 (1st Cir. 1982) (holding that the signing and filing of a false tax return claiming a refund constituted a false claim under 18 U.S.C. § 287)."  DOJ says that a refund claim must be made, but in the context of a Form 1040, the unsigned return is not a refund claim for the reasons noted above.

New IRS Guidance for International Taxpayers (10/10/14)

A source just forwarded me the following links for some new IRS postings, so I pass them on (before I have had time to study; will post my thinking on them later):

Quick Comments:

1. The FAQs for SDOP answer some questions that taxpayers and practitioners have been raising about the more cryptic earlier SDOP instructions.

Deutsche Bank Swiss Unit Joined DOJ Program as Category 2 Bank (10/10/14)

John Letzing and EYK Henning, Deutsche Bank to Aid U.S. Justice Department in Swiss Tax Evasion Probe (WSJ Markets 10/9/14), here.  Excerpts:
Deutsche Bank AG’s Swiss unit has entered a U.S. Justice Department self-reporting program for banks that believe they may have helped Americans evade taxes, according to people familiar with the matter. 
* * * * 
Deutsche Bank’s Swiss business has around 13,000 clients in total, though the number of U.S. clients is insignificant, a person familiar with the matter said.  
* * * * 
The Justice Department’s self-reporting program for Swiss banks represents the culmination of a years-long U.S. legal crackdown. The first non-prosecution agreements for banks participating in the program could be announced as soon as the end of this year, according to attorneys and experts. 
Some banks in the self-reporting program have found the process to be trying, people familiar with the matter said. 
For instance, banks must try to get current and former clients to waive their right to privacy under Swiss law, so that they can identify those clients to U.S. authorities as having disclosed their accounts. Amounts voluntarily disclosed by these clients can be subtracted from a bank’s penalty, according to the program’s rules. 
The savings could be substantial. Some banks in the program could see hundreds of millions of dollars shaved from their total penalties, according to people familiar with the matter. But many disgruntled clients have been unwilling to provide the necessary paperwork, these people say.

Thursday, October 9, 2014

IRS Information Letter on Treatment of "Green Card" Holders (Noncitizen Lawful Residents) (10/9/14)

The IRS has released this Information Letter 2014-0033, here, with information about the U.S. tax regime for "green card" holders.

The background is that non-citizen residents of the U.S. are subject to U.S. tax.  Key excerpts are:
An alien individual is classified as a resident of the United States with respect to any calendar year if he or she (i) is a lawful permanent resident of the United States at any time during such calendar year (commonly referred to as the “green card test”), (ii) meets the substantial presence test in section 7701(b)(3), or (iii) makes the first-year election provided in section 7701(b)(4). Code § 7701(b)(1)(A). An individual who is neither a citizen of the United States nor a resident of the United States within the meaning of section 7701(b)(1)(A) is classified as a nonresident alien. Code § 7701(b)(1)(B). 
Section 7701(b)(6) provides that an individual is a lawful permanent resident of the United States if he or she has the status of having been lawfully accorded the privilege of residing permanently in the United States as an immigrant in accordance with the immigration laws and such status has not been revoked (and has not been administratively or judicially determined to have been abandoned). Lawful permanent residents are colloquially referred to as “green card” holders. 
Many green card holders may also be treated as residents of a foreign country—under that foreign country’s domestic law—with which the United States has an income tax treaty in force. Such an individual is a “dual resident taxpayer.” See Treas. Reg. § 301.7701(b)-7(a). Income tax treaties typically have tiebreaker rules that apply to determine the residence—for purposes of the treaty—of an individual who otherwise would be treated as a resident of both the United States and the other country. See, e.g., Paragraph 3, Article 4 (Residence) of the U.S. Model Income Tax Convention (2006). If a green card holder would be treated as a resident of another country under a tiebreaker rule in an applicable income tax treaty for a taxable year, he or she may claim a treaty benefit as a nonresident alien for purposes of computing his or her U.S. income tax liability with respect to that portion of the taxable year he or she was considered to be a dual resident taxpayer. A dual resident green card holder may compute his or her U.S. income tax liability as if he or she were a nonresident alien by filing a Form 1040NR with a Form 8833 attached, as explained in Treas. Reg. § 301.7701(b)-7(b) and (c). See also “Effect of Tax Treaties” in Chapter 1 of IRS Publication 519 (U.S. Tax Guide for Aliens). If issues arise as to the proper interpretation or application of a treaty, the Competent Authorities may assist under the terms of the Mutual Agreement Procedure Article in the applicable treaty. See, e.g., Rev. Proc. 2006-54, 2006-2 C.B. 1035 (Nov. 17, 2006). 
With that background, the Information Letter addresses the following subjects:

  • First year of U.S. residence—residency starting date 
  • Special no-lapse residence rules
  • Termination of treatment as a green card holder
  • Application of sections 877 and 877A to green card holders [rules for expatriation]
  • Application of section 6039G [requirement to attach information statement in year of expatriation]

Raoul Weil Trial Begins Next Week; Some Items for the Run-Up (10/9/14)

Raoul Weil, former head of UBS' bank activities including forays into U.S. tax evasion (see Wikipedia entry here), is scheduled for criminal trial next week in Florida.  So, I picked up some items from the internet.

  • Joint Statement of the Case, here.
  • Ama Sarfo, Ex-UBS Exec Says Swiss Reports Belong In Tax Evasion Trial (Law 360 10/7/14), here.  Discusses move to introduce certain reports by the Swiss Federal Banking Commission and the Swiss Financial Market Supervisory Authority which, allegedly, pin the blame subordinates for UBS' U.S. skullduggery as to U.S. taxes.  The following are quotes from the article: 

He believes that Swiss authorities conducted a more thorough investigation into the tax evasion matter than the U.S. Department of Justice, which he says did relatively little sleuthing outside of multiple interviews conducted with one witness, former UBS senior banker Martin Liechti, who was held for four months and released with a nonprosecution agreement after he implicated Weil, according to Weil's motion.  
“The defense is not seeking to admit the reports in order to prove a 'malicious or vindictive' prosecution, as the government now claims,” he says. “It is Mr. Weil’s position that the U.S. government indicted Mr. Weil prematurely. ... The [Swiss Federal Banking Commission] reviewed the evidence available, evidence not available to Mr. Weil except through this motion, and concluded that it was 'not comprehensible' why he was indicted.”

  • Ex-banker heads to Florida to testify in Weil case (swissinfo.ch 10/8/14), here.
  • Joshua Franklin, UBS faces fine of up to $6.3 billion in French tax probe: paper (Reuters 10/3/14), here.  Suggests to me the question of whether UBS got off way too light for its U.S. tax skullduggery.

Wednesday, October 8, 2014

IRS Grants Automatic Treaty Relief for Canadian RRSPs and RRIFs (10/8/14)

The IRS has adopted a revenue procedure to provide relief for U.S. taxpayers with certain Canadian retirement plans (RRSPs and RRIFs).  Previously, provided an election under the U.S. Canada double tax treaty was made, those plans were exempt from current taxation for contributions and internal build-up, provided that the taxpayer made an election, with taxation deferred until distribution (much like U.S. IRAs).  The IRS was liberal in granting relief for late elections.  The relief is now automatic in most cases without an election provided that the taxpayer has otherwise complied with the U.S. filing requirements.

The press release is IR-2014-97 (10/7/14), here.  Key excerpts (virtually all) of the notice summarizing the new revenue procedure are:
The Internal Revenue Service today made it easier for taxpayers who hold interests in either of two popular Canadian retirement plans to get favorable U.S. tax treatment and took additional steps to simplify procedures for U.S. taxpayers with these plans. 
As part of this, the IRS provided retroactive relief to eligible taxpayers who failed to properly choose this benefit in the past. In addition, the IRS is eliminating a special annual reporting requirement that has long applied to taxpayers with these retirement plans. 
Under this change, many Americans and Canadians with registered retirement savings plans (RRSPs) and registered retirement income funds (RRIFs) now automatically qualify for tax deferral similar to that available to participants in U.S. individual retirement accounts (IRAs) and 401(k) plans. In general, U.S. citizens and resident aliens qualify for this special treatment as long as they filed and continue to file U.S. returns for any year they held an interest in an RRSP or RRIF and include any distributions as income on their U.S. returns. 
The change relates to a longstanding provision in the U.S.-Canada tax treaty that enables U.S. citizens and resident aliens to defer tax on income accruing in their RRSP or RRIF until it is distributed. Otherwise, U.S. tax is due each year on this income, even if it is not distributed. 
In the past, however, taxpayers generally would get tax deferral by attaching Form 8891 to their return and choosing this tax treaty benefit, something many eligible taxpayers failed to do. Before today's change, a primary way to correct this omission and retroactively obtain the treaty benefit was to request a private letter ruling from the IRS, a costly and often time-consuming process. 
Many taxpayers also failed to comply with another requirement; namely that they file Form 8891 each year reporting details about each RRSP and RRIF, including contributions made, income earned and distributions made. This requirement applied regardless of whether they chose the special tax treatment. The IRS is eliminating Form 8891, and taxpayers are no longer required to file this form for any year, past or present. 
The revenue procedure does not modify any other U.S. reporting requirements that may apply under the Bank Secrecy Act (BSA) and section 6038D. See FinCEN Form 114 due by June 30 of each year, and Form 8938 attached to a U.S. income tax return for more information about the reporting requirements under the BSA and section 6038D. Different reporting thresholds and special rules apply to each of these forms.
Rev. Proc. 2014-55 is here.

NTA Nina Olson Speaks on the Rough Edges of FATCA (10/8/14)

Nina Olson, the National Taxpayer Advocate, feels taxpayer's pain with respect to the rough edges of FATCA.  William Hoffman, FATCA 'Tormenting' Taxpayers, Olson Says, 2014 TNT 195-3 (10/8/14).  Olson was speaking at the Securities Industry and Financial Markets Association FATCA Policy Symposium in Washington yesterday.  Here are some excepts from the article:
"This is a piece of legislation that is so big and so far-reaching, and [has] so many different moving pieces, and is rolling out in an incremental fashion . . . that you really won't be able to know what its consequences are, intended or otherwise," Olson said. "I don't think we'll know that for years. And by that point we'll actually be a little too late to go, 'Oops, my bad, we shouldn't have done this,' and then try to unwind it." 
* * * * 
"I keep asking in all of these questions -- are we burdening the compliant taxpayer?" Olson said. "And the people that we're really trying to uncover are not participating in this process, and so they're not feeling any burden whatsoever, because they're not paying the extra cost." 
* * * * 
There is good news for some, Olson said. After foreign banks expressed reluctance to open accounts for some U.S. taxpayers overseas, some enterprising businesses began offering insurance to protect against incomplete FATCA disclosures, she said.
"So here we now have created a whole new industry for a risk we have manufactured ourselves," Olson said.
I do not have permission to provide the article, but will try to locate non copyrighted reports of her talk and, if I find any, I will post the link.

Saturday, October 4, 2014

Two Enablers Caught in Sting Investigation Sentenced (10/3/14)

According to a DOJ Press release, here, two offshore financial account enablers -- Eric St.-Cyr and Patrick Poulin -- were sentenced "to serve 14 months in prison and three years of supervised release each for conspiring to launder monetary instruments."    The sentences were lighter based on the defendants' substantial cooperation with ongoing investigations.  Links to prior blog entries related to these sentencings are the end of this blog entry.

Key excerpts from the press release are:
According to the plea agreements and statements of facts, Vandyk, St-Cyr and Poulin conspired to conceal and disguise the nature, location, source, ownership and control of property believed to be the proceeds of bank fraud, specifically $2 million.  Vandyk, St-Cyr and Poulin assisted undercover law enforcement agents posing as U.S. clients in laundering purported criminal proceeds through an offshore structure designed to conceal the true identity of the proceeds’ owners.  Vandyk and St-Cyr invested the laundered funds on the clients’ behalf and represented that the funds would not be reported to the U.S. government. 
* * *   “This investigation, which lasted years, involved extensive undercover activity as well as cooperation from multiple foreign law enforcement agencies.  The undercover IRS agents in this investigation went to Canada, the Turks and Caicos and the Cayman Islands to develop the evidence.  These two defendants are cooperating with the IRS, and we anticipate that other investigations will develop from the information they have provided.” 
 * * * * 
According to court documents, Vandyk and St-Cyr lived in the Cayman Islands and worked for an investment firm based there.  St-Cyr was the founder and head of the investment firm, whose clientele included numerous U.S. citizens.  Poulin, an attorney at a law firm based in Turks and Caicos, worked and resided in Canada as well as Turks and Caicos.  His clientele also included numerous U.S. citizens.  Vandyk, St-Cyr and Poulin solicited U.S. citizens to use their services to hide assets from the U.S. government, including the IRS.  Vandyk and St-Cyr directed the undercover agents to create an offshore corporation with the assistance of Poulin and others because they and the investment firm did not want to appear to deal with U.S. clients.  Vandyk, St-Cyr and Poulin used the offshore entity to move money into the Cayman Islands and used Poulin as a nominee intermediary for the transactions. 
According to court documents, Poulin established an offshore corporation called Zero Exposure Inc. for the undercover agents and served as a nominal board member in lieu of the clients.  Poulin transferred approximately $200,000 that the defendants believed to be the proceeds of bank fraud from the offshore corporation to the Cayman Islands, where Vandyk and St-Cyr invested those funds outside of the United States in the name of the offshore corporation.  The investment firm represented that it would neither disclose the investments or any investment gains to the U.S. government, nor would it provide monthly statements or other investment statements to the clients.  Clients were able to monitor their investments online through the use of anonymous, numeric passcodes.  Upon request from the U.S. client, Vandyk and St-Cyr liquidated investments and transferred money, through Poulin, back to the United States.  According to Vandyk and St-Cyr, the investment firm would charge clients higher fees to launder criminal proceeds than to assist them in tax evasion.
Readers should note that one of their colleagues, Joshua Vandyk, an attorney, caught up in the same conduct and indicted at the same time, was previously sentenced to 30 months.  See Offshore Enabler Nabbed in Sting Operation Sentenced (Federal Tax Crimes Blog 9/5/14), here.  There is no specific indication as to the differences in the sentencings, but the St.-Cyr and Poulin sentencing press release emphasizes their cooperation, but the Vandyk sentencing press release does not indicate cooperation.

Other Prior Related Blog Entries:
  • Enabler Guilty Pleas from Sting Operation (Federal Tax Crimes Blog 7/12/14), here.
  • IRS Sting Investigation Nabs Offshore Bank Account Enablers (Federal Tax Crimes Blog 3/24/14), here.

Wednesday, October 1, 2014

Penalties and Corporate America's Shenanigans (10/1/14)

Michael Lewis continues to amaze.  See Michael Lewis, The Secret Goldman Sachs Tapes (BloombergView 9/16/14), here.  He is not the story.  He is the story-teller.  One who hears stories from others and says something meaningful about their story.  The story here is from a bureaucrat, Carmen Segarra, the hero of the piece.  The big issue here could be characterized as capture of the regulators, but that may be a bit too facile as the articles cite.  See also Nolan McCarthy, Five things the Goldman tapes teach us about financial regulation (Washington Post Monkey Cage 9/03/14), here.

The story here is about how Goldman Sachs, the larger than life financial institution, works its will with the regulators who are supposed to restrain its will.  It is probably not a story about the evil giant, GS.  GS is not evil (in my opinion).  It is big, it is powerful, it has friends in the right places.  The regulators know that.  That is the evil.  But that is life.  The job of Government is to mitigate that evil by diligence of the type that, allegedly, did not happen with GS.

I won't try to summarize the story.  I can't do that as well as Michael Lewis or Carmen Sagarra in the This American Life episode.  536: The Secret Recordings of Carmen Segarra (This American Life 9/26/14), here.  (For those who prefer reading, the transcript is here.)

The story is about regulators with the Federal Reserve regulating GS.  In reading this story, I could not help but think about this episode in the context of IRS audits.  I have spoken often about bullshit tax shelters.  Basically, fraudulent shelters playing on complexity to discourage regulators (IRS agents) from having the will to get to the bottom of the bullshit.  Many of those shelters were implemented by the titans and exemplars of corporate America.  Those who knew better.  Some of the bullshit shelters were caught and splayed before the public when the taxpayers were so brazen as to litigate in a public forum.  But the GS episode makes me wonder how many were not caught or may have received a pass for some of the reasons laid out in the saga of the Federal Reserve and GS.

In this regard, here are some excerpts from the WP Monkey Cage article summarizing the PRI Sagarra episode.
2.  Complexity may be an important source of capture 
While the tapes don’t conclusively resolve why the Fed was so soft on Goldman, it does offer several clues that suggest the importance of the complexity of the financial sector.  At various junctures in the tapes, Segarra is encouraged by her bosses to cultivate a more cooperative relationship with Goldman.  Their rationale was that her more aggressive posture would ultimately lead Goldman to be less transparent and forthcoming with regulators about its activities.  There is undoubtedly something to this argument.  Goldman is a large and complex firm that makes large and complex deals and investments in a large number of complex markets.  Goldman management itself has a hard time keeping track of all that is going on.  There is no way that a small examination staff, even one co-located at the bank, can do its job without the active cooperation of the bank. So it is quite possible in such a setting that aggressive regulation will be ineffective regulation. 
A partial solution to this problem is to increase the number of examiners and pay the premium needed to attract talent and expertise to the Fed.  But the better solution is to make banks smaller and less complex.  The increase in transparency will lead to better regulation all around. 
 3. Our rules-based regulatory system tilts in favor of Wall Street 
To vastly over-simplify, there are two approaches to regulation:  rules-based and principles-based regulation.  In a rules-based system such as ours, regulators promulgate very specific rules based on the authority that has been delegated to them by Congress.  Ultimately, whatever is not explicitly forbidden is allowed.  In a principles-based system, regulators establish broad principles of behavior and then have a fair amount of leeway in determining whether the regulated firm is complying with the underlying principle. 
There are good arguments for and against both approaches.  But the Goldman tapes show a clear liability of the rules-based system.  As discussed in the broadcast, Goldman was working on a deal with Banco Santander to accept a temporary transfer of some of Santander’s assets so that the Spanish bank would appear to be better capitalized.  The whole purpose of the transaction was to help Santander evade its regulators’ capital requirements.  While the Fed supervisors felt the deal was “shady,” they felt they had no explicit legal authority to block the specific type of transaction.  Perhaps under a regime that enforced a principle against regulatory arbitrage and the subversion of the banking regulations, the Fed could have acted.
To leap from there.  These corporate taxpayers used complexity -- complexity driven in part by little more than increasing obscurity and the chance of winning the audit lottery -- to achieve their raid on the fisc.  While, at least from the raids that were caught, the taxes, some penalties and interest were ultimately collected, many were not caught and, even the ones that were caught, got off lightly in terms of the civil and criminal penalties that could have applied to their shenanigans.  Is there some notion harbored in the IRS and perhaps even in the courts that the exemplars of corporate American do not behave in this fashion (a notion that, in my view, is disproved by the anecdotal cases where they were caught) and thus cannot be subject to the penalties that ordinary U.S. citizens and taxpayers would draw if they undertook this type of behavior?  Why not more penalties?

Instead of focusing the fire where far more revenue is involved and apply penalties in a way that will discourage misbehavior, the IRS goes after the small fish when there are bigger fish to fry.

Saturday, September 27, 2014

Wylys Ordered to Disgorge Hundreds of Millions of Tax Benefits With Interest (9/27/14)

Judge Shira Scheindlin, of SDNY, has ordered (see here) the Wyly brothers to pay 187.7 million plus interest over a long period in disgorgement of taxes on certain offshore trading activity.  See Joseph Axe and Nate Raymond, U.S. SEC wins hundreds of millions in Wyly fraud case (Reuters 9/25/14), here.  (For a previous post on this suit, see Wyly Brothers' Use and Tax Abuse of Offshore Banks and Entities (Federal Tax Crimes Blog 8/5/14), here; and SEC Suit for Disgorgement of Federal Income Tax Related to Securities Fraud (Federal Tax Crimes Blog 6/16/13), here.)

The suit was brought by the SEC (rather than by or on behalf of the IRS) under securities statutes authorizing disgorgement.  I post first a very brief summary of the Conclusions and then a cut and paste of the Conclusions.


1.  Ordering disgorgement does not violate the IRC's command that the Secretary assess and collect tax.

2.  This action for disgorgement, although measured by unpaid tax, is not an action to collect the tax; it is an action for disgorgement, "a discretionary and equitable remedy aimed at preventing unjust enrichment."

3.  The disgorgement equitably should be applied against any tax liabilities the IRS asserts.  Here a key quotes:
While it would be equitable to credit the amount disgorged in this SEC enforcement action towards any tax liability assessed in the future arising out of the same conduct, treating such amount as an offset does not transform the disgorged amount into a tax. 
* * * * 
As I mentioned earlier, any amounts disgorged in this case should be credited towards any subsequent tax liability determined in an IRS civil proceeding as a matter of equity. n205
   n205 In the event there is a judicial determination that contravenes the legal conclusions of this Opinion and Order — that is, if another court determines that the IOM Trusts are in fact, tax-exempt non-grantor trusts, defendants may pursue all available remedies in this Court, including a motion to vacate the final judgment under Rule 60(b) of the Federal Rules of Civil Procedure. But no such motion will be considered if the IRS, in exercising its discretion, chooses not to proceed with an administrative or civil action against the Wylys."
4.  The tax issues are not too difficult to resolve in a disgorgement case.

5.  The Court then determines the tax issues.  They are far too difficult to summarize here, but the details are included in the lengthy quote below.  But essentially the offshore structures were treated as grantor trusts with the tax consequences being visited contemporaneously on the Wylys.

Monday, September 22, 2014

Comments on the Warner Sentencing Oral Argument (9/22/14)

Readers of this blog know that the Government appealed the sentencing of Ty Warner.  Under the sentencing scheme we have had from the 1980's, sentences can be appealed.  After the Booker change to the scheme in 2005, sentences are still appealable but, as interpreted, judges have considerably more discretion to impose non-Guideline sentences (referred to as variances).

In his plea agreement, the parties agreed that the Guidelines sentencing range was 46-57 months.

At sentencing , the Government recommended to the sentencing judge a sentence of 1 year and 1 day (which, with the good in 18 U.S.C. § 3624(b) would be 47 days less than the sentence).  The defendant argued for no incarceration -- probation.

The sentencing judge in Warner can gave  a considerable variance, awarding probation.

Just last week, the Seventh Circuit heard oral argument in the Government's appeal.  The oral argument is here. I previously posted the briefs.  When is Booker Variance Too Much? Per DOJ, Certainly in the Ty Warner Case (Federal Tax Crimes 5/12/14), here; Ty Warner Appellee Brief on Sentencing Appeal (Federal Tax Crimes 7/28/14), here; and the Reply Brief is here.

This blog will focus on on the oral argument (linked above).  Many hear the oral argument as indicating that the Court will uphold the sentence by the district judge.  See e.g.,  Douglas Berman, Seventh Circuit panel seemingly unmoved by feds appeal of probation sentence given to Beanie Babies billionaire (Sentencing Law and Policy Blog 9/17/14), here.

I listened to the oral argument.  Having spent four years doing court of appeals work with DOJ Tax  and having many arguments), my experience is that it is often hard to predict results from questioning at oral argument.  Sometimes judges just want to fully test an argument with tough questions before they accept it.  But, if one can predict a result from this argument, it appears that the panel was not struggling with the issue of what was necessary to reverse and remand for sentencing but what was necessary to affirm.  Still, I am not sure I would wager on either outcome.  (I have said before that, given my perspective on the federal tax crimes system and the role of sentencing within it, if there was ever a case that demanded some incarceration in the context of sophisticated tax crimes, this was it; a probation sentence, if allowed, will bubble throughout tax sentencing and will force judges of good conscience to struggle with the issue of whether the defendant before them should be treated worse that Ty Warner.)

I want to make only a few points about the oral argument: