Updates on Forfeiture and Civil Penalty in Bullshit Tax Shelter Cases (6/18/18)

I write on two unrelated topics today.  Neither are directly related to federal tax crimes, so I write in summary only.

1.  In United States v. Daugerdas, ___ F.3d ___, 2018 U.S. App. LEXIS 15823 (2d Cir. 2018), here, the Second Circuit held that the petitioner-appellant, the wife of Paul Daugerdas who was convicted for bullshit tax shelter activity, could have the opportunity to amend her pleadings in the criminal forfeiture in Paul's case against funds in which she claimed an interest.  I have previously posted a number of blog entries on Paul.  A general search, here, on Daugerdas will show those entries.  Here is the Second Circuit's summary of the case:

Petitioner-appellant Eleanor Daugerdas appeals from an order of the United States District Court for the Southern District of New York (William H. Pauley III, J.), dismissing her petition asserting a third-party interest in certain accounts (the "Accounts") preliminarily forfeited in the underlying criminal proceedings against her husband, Paul M. Daugerdas. The parties agree that Paul initially funded the Accounts, at least in part, with money he was paid by the law firm through which he conducted his fraudulent activities, and that he gratuitously transferred ownership of the Accounts to his wife over a period of years. Eleanor contends that the law firm irreversibly commingled the income it received from Paul's fraudulent-tax-shelter clients with untainted money before it paid Paul, and accordingly the funds in the Accounts cannot easily be traced to her husband's fraud. Eleanor therefore asserts that the Accounts cannot now be taken from her to satisfy her husband's forfeiture obligations; instead, she argues, equivalent amounts must be collected from her husband's own assets in the same manner that a judgment creditor would enforce any personal money judgment. 

We conclude that Eleanor's petition does not currently contain sufficient plausible allegations to sustain her position; however, at oral argument, she claimed to be able to plead additional facts, and such repleading would not necessarily be futile. Because denying Eleanor the ability to assert the argument she raises here could potentially permit the government to deprive her of her own property without due process of law, we VACATE the district court's order and REMAND the case for proceedings consistent with this opinion.

The opinion contains a good discussion of the differences between criminal forfeiture (in personam) and civil forfeiture (in rem).

2.  In Greenberg v. Commissioner, Tax Ct. Memo LEXIS 79, here, the Court rejected Greenberg's bullshit tax shelter claims but held that, although it would otherwise have sustained the 40% accuracy related penalty, it would not do so because the IRS had not met the requirement that it meet a production burden with respect to the written supervisor approval required by § 6751(b).  The Tax Court's opening two paragraphs project the result:

These cases are about a lawyer and a tax accountant who used a series of complex option spreads to generate millions in tax savings for themselves and their clients. The Commissioner says these transactions look too much like Son-of-BOSS deals--a type of deal this Court has consistently said doesn't work. n2 He argues that the taxpayers made a fortune selling tax shelters and tried to shelter their shelter income with the same kind of shelter. He also takes issue with a large tax loss that the taxpayers say was generated when they abandoned their interest in a mysterious partnership--even though there is no paperwork to prove any such abandonment.
   n2 Son-of-BOSS is a variation of a slightly older alleged tax shelter known as BOSS, an acronym for "bond and options sales strategy." There are a number of different types of Son-of-BOSS transactions, but what they all have in common is the transfer of assets encumbered by significant liabilities to a partnership with the goal of increasing basis in that partnership or the assets themselves. The liabilities are usually obligations to buy securities, and are typically not completely fixed at the time of transfer. This may let the partnership treat the liabilities as uncertain, which may let the partnership ignore them in computing basis. If so, the result is that the partners will have a basis in the partnership or the assets themselves so great as to provide for large--but not out-of-pocket--losses on their individual tax returns. We have never found a Son-of-BOSS deal that works. See, e.g., CNT Inv'rs, LLC v. Commissioner, 144 T.C. 161, 169 n.7 (2015); BCP Trading & Invs., LLC v. Commissioner, T.C. Memo. 2017-151, at *2 n.2. 

The Commissioner issued two rounds of notices of deficiency. The first disallowed losses from option spreads claimed through the taxpayers' partnership, GG Capital, as well as the abandonment loss. The second disallowed losses the Commissioner says the taxpayers claimed from another partnership--AD Global-- through the same type of transaction. The taxpayers say they never claimed these losses. They also say the Commissioner got the procedure wrong--he should have issued notices of final partnership administrative adjustment (FPAAs), not notices of deficiency--and that he missed the statute of limitations. If those arguments fail, they say these transactions were legitimate investments, not Son-of-BOSS deals. The Commissioner thinks this sounds too good to be true.

Evidentiary Rulings in FBAR Collection Suit (6/6/18)

In United States v. Garrity, 2018 U.S. Dist. LEXIS 92561 (D. Conn. 2018), here, the Court rules on objections to evidence in this FBAR collection action about which I have previously written (blog entries collected at the end of this blog entry).  Because of the number of the exhibits and objections, the Court opens with a general discussion titled "I. General Principles and Observations About the Parties' Objections to Exhibits."  Then in part II, titled "II. The Court's Rulings on Specific Proposed Exhibits," the Court addresses the specific exhibits and objections in chart form.  I address here only the general discussion.  Readers may, however, find the specific discussion useful.

The particular part of the general discussion I found interesting is:

1. Authenticity 

Finally, courts have held that the fact that the records were produced by a party in response to a discovery request, "while not dispositive of the issue of authentication, is surely probative." McQueeney, 779 F.2d at 929. See also Burgess v. Premier Corp., 727 F.2d 826, 835-36 (9th Cir. 1984) (holding that "the district court could properly have found that all of the exhibits were adequately authenticated by the fact of being found in [defendant's] warehouse"). 

In this case, as noted below in the specific rulings, the documents whose authenticity defendants challenge include records bearing the signature and/or initials of Mr. Garrity, Sr., and/or his sons—and those signatures, which appear to be by the same person(s), are also contained in other records to which Defendants do not object. See, e.g., Exs. 25 (signed by Kevin Garrity, and to which Defendants do not object), 61 (will signed by Mr. Garrity and submitted to the Court at ECF No. 115-13), and 99 (promissory notes signed by Mr. Garrity and submitted to the Court at ECF No. 115-11). Other documents include the same bank account number and appear to be records of the same bank as to which Defendants have made judicial admissions in their answer; appear to be records of the same foundation, and bear the same dates, about which Defendants have made judicial admissions in their answer; and provide evidence of the same "shared signature authority" about which defendants have made judicial admissions in their answer. See ECF No. 9 ¶¶ 7, 8, and 21. Further, Plaintiff has represented that all of these documents were produced by Defendants after the documents were obtained from the foundation or "after Defendants' counsel travelled to Liechtenstein and obtained it directly from" the bank that served as the foundation's agent. See ECF No. 155 at 1-2. Defendants have not contested this representation.

In addition, for some related context of the above, I picked up two recently filed documents related to specific requests for jury instructions on specific subjects requested by the Court.  The item  of particular interest is both sides' proposed instructions on "Judicial Admissions from Answer" (Gov't description) and "Uncontested Facts" (Defendant's description).

• Government Instructions, here.
• Defendant's Instructions, here.

Tax Attorney's Conviction and Sentencing Affirmed on Appeal (6/6/18)

In United States v. Lynch, 2018 U.S. App. LEXIS 14085 (3rd Cir. 2018) (nonprecedential), here, the Third Circuit affirmed the conviction and sentencing of Steven J. Lynch, a tax attorney, whose criminal conviction and sentencing I have written before.  See Tax Attorney Convicted of Employment Tax Fraud (Federal Tax Crimes Blog 9/8/16; 9/10/16), here, and Tax Attorney Sentenced to 48 Months of § 7202 Convictions (Federal Tax Crimes Blog 1/14/17), here.  The decision is nonprecedential and covers no new ground.  It  does cover a lot of points, albeit in some cases not in great detail.  I will just point out some of the points as reminders to readers.

1.  As a defense to the criminal charge and as a  means to lower his tax loss for sentencing, Lynch argued that the subsequent delinquent payment of the Trust Fund tax should be considered.  The Court's rejections of those arguments were as follows:

Lynch argues that § 7202 does not contain within it any language specifying a due date and so argues that his late payments do not alone suffice to establish that he failed to pay over the taxes. This argument fails on its face. Section 7202 applies to taxes "imposed by this title," and § 6151 makes clear that "when a return of tax is required under this title or regulations, the person required to make such return . . . shall pay such tax at the time and place fixed for filing the return." See, e.g., United States v. Quinn, No. 09-cv20075 (JWL), 2011 U.S. Dist. LEXIS 10506, 2011 WL 382369, at *1 (D. Kan. Feb. 3, 2011) ("[A] 'failure to pay over' necessarily incorporates the concept of a deadline, as the failure must be measured as of some particular time."), aff'd, 566 F. App'x 659 (10th Cir. 2014). Thus, where a payment is late, the responsible person has by definition failed to pay it over and if that failure was willful, that person has violated § 7202. 

* * * * 

Lynch next argues that the tax loss should actually have been zero, given that he always intended to pay the taxes, or alternatively should have been reduced by the amount of his late payments. As we already explained, § 7202 is violated when the taxes are willfully not paid as of the time that the filing is due. The Guidelines, for their part, are clear that for willful failure-to-pay offenses, "the tax loss is the amount of tax that the taxpayer owed and did not pay" and furthermore that "[t]he tax loss is not reduced by any payment of the tax subsequent to the commission of the offense." § 2T1.1(c)(3) & (c)(5). Accordingly, the tax loss is properly calculated based on whatever Lynch owed and willfully did not pay when the applicable filings were due, at which point the offense had been committed. Subsequent payments cannot retroactively reduce that tax loss.

2.  Lynch argued that the prosecutor had improperly asserted to the jury that the taxes were his taxes when, in fact, they were employer taxes.  The Court rejected the argument as follows:

Court Rejects Defense Expert Testimony as to State of Law and Duty in Government FBAR Willful Penalty Case (6/3/2018)

In United States v. Garrity, 2018 U.S. Dist. LEXIS 91665 (D. Conn. 2018), here, a Government suit to obtain judgment on an FBAR willful penalty, the Court granted the Government's motion in limine to preclude the testimony of the defense's expert witness.  The Court described the testimony thus excluded:

According to Defendants' expert disclosure, Mr. Epstein is a certified public accountant with over 25 years of experience. (Report of Howard B. Epstein, CPA, ECF No. 114-2 at 2.) His practice focuses on international tax planning and compliance for individual taxpayers and multi-national companies. (Id.) Defendants propose that Mr.  Epstein will testify at trial on the following general subjects: 

• "general reporting requirements as they related to Foreign Financial Accounts and Foreign Trusts"; and
• "general guidance published by the Internal Revenue Service, the Department of Treasury, and FinCen explaining the rules and reporting requirements to taxpayers and practitioners relating to such vehicles for the year the subject penalty is assessed (2005), as compared to years before and after." (ECF No. 114-2 at 2.) 

More specifically, Mr. Epstein's proposed testimony includes opinions on: 

• "the state of published guidance and public awareness of [foreign account] reporting requirements so as to provide an objective backdrop or perspective . . . .";
• "how such guidance evolved in the years before and after the subject year [i.e., 2005], and how, in that climate, international tax compliance has been viewed and understood by practitioners and taxpayers . . . ."; and
• "whether an individual taxpayer could have been unaware of his filing foreign income and asset reporting requirements." (ECF No. 114-2 at 3.) 

Mr. Epstein's proposed testimony purports to answer the question, "Should Paul Garrity Sr. have known of his requirements to report the Stiftung [a Liechtenstein entity]?" (ECF No. 114-2 at 9.) He opines that "the IRS should not and does not determine—without specific supporting evidence—that a taxpayer should have known of his foreign bank account reporting requirements." (Id. at 10.)

The Court excluded the testimony for three reasons:  First, it found that "it will not assist the jury to understand the evidence or to determine a fact in issue."  Second, it found the proffered testimony to be "is irrelevant to the question of willfulness."  Third, even if relevant, the Court invoked Rule 403 "because allowing Mr. Epstein to testify on the proposed subjects would risk jury confusion and invade the province of the Court.

The opinion is very short, so I encourage readers interest in this subject to read the opinion.  Basically, I think the reasoning is as follows:

1.  The issue in the case is whether the taxpayer (the deceased parent) was willful in not reporting the foreign accounts.  Willfully, the court says, means "knowingly or recklessly" failing to file.  Significantly, the court said:

Actual knowledge encompasses "willful blindness" to the obvious or known consequences of one's actions. McBride, 908 F. Supp. 2d at 1205 (citing Global-Tech Appliances, Inc. v. SEB S.A., 563 U.S. 754, 767 (2011)). The government may prove willful blindness with evidence that Mr. Garrity, Sr. made a "conscious effort to avoid learning about reporting requirements." Williams, 489 Fed. Appx. at 659. Evidence of a taxpayer's negligence, however, is insufficient to prove willfulness. See, e.g., Bedrosian, 2017 WL 4946433, at *6 (finding that the defendant was not liable for willful failure to file an FBAR because his actions amounted to, at most, negligence).

2.  On the issue the jury will resolve, the expert's report:

does not, and does not purport to, address the subjective standard at issue here. Instead, Mr. Epstein speaks only to an objective standard—whether Mr. Garrity, Sr. "should have known" of the reporting obligation in light of the IRS's public education on the issue at the relevant time. What Mr. Garrity, Sr. should have known—i.e., whether Mr. Garrity, Sr. was negligent in his failure to file an FBAR—is not the issue in this case. 

What Mr. Garrity, Sr. actually knew (or consciously chose to avoid learning) is the key issue, and there is no evidence linking that issue with Mr. Epstein's proposed testimony.

JAT Comments:

Excellent Presentation on Restitution in Tax Crimes Cases (5/20/18)

At the ABA Tax Section May Meeting, a panel discussed restitution in criminal tax cases and presented a slide presentation titled "The Gathering Storm: Grappling with the Impact of Restitution Orders on Civil Tax Litigation," here.  The slide presentation was prepared by Caroline Caraolo, here.

The Topics covered are:

• Tax Loss in a Criminal Proceeding
• Restitution
• How is a Restitution Calculated?
• How can a Restitution Order be Challenged?
• How is Restitution Collected?
• Restitution-Based Assessments
• Can Restitution be Avoided?
• Can a Civil Examination be Avoided?
• Impact of Restitution-Based Assessments in Civil Tax Proceedings

I add some points that are inherent in the presentation, but I would state differently to make the points:

• Practitioners should understand the difference between tax loss for Sentencing Guidelines purposes and restitution.  Restitution is the actual tax loss for the count(s) of conviction.  Tax loss for Sentencing Guidelines purposes can include, in addition to the tax loss for the count(s) of conviction, the tax loss attributable to "relevant conduct" -- which may include related criminal conduct not included in the count(s) of conviction, whether not charged, dismissed, or acquitted.  Further, tax loss for Sentencing Guidelines purposes can overstate the actual tax loss if calculated without consideration of unclaimed deductions or credits.  And tax loss calculations are, as the slide presentation notes, subject to certain estimating conventions if it is otherwise not reasonably estimable.  
• I don't think those Sentencing Guidelines conventions for estimation apply to the tax restitution calculation, so at sentencing it is important to argue that the Government should not be able to get by on such estimations.  Estimations work for Sentencing Guidelines purposes because of the broad bands of tax loss in the Tax Table (S.G. §2T4.1., here).  Most of the time even significant differences between the estimated tax loss and the real tax loss will not affect the Guidelines calculations and will not affect sentencing because of Booker downward variances so common in tax cases.  But, restitution calculations will affect the real world.  The taxpayer (or other defendant liable for restitution) will have to pay any excess of restitution over the real tax loss (or at least be liable to pay such excess).  So, in my judgment, estimations should not work unless they resolve all reasonable doubt within the preponderance of the evidence standard in favor of the defendant.  As the presentation notes:  "To estimate loss [for restitution], there must be a reasonable basis to approximate loss, and impossible to determine actual loss. United States v. Futrell, 209 F.3d 1286, 1291-92 (11th Cir. 2000)."  I don't think that is inconsistent with saying that reasonable doubts as to the restitution amount should be resolved in favor of the defendant.  
• Keep in mind that for tax restitution, the amount can be assessed immediately and cannot be reduced by the IRS, so that really serious consequences can apply if the restitution is higher than the real tax loss.  In this regard, if the IRS believes that the real tax loss is higher than restitution, it can use the standard deficiency procedures to assess and collect the tax, so foregoing asserting restitution amounts that may be too high will not impair the fisc.

Another thanks to Caroline.  (Thanks to Caroline are very common on this blog; or at least not uncommon.)

Prior Blogs on restitution and tax loss are (reverse chronological order):

• Relevant Conduct Raised by the Probation Officer and Used by the Sentencing Judge in Calculating the Guidelines (Federal Tax Crimes Blog 3/10/15), here.
• On Restitution, Count of Conviction and Tax Loss (Federal Tax Crimes Blog 10/24/13), here.
• Restitution, Relevant Conduct, Counts of Conviction (Federal Tax Crimes Blog 4/11/13), here.

Data Table and Statistics on FBAR Penalty Civil Litigation (5/19/18)

I provide here an excel spreadsheet titled FBAR Civil Litigation Spreadsheet.  As noted in the sources worksheet, I think the source for the raw data is DOJ Tax.  That raw data is in the worksheet titled Data.  I put that raw data into Excel's Table format so that it can be sorted, sliced and diced.  I also created the Statistics worksheet to derive statistics from the data table.  If anyone has corrections, updates or comments, please let me know at jack@tjtaxlaw.com.

There are some limitations to the spreadsheet

Outstanding Presentation on Collection of Title 31 International Penalties (Including FBAR) (5/19/18)

I offer here, with permission, an updated version of Caroline Ciraolo's outstanding PowerPoint presentation (with co-panelists Sandra Brown, Jeremy Herndon, Niles Eber, and Charles Pillitteri), titled Collection of Title 31 International Penalties.  This is from a presentation at the ABA Tax Section May Meeting.  Caroline's bio is here.  I highly recommend to all who have an interest in this area.

From the "Topics" page, the subjects covered are:

• Title 31 – Bank Secrecy Act
• FBAR Penalties
• Authority to Assess and Collect
• Statute of Limitations
• Federal Debt Collection Procedures
• Administrative Collection Tools
• Suits to Collect - Tax Division, U.S. Department of Justice
• Collection of Judgments
• Suits to Challenge FBAR Penalty
• Bankruptcy Procedures re: FBAR Penalties

Of the foregoing, probably the most interesting for readers of this blog is Taxpayer Suits to Challenge FBAR Penalties (slides 33-35).

Thanks to Caroline.

I posted the prior version of this presentation in 2013:  FBAR Penalty Collection -- Beyond the Collection Suit, Administrative Offsets Loom Large and Long (Federal Tax Crimes Blog 4/2/13; Updated 4/10/13), here.

District Court Caps IRS Authority to Assess Willful FBAR Penalty at $100,000 (5/19/18)

In United States v. Colliot (W.D. Texas No. AU-16-CA-01281-SS), a case brought by the U.S. to obtain judgment on an FBAR willful penalty, the Court granted Colliot's motion for summary judgment, holding that the IRS cannot assess a willful penalty in excess of $100,000 despite the statute allowing a penalty assessment of the higher of $100,000 or 50% of the maximum amount in the unreported foreign account(s).  The order granting summary judgment is here.  This is a major holding which will surely follow, could dramatically affect the landscape for cases in the pipeline until the IRS acts to change the regulations landscape on which the decision was based.

First, I offer the relevant documents as follows:

• Colliot's Motion, here.
• U.S. Response to Motion, here, with a diagram, here.
• Colliot's Reply, here.
• U.S. SurReply, here.
• Court Order Granting Colliot's Motion for Summary Judgment, here.
• The docket entries in the case through today, here.

The following is the Court's summary of the relevant facts and regulatory background which, I think, is consistent with the summary judgment submissions by the parties.

A. Legal Framework 

To understand Colliot's argument, it is first necessary to briefly review the history of the provision used to impose civil penalties upon Colliot, 31 U.S.C. § 532 1(a)(5). A previous version of § 5321(a)(5) allowed the Secretary of the Treasury to impose civil monetary penalties amounting to the greater of $25,000 or the balance of the unreported account up to $100,000. See Resp. Mot. Summ. J. [#57] at 2. A related regulation promulgated by the Department of the Treasury via notice-and-comment rulemaking, 31 C.F.R. § 103.57, reiterated that "[f]or any willful violation committed after October 26, 1986 . . . the Secretary may assess upon any person, a civil penalty[] . . . not to exceed the greater of the amount (not to exceed $100,000) equal to the balance in the account at the time of the violation, or $25,000." Amendments to Implementing Regulations Under the Bank Secrecy Act, 52 Fed. Reg. 11436, 11445-46 (1987).  

In 2002, the Treasury delegated the authority to assess penalties under § 532 1(a)(5) to the Financial Crimes Enforcement Network (FinCEN). Treasury Order 180-01, 67 Fed. Reg. 64697 (2002). In addition to this delegation of enforcement authority, Treasury Order 180-01 provided that related regulations were unaffected by this transfer of power and should continue in effect "until superseded or revised." Id. Roughly six months later, FinCEN redelegated  the authority to assess penalties under § 532 1(a)(5) and its related regulation, § 103.57, to the IRS. Mot. Summ. J. [#52-5] Ex. E (Memorandum of Agreement and Delegation of Authority for Enforcement of FBAR Requirements). 

In 2004, Congress amended § 5321 to increase the maximum civil penalties that could be assessed for willful failure to file an FBAR. 31 U.S.C. § 532 1(a)(5); American Jobs Creation Act of 2004, Pub. L. No. 108-357, § 821, 118 Stat. 1418 (2004). Under the revised statute, the civil monetary penalties for willful failure to file an FBAR increased to a minimum of $100,000 and a maximum of 50 percent of the balance in the unreported account at the time of the violation. 31 U.S.C. § 5321(a)(5)(C). 

Despite this change, the regulations promulgated in reliance on the prior version of the statute remained unchanged. Thus, § 103.57 continued to indicate the maximum civil penalty for willful failure to file an FBAR was capped at $100,000. FinCEN subsequently renumbered § 103.57it is now 31 C.F.R. § 1010.820as part of a large-scale reorganization of regulatory provisions. It also amended part of the regulation to account for inflation. Civil Monetary Penalty Adjustment and Table, 81 Fed. Reg. 42503, 42504 (2016). FinCEN did not, however, revise the regulation to account for the increased maximum penalty now authorized under § 5321 (a)(5). 31 C.F.R. § 1010.820. Nevertheless, the IRS did not let § 103.57 (now § 1010.820) constrain its enforcement authority, and since 2004, the IRS has repeatedly levied penalties for willful FBAR violations in excess of the $100,000 regulatory cap. Resp. Mot. Summ. J. [#57] at 3. 

Based on this Framewor, the Court held that, as written, the subsequent legislation did not implicitly repeal the regulation as written which capped the penalty at $100,000.  The reason is that, in its discretion, FinCEN and the IRS can set willful penalties anywhere under the ceilings under the amended § 5321(a)(5)(C) (the higher of $100,000 or 50% of the amount in the accounts) so that, by leaving the regulation in place, FinCEN In effect said that it would exercise that discretion to have a cap of $100,000 despite the statute allowing willful penalties up to 50% in the account(s) if greater than $100,000.  FinCEN and the IRS certainly have that discretion under the statute and, by leaving the regulation in place, exercised that discretion.

The Court summarizes its holding (p. 5):

In sum, § 1010.820 is a valid regulation, promulgated via notice-and-comment rulemaking, which caps penalties for willful FBAR violations at $100,000. 31 C.F.R. § 1010.820. Rules issued via notice-and-comment rulemaking must be repealed via notice-and-comment rulemaking. See Perez v. Mortgage Bankers Ass 'n, 135 S. Ct. 1199, 1206 (2015) (requiring agencies to "use to the same procedures when they amend or repeal a rule as they used to issue the rule in the first instance"). Section 1010.820 has not been so repealed and therefore remained good law when the FBAR penalties in question were assessed against Colliot. Consequently, the IRS acted arbitrarily and capriciously when it failed to apply the regulation to cap the penalties assessed against Colliot. 5 U.S.C. § 706(2) (requiring agency action to be "in accordance with law"); see also Richardson v. Joslin, 501 F.3d 415, (5th Cir. 2007) ("[A]n agency must abide by its own regulations.") (citing United States ex rel. Accardi v. Shaughnessy, 347 U.S. 260 (1954)).
   fn 3  If FinCEN or the IRS wished to preserve their discretion to award the maximum possible penalty for willful FBAR violations under § 5321(a)(5), they might easily have written or revised § 1010.820 to do so. For example, § 1010.820 might have incorporated § 5321 (a)(5) 's maximum penalty thresholds by reference, or alternatively, the IRS might have revised § 1010.820 to reflect the increased penalty limits. Instead, FinCEN and the IRS enacted and then left in place the $100,000 penalty cap.

JAT comments:

Special Counsel Opposes Motion to Dismiss FBAR Count as Untimely Because of Secret 18 USC 3292 Order (5/15/18)

Paul Manafort filed a motion to dismiss the FBAR count, Count 11 of the superseding indictment, here, in the case in E.D. Virginia, United States v. Manafort (E.D. Va. No. 1:18-cr-83 (TSE)).  The argument was the the statute of limitations prevented that count.  As described in the superseding indictment:

COUNTS 11-14: 31 U.S.C. §§ 5314 and

5322(a); 18 U.S.C. §§ 2 and 3551 et seq.

Failure To File Reports Of Foreign Bank

And Financial Accounts

Count 11 was for failure to file the FBAR for 2011, due on June 29, 2012.  The statute of limitations is 5 years (18 USC 3282(a), here), which had lapsed on June 29, 2017.  The original indictment was brought on February 13, 2018, and the superseding indictment brought on February 22, 2018.  The indictment was clearly out of time unless some special rule applied.  And it did.  As the prosecutors explained in its response to the motion, here (and Exhibit A here):

Section 3292(a)(1) of Title 18 suspends the running of the statute of limitations where the government, before the return of an indictment, applies to a court in which a grand jury is investigating the offense to suspend the running of the statute of limitations because evidence of the offense being investigated is in a foreign country. In connection with that application, the government must show, by a preponderance of the evidence, that “an official request has been made for such evidence and that it reasonably appears, or reasonably appeared at the time the request was made, that such evidence is, or was, in such foreign country.” 18 U.S.C. § 3292(a)(1). If the government is successful in making that showing, the running of the applicable statute of limitations is suspended from “the date on which the official request is made” until “the date on which the foreign court or authority takes final action,” id. § 3292(b), though the suspension may not exceed three years, id. § 3292(c).

Because the government secured a timely and valid order in this District to suspend the running of the applicable statute of limitations until at least the date on which the Superseding Indictment was returned, Manafort’s motion should be denied. On June 6, 2017, the government transmitted a request pursuant to a mutual legal assistance treaty (“MLAT”) to the Republic of Cyprus seeking, among other evidence, bank records, articles of incorporation, and witness interviews concerning certain of Manafort and Richard Gates’s bank accounts in Cyprus.  

On June 26, 2017, the government applied, ex parte, to this Court for an order pursuant to 18 U.S.C. § 3292 to suspend the applicable statute of limitations in light of the government’s MLAT request to Cyprus. This Court (Hilton, J.) granted the government’s request on June 27, 2017, thus suspending the applicable statute of limitations during the pendency of the government’s official request to Cyprus. See In Re Grand Jury Investigation, No. 14 GJ 1420 (E.D.V.A. June 27, 2017) (attached hereto as Exhibit A). As found by Judge Hilton, a grand jury impaneled in this District was conducting an investigation into, as relevant here, the flow of foreign money to Manafort, DMP International, Davis Manafort Partners, Smythson LLC, and Jesand Investment Corporation, and into subject offenses that included potential violations of 31 U.S.C. §§ 5314 and 5322(a) (Failure to File a Report of Foreign Bank Accounts). Judge Hilton further found, based on a preponderance of evidence, that evidence of such offenses was located in Cyprus and that the government had made an “official request” to Cyprus for that evidence under 18 U.S.C. § 3292(d) on June 6, 2017. Having found the requirements of Section 3292 satisfied, Judge Hilton ordered that the statute of limitations be suspended for the FBAR offenses, among others, for the period authorized by Section 3292(c). 

Because Cyprus had not taken “final action” on the government’s June 6, 2017 official request at the time the Superseding Indictment was returned, the statute of limitations remained suspended. Specifically, Cyprus produced documents in response to the government’s June 6 request on September 6, 2017; October 2, 2017; November 1, 2017; and April 30, 2018. Several of the items requested in the June 6, 2017 request remained outstanding at least until the time of the April 2018 production. For example, on December 8, 2017—before Cyprus’s most recent production—the government wrote to Cypriot authorities to renew its June 6, 2017 request (and a related request made two weeks later). The government’s December 8 letter stated that, after reviewing the records produced thus far, investigators had identified several items called for in the MLAT request that Cyprus had not produced. And Cyprus did not make a subsequent response to the government’s request until the April 30, 2018 production mentioned above. The bottom line, then, is that Cyprus had not fully satisfied the government’s official request when the original and Superseding Indictment of Manafort were returned on February 13 and 22, respectively. As a result, no “final action” had yet occurred as of the date of the operative indictments, and the applicable statute of limitations remained suspended. See United States v. Bischel, 61 F.3d 1429, 1433-34 (9th Cir. 1995) (construing “final action” to mean “a dispositive response by the foreign sovereign to both the request for records and for a certificate of authenticity of those records”); see also, e.g., United States v. Ratti, 365 F. Supp. 2d 649, 659-60 (D. Md. 2005) (following Bischel’s interpretation of Section 3292).

More On Joint Defense Agreements (5/15/18)

I previously wrote on joint defense agreements in response to news articles regarding the special counsel investigation of Russian meddling.  On Joint Defense Agreements (Federal Tax Crimes Blog 11/23/17), here.  I thought I would provide some update information that is less topical to the news cycle.

In United States v. Krug, 868 F.3d 82 (2d Cir. 2017), here, the Second Circuit rejected a claim of joint defense/common interest with respect to hallway communication between two clients to a joint defense agreement ("JDA").  One of the members of the JDA decided to cooperate with the Government.  In that cooperation, the cooperating defendant disclosed the contents of a "hallway" discussion between he and one of the other participants in the JDA.  Their lawyers were not present for that discussion.  The precise content of the discussion is redacted.  Based on the common interest privilege, the district court precluded the Government from using the testimony about the contents of the discussion.  The Government appealed.

The Court of Appeals reversed, thus permitting the Government to use the evidence.  The Court offers a good discussion of the privilege, illustrating the danger of applying the privilege beyond its intended scope.  The key discussion is short, so I excerpt it all.  Please note that I am using the "cleaned up" technique (see here) to make the excerpt more readable.

The underlying purpose of the attorney-client privilege is to encourage full and frank communication between attorneys and their clients. As a result, the attorney-client privilege creates a rule of confidentiality that recognizes that sound legal advice or advocacy serves public ends and that such advice or advocacy depends upon the lawyer's being fully informed by the client. To that end, the attorney-client privilege protects communications (1) between a client and his or her attorney (2) that are intended to be, and in fact were, kept confidential (3) for the purpose of obtaining or providing legal advice. 

In order to balance this protection of confidentiality with the competing value of public disclosure, however, courts apply the privilege only where necessary to achieve its purpose and construe the privilege narrowly because it renders relevant information undiscoverable. The parties asserting the privilege, in this case [Krug and Wendel], bear the burden of establishing its essential elements. 

The joint defense privilege, more properly identified as the common-interest rule, is an extension of the attorney-client privilege. It serves to protect the confidentiality of communications passing from one party to the attorney for another party where a joint defense effort or strategy has been decided upon and undertaken by the parties and their respective counsel.The common-interest rule protects only those communications made in the course of an ongoing common enterprise and intended to further the enterprise. As with all attorney-client privilege claims, a claim of privilege under the common-interest rule requires a showing that the communication in question was given in confidence and that the client reasonably understood it to be so given.  

Although the common-interest rule somewhat relaxes the requirement of confidentiality by defining a widened circle of persons to whom clients may disclose privileged communications, a communication directly among the clients is not privileged unless made for the purpose of communicating with a privileged person, the lawyer, agents of the client or of the lawyer who facilitate communications between the client and the lawyer, and agents of the lawyer who facilitate the representation. In this vein, we have stated that it is not necessary for the attorney representing the communicating party to be present when the communication is made to the other party's attorney under a common-interest agreement. Ultimately, what is vital to the privilege is that the communication be made in confidence for the purpose of obtaining legal advice from the lawyer.  

The communications at issue in this case did not serve the interests that justify the privilege. The communications occurred outside the presence of any lawyer. Notwithstanding that the lawyers for the defendants were nearby and had recently been in communication with their clients, the excluded statements were not made for the purpose of obtaining legal advice from a lawyer, nor did the excluded statements share among defendants advice given by a lawyer, nor did the excluded statements seek to facilitate a communication with a lawyer. Here, the hallway discussion consisted of one member of the JDA (Wendel) conveying his independent, non-legal research to another member of the JDA (Krug) while noting he had sent the same research to his attorney. No legal advice was mentioned, much less shared or otherwise conveyed, among the co-defendants. The mere fact that the communications were among co-defendants who had joined in a joint defense agreement is, without more, insufficient to bring such statements within the attorney-client privilege. We know of no precedent applying the attorney-client privilege on such facts and we find no circumstances present here that could justify extending the attorney-client privilege to these communications. 

CONCLUSION 

For the reasons discussed above, we reverse the order of the district court. The government may offer the proffered testimony by Kwiatkowski regarding the hallway discussion at the trial of Krug and Wendel.

Another Offshore Account Guilty Plea (5/15/2018)

I recently reported on the district court resolution of pretrial motions in an offshore account case charging tax obstruction (§ 7212(a)), tax perjury (§ 7206(1)), and conspiracy (18 USC § 371).  See Pretrial Order Excluding Government Evidence in Criminal Tax Case for Offshore Accounts (Federal Tax Crimes Blog 4/22/18), here, discussing  United States v. Doyle, 2018 U.S. Dist. LEXIS 66980 (S.D. N.Y. 2018), here.  Shortly after that disposition, the defendant in the case, Lacy Doyle, pled guilty to one count of tax perjury, § 7206(1), a three year felony.  See SDNY USAO press release, here.  (Note the USAO press release does not mention the count for the plea, but I have confirmed from other sources that it was tax perjury; I could not find any plea documents on Pacer as of today.)

Key excerpts from the USAO press release:

As alleged in the Indictment and other documents filed in the case, DOYLE, assisted by others – including Beda Singenberger, a Swiss citizen who ran a financial advisory firm – established and maintained undeclared bank accounts in Switzerland and hid those accounts from the IRS.  DOYLE used a sham entity to conceal from the IRS her ownership of some of the undeclared accounts and deliberately failed to report to the IRS the accounts and the income generated in the accounts. 

In 2003, DOYLE’s father died, and DOYLE was appointed the executor of her father’s estate.  At that time, DOYLE and her father jointly held an account at Credit Suisse with a value of approximately $3,700,000.  DOYLE then made court filings falsely stating under penalty of perjury that the total value of her father’s estate was under $1 million when, in truth and fact, it was more than four times that amount.  Doyle initially held the secret inheritance from her father in an account at Credit Suisse under her own name.
Thereafter, in 2006, DOYLE, with Singenberger’s assistance, opened an undeclared Swiss bank account for the purpose of depositing the secret inheritance from her father.  The account was opened in the name of a sham foundation formed under the laws of Lichtenstein to conceal DOYLE’s ownership.  As of May 15, 2007, the account held assets valued at approximately $5,056,548. 

In 2010, the sham foundation controlled by DOYLE was re-domiciled from Lichtenstein to Panama.  As of December 31, 2016, the sham foundation maintained assets of at least approximately $3,028,562.

JAT Comments:

Reversal of Tax Obstruction Conviction Based on Marinello; A Win in a War Already Lost? (5/14/18; 5/15/18)

I assume all readers are already aware of the Supreme Court's decision in Marinello substantially paring back the Government's expansive reading of the tax obstruction crime.  See my blog, Supreme Court Holds that Omnibus Clause of the Tax Obstruction Crime (§ 7212(a)) Requires Awareness of Pending Tax-Related Proceeding (3/21/18; 3/22/18), here.  As I noted in that blog discussion, because of other counts of conviction that stand unreversed, it is not clear that Marinello's sentencing will be affected by the "victory." 

Marinello has resulted in other reversals of tax obstruction convictions.  I read another today, and briefly discuss it because it too may not win anything for the defendant.

In United States v. Gentle, 2018 U.S. App. LEXIS 12119 (2d Cir. 2018) (unpublished), here, the Second Circuit remanded a case to dismiss the conviction for tax obstruction and to re-sentence the defendant.  Unfortunately for the defendant, the remand left standing 38 counts of aiding and assisting under § 7206(2), each being a 3-year felony.  Although the Second Circuit did not say specifically what the court should do on re-sentencing, it did say (cleaned up):

  fn 1 The process of resentencing under these circumstances "need not be overly cumbersome" for the district court.  While the court may not automatically impose the same sentence on remand, it need not accept new evidence that could have been submitted at the original sentencing, and it may, in exercising its discretion anew, decide to impose the same sentence it did at the initial sentencing.

As Sentencing Guideline fans know, since the key Guidelines calculations are driven principally by the tax loss for the conduct of conviction and relevant conduct (conduct for other crimes whether charged, uncharged or acquitted), I would think it likely that the tax loss may be unaffected by the dismissal of the tax obstruction count of conviction or will not be affected in a meaningful way.  So, it well may be that the Guidelines calculation will be basically the same.  The key question is whether the sentencing judge will think that the dismissal of the tax obstruction count should meaningfully affect any decision whether to vary the sentence downward under Booker.

I further note that, in the event the tax loss originally calculated included loss from conduct other than to the unreversed counts of conviction, then that loss could probably be included anyway, albeit through relevant conduct for uncharged tax evasion or uncharged aiding and assisting counts.

Addendum 5/15/18 2:00pm:

In further understanding the Guidelines calculations, I offer the following from my article:  John A. Townsend, Tax Evaded in the Federal Tax Crimes Sentencing Process and Beyond, 59 Vill. L. Rev. 599, 607-608 (2014), here (footnotes omitted from excerpt)

3. Sentencing Tax Loss 

The Sentencing Guidelines use "tax loss" as the principal component in the advisory guideline sentencing range for a defendant convicted of one or more tax or tax related crimes. The Sentencing Guidelines define tax loss as "the total amount of loss that was the object of the offense...."  It is the same as the tax the taxpayer intended to evade - "tax evaded" as I use the term.  There are some key nuances in the tax loss concept in the Guidelines that may cause the tax loss to exceed the tax evaded number used in the guilt determination phase. First, because sentencing findings (including tax loss) are determined by a preponderance of the evidence rather than beyond a reasonable doubt, the evaded tax for Sentencing Guidelines purposes may include more components than tax evaded for guilt of the crime of tax evasion.  Second, the tax loss can include tax loss for "relevant conduct" - other related crimes for which  [*607]  the defendant was not convicted. The relevant conduct concept is described as the cornerstone of the Guidelines (although consistent with pre-Guidelines sentencing practice) and plays a major role in tax cases where multiple years or events may be involved.  

Consider this example: The indictment alleges that the taxpayer evaded $ 100,000. That means that the prosecutors believe they can prove beyond a reasonable doubt that the taxpayer evaded $ 100,000. The taxpayer is convicted on that basis. Suppose, however, that, for sentencing purposes, the Government can prove by a preponderance of the evidence that the taxpayer really evaded $ 200,000, but did not allege the additional $ 100,000 in the indictment because it did not believe that it could prove that additional amount beyond a reasonable doubt. Further, suppose that the taxpayer's real unpaid civil tax liability for the year is $ 300,000, with the additional $ 100,000 representing items for which the Government cannot prove the taxpayer intended to evade under any standard of proof. There are three concepts related to the overall unpaid civil tax liability. In the order presented, they are: (i) the evaded tax - the "criminal number" - of $ 100,000 used for purposes of charging and convicting for evasion; (ii) the evaded tax for sentencing purposes - the tax loss - of $ 200,000, consisting of the evaded tax of $ 100,000, proved beyond a reasonable doubt, and the evaded tax of $ 100,000 proved by a preponderance of the evidence; and (iii) the residual tax of $ 100,000 not related to tax evasion for any criminal purpose (i.e., it solely affects civil tax liability). 30 The three components in the aggregate represent the civil tax liability  [*608]  (or deficiency), whereas only the first two are evaded taxes relevant to the criminal process.

This is a simplified example. As I will note later, there are other concepts that can cause the sentencing tax loss to vary from the tax evaded used in the guilt determination phase. The principal concept is the relevant conduct Guidelines concept that requires, or at least permits, the sentencing court to include in the base offense calculations criminal conduct for unconvicted crimes. In a criminal tax setting involving income taxes, the relevant conduct is the tax loss from similar evasive conduct in years other than the year(s) in the count(s) of conviction. I used a single year in the example above, but assume that the taxpayer had similar evasive conduct in three other years and tax loss in the same amount - $ 200,000 - for each of the years (the one convicted year and the three unconvicted years). The tax loss for those unconvicted years can be included in the tax loss computation regardless of whether (i) the defendant was acquitted of criminal conduct for the unconvicted years; 31 (ii) criminal conduct was charged for the unconvicted years but dismissed pursuant to the plea agreement; or (iii) criminal conduct was never charged for the unconvicted years for whatever reason, including expiration of the statute of limitations. 32 Hence, if the three other years involved the same type of conduct, the defendant's tax loss number would be $ 800,000 rather than $ 200,000. That makes for a significantly higher sentencing range under the Guidelines. 33 Relevant conduct tax losses to drive up sentencing are frequently encountered in tax cases.

The key points are:

1. The tax loss really is the tax evaded component of a tax evasion charge, but with a lesser burden of proof for the Guidelines calculations sentencing.  
2. The tax loss applies even if the count(s) of conviction are not tax evasion.
3. Hence, the tax loss already calculated for the defendant before reversal of the tax obstruction count based on Marinello will likely be the same, particularly with the inclusion of relevant conduct. 

District Court Opinion Rejecting Fifth Amendment Act of Production Claim by Password Holder for Encrypted Devices (5/4/18)

In United States v. Spencer, 2018 U.S. Dist. LEXIS 70649 (N.D. Cal. 2018), here, the Court (District Judge Charles Breyer) rejected a Fifth Amendment claim to being compelled to decrypt three devices--phone, laptop, and an external hard drive--after the Government seized them pursuant to search warrant. The issue involves the act of production doctrine and the foregone conclusion exception to the act of production doctrine.

In the excerpts below, I use the "cleaned up" technique here to eliminate unnecessary noise in quotations and citations.

Judge Breyer explains the standards as follows:

The Fifth Amendment to the United States Constitution provides that "No person . . . shall be Compelled in any criminal case to be a Witness against himself." It applies only when the accused is compelled to make a Testimonial Communication that is incriminating.  Accordingly, the Fifth Amendment is not violated whenever the government compels a person to turn over incriminating evidence. Instead, it is only implicated when the act of production itself is both "testimonial" and "incriminating." 

The act of production is neither testimonial nor incriminating when the concession implied by the act adds little or nothing to the sum total of the Government's information by conceding that he in fact has the evidence—that is, where the information conveyed by the act of production is a "foregone conclusion." It is important to stress the limited scope of the "foregone conclusion" rule. It only applies where the testimony at issue is an implied statement inhering in the act of production itself. Otherwise, the government cannot compel a self-incriminating statement, regardless of whether the contents of the statement are a "foregone conclusion."  

For instance, the government could not compel Spencer to state the password itself, whether orally or in writing. But the government is not seeking the actual passcode. Rather, it seeks the decrypted devices. Spencer argues that production of the devices would not fall within the act-of-production doctrine because producing the devices would require him to enter the decryption password. In other words, Spencer argues that because the government cannot compel him to state the passwords to the devices, it cannot compel him to decrypt the devices using the passwords, either. This argument has some superficial appeal, and finds support in a dissent by Justice John Paul Stevens, who once contended that a defendant could not be compelled to reveal the combination to his wall safe either by word or deed. While the analogy is not perfect, we may assume that storing evidence in encrypted devices is equivalent to securing items in a safe protected by a combination, and that Justice Stevens' reasoning applies equally to the situation at hand. 

Second Circuit Opinion in NonTax Case on Willfulness and Willful Blindness (5/2/18)

In United States v. Henry, ___ F.3d ___, 2018 U.S. App. LEXIS 10620 (2d Cir. 2018), here, Henry was convicted by jury of "one count of conspiracy to violate and one count of violating, attempting to violate, and aiding and abetting the violation of the Arms Export Control Act ("AECA"), 22 U.S.C. §§ 2778(b)(2), (c)."  The Court explains the AECA (footnotes omitted and "cleaned up" per the explanation here):

The AECA, in relevant part, authorizes the President in furtherance of world peace and the security and foreign policy of the United States—to compile the United States Munitions List ("USML"), which is to be comprised of goods and services that he designates as defense articles and defense services.The AECA also authorizes the President "to promulgate regulations for the import and export of such articles and services." Any good or service placed on the USML cannot be imported or exported except by license, and the statute imposes criminal penalties on violators. The President has in turn delegated the authority to compile the USML and to grant or deny applications for export licenses to the Secretary of State. 

As promulgated pursuant to this authority, the USML sets forth twenty categories of defense articles. For each category, it enumerates a list of specific defense-related materials subject to regulation under the AECA.26 The ablative materials and microwave amplifiers that Henry exported or attempted to export are among the defense articles enumerated in the USML.

WILLFULNESS

Criminal violation of the AECA required that the defendant act "knowingly and willfully."  At trial, the court gave the jury the following instruction:

The fourth and final element that the government must prove, is that the defendant acted knowingly and willfully. A person acts knowingly if he acts intentionally and voluntarily and not because of ignorance, mistake, accident, or carelessness. Willfully means to act with knowledge that one's conduct is unlawful and with the intent to do something that the law forbids. That is to say, with a bad purpose, either to disobey or disregard the law. The defendant's conduct was not willful if it was due to negligence, inadvertence, or mistake. However, it is not necessary for the government to prove that the defendant knew the precise terms of the statute or regulatory provision he is charged with violating—that is, the government is not required to prove that the defendant knew the existence or details of the Arms Export Control Act or the related regulations. All that is required is that the government prove that the defendant acted with the intent to disobey or disregard the law.

The defendant urged on appeal that this instruction incorrectly stated the law.  The Court rejected the argument as follows (footnotes omitted and cleaned up):

Second Circuit Holds Onerous § 6707 Penalty -- $61 Million -- Based on BullShit Tax Shelter Subject to Flora Full Payment Rule (4/26/18; 5/8/18)

In Larson v. United States, ___ F.3d ___, 2018 U.S. App. LEXIS 10418 (2d Cir. 2018), here, the Second Circuit held that, in order to pursue the refund suit for the § 6707 penalty, Larson, a convicted tax shelter promoter, had to prepay the $67,661,349 penalty assessed.  Needless to say, the tax shelter was of the BullShit genre.  I had written on this litigation at the trial level.  SD NY District Court Rejects Partial Payment § 6707 Penalty Refund Suit (Federal Tax Crimes Blog 1/2/17; 1/9/17), here.

The Court of Appeals applied the Flora rule which generally requires full payment for refund suit. Flora v. United States (Flora I), 357 U.S. 63 (1958); and Flora v. United States (Flora II), 362 U.S. 145 (1960).  The opinion is straight-forward in stating the rule and rejecting Larson's claims under the Fifth Amendment, the APA and the Eighth Amendment.

The opinion does state, though, that something may be amiss quotation marks omitted):

We close with a final thought. The notion that a taxpayer can be assessed a penalty of $61 million or more without any judicial review unless he first pays the penalty in full seems troubling, particularly where, as Larson alleges here, the taxpayer is unable to do so. But, while the Flora rule may result in economic hardship in some cases, it is Congress' responsibility to amend the law. 

Larson and those similarly subject to this and other potentially onerous penalties may ultimately litigate in the following possible venues:

• In a collection suit brought by the Government to reduce the penalty to judgment, usually brought just short of the 10 year collection period. 
• A CDP proceeding, with Tax Court prepayment remedy, See IRM 8.22.8.10.5 (10-01-2012), IRC 6707 or 6707A Disclosure Penalties ("2. A taxpayer may dispute a IRC 6707 and IRC 6707A penalty in CDP if the taxpayer did not have a prior opportunity to do so")
• Perhaps in a bankruptcy proceeding, but I have not researched that issue. [See the Addendum immediately below which answers this question.]

ADDENDUM 5/8/18 4:10PM:

In an answer to the bankruptcy point above Lavar Taylor an outstanding practitioner in this area (Lavar's bio is here) says in a comment to a posting on the Procedurally Taxing Blog, Carlton Smith, Larson Part I Post: Full-Payment Rule of Refund Suits Held to Apply to Assessable Penalties (5/6/18), here,:

May 7, 2018 at 10:40 pm 

In a bankruptcy case, the penalty could be litigated if the IRS filed a claim for the penalty. The Court would also have jurisdiction to determine the amount of the penalty under section 505(a) in the absence of the filing of a claim by the IRS, but the government might bring an abstention motion, which might or might be granted. 

The most important point as far as I am concerned is that the penalty is completely dischargeable in Bankruptcy if the conduct giving rise to the penalty occurred more than three years prior to the date of the Bankruptcy petition. I have represented multiple clients who discharged 6700/6701 penalties in Bankruptcy

ADDENDUM 5/7/18 1:30PM:

Carlton Smith has an excellent Guest Blogger discussion of Larson in Larson Part I Post: Full-Payment Rule of Refund Suits Held to Apply to Assessable Penalties (Procedurally Taxing Blog 5/6/18), here.  The posting has links to all of the briefs.

In summary, Smith presents the arguments for Larson based on on a close reading of the Supreme Court's landmark Flora decisions--yes there were two required to resolve the case.  Flora v. United States, 357 U.S. 63 (1958) , here (often referred to as “Flora I”); and 362 U.S. 145 (1960), here (often referred to as “Flora II”) and a subsequent opinion in Laing v. United States, 423 U.S. 161 (1976), here.  The nub of the argument is that based on the actual opinions in Flora and Laing and, most importantly, the Solicitor General's arguments (referred to as concessions) particularly in Laing, the full payment rule for income tax cases applies only where there is a prepayment forum in the U.S. Tax Court case.  Generally, this requires a tax subject to the deficiency notice procedure offering a prepayment remedy in the Tax Court.  Smith deftly traces the trajectory and makes a powerful case that Flora should not apply to assessments that are not preceded by a prepayment judicial remedy.  Smith also provides links to the briefs filed in Larson.

Smith's post indicates that Keith Fogg, a sponsor of the Procedurally Taxing Blog will do a subsequent post (presumably Part II) on the amicus brief filed by the tax clinics at Harvard and Georgia State.

ADDENDUM 5/9/18 2:45PM:

For Peter Reilly's discussion of the district court opinion, with some helpful background on Laron's promoter activities and misconduct, see Peter J. Reilly, Tax Shelter Guru Gets $60 Million IRS Penalty And No Day In Court (Forbes 1/7/17), here.

Michael Little, British/US Lawyer, Convicted for Offshore Account Enabler and Personal Income Tax Charges (4/22/18)

I have previously posted on the prosecution of Michael Little, a UK barrister, U.S. lawyer and U.S. citizen.  Little was an enabler for U.S. persons evading U.S. tax liabilities and FBAR reporting requirements.  I list the significant prior blogs at the end of this blog.  In the second superseding indictment, here, Little was indicted for one count of tax obstruction (§ 7212(a), six counts of failure to file his own income tax return (§ 7203), one count of failure to file FBAR (31 USC § 5314 & 5322(a); CFR §§ 103.24, 103.27(c,d) and 103.59(b); and 2 USC § 2), one count of defraud / Klein conspiracy (18 USC § 371), and ten counts of aiding and assisting (§ 7206(2)).

On April 10, 2018, Little was convicted on all counts.  See the jury verdict here; see also the USAO Press Release on the convictions here.  Key excerpts from the press release are:

Geoffrey S. Berman, the United States Attorney for the Southern District of New York, announced that a federal jury today found MICHAEL LITTLE guilty of charges that he participated in an 11-year tax fraud scheme in which he advised and helped an American family to defraud the Internal Revenue Service by hiding approximately $14 million in overseas Swiss bank accounts and by other means, failed to file his own personal tax returns, and assisted in the filing of false tax returns.  The three-week-long trial took place before U.S. District Judge P. Kevin Castel, who is scheduled to sentence LITTLE on September 6, 2018. 

According to the allegations contained in the Complaint, Indictment, and the evidence presented in Court during the trial: 

LITTLE, a British attorney who resides in England and is licensed to practice law in New York, was a business associate of the patriarch of the Seggerman family, an American family residing in the United States.  In August 2001, after the patriarch died, LITTLE and a lawyer from Switzerland (the “Swiss Lawyer”) met with his widow and adult children at a hotel in Manhattan, and advised them that the patriarch had left them approximately $14 million in overseas accounts that had never been declared to U.S. taxing authorities.  LITTLE and the Swiss lawyer also advised the various family members on steps they could take to continue hiding these assets from the IRS.  In particular, LITTLE discussed with the family members various methods by which they could bring the money into the United States from the Swiss accounts while evading detection by the IRS.  Among other means, he advised family members that they could bring money back to the United States in small increments, or “little chunks,” through means such as traveler’s checks, or by disguising money transfers to the United States as being related to the sales of artwork or jewelry.  Various members of the Seggerman family agreed to work together with LITTLE and the Swiss Lawyer to repatriate the offshore funds.  

In accordance with the plan he orchestrated, LITTLE assisted in opening an undeclared Swiss account for the purpose of holding and hiding the widow’s inheritance funds.  LITTLE also enlisted the assistance of a New Jersey accountant to prepare false and fraudulent tax returns and to keep falsified accounting records for a corporate entity in the United States, controlled by the widow and used to receive inheritance funds repatriated from the Swiss account.  Between 2001 and 2010, LITTLE caused over $3 million to be sent surreptitiously from the undeclared Swiss account to the United States corporate entity for the widow’s benefit.  LITTLE also worked with the New Jersey accountant to establish a sham mortgage that allowed another Seggerman family member to access approximately $600,000 of undeclared inheritance funds held in a Swiss account. 

In or about 2010, LITTLE became aware of an IRS criminal investigation into the scheme.  In an attempt to cover up his involvement, LITTLE communicated with a tax attorney and the accounting firm that had prepared the widow’s individual tax returns.  LITTLE provided false information to the tax lawyer and the accounting firm about the nature of the transfers from the Swiss account to the United States, claiming that the transfers represented “pure gifts” from a non-U.S. person who had “absolutely no relationship” to the widow.  Based on LITTLE’s misrepresentations, the accounting firm filed inaccurate tax returns for the years 2001 through 2010, which categorized the transfers of over $3 million to the widow as foreign gifts. 

LITTLE has been a lawful permanent resident of the United States, also known as a green card holder, since 1972.  As a lawful permanent resident, he had an obligation to file annual tax returns reporting his worldwide income to the IRS.  In or about 2005, LITTLE was admitted to the New York State Bar as an attorney.  Between 2005 and at least late 2008, LITTLE resided full time in New York City, where he worked and earned hundreds of thousands of dollars of income as an attorney representing clients.  During the period of 2001 to 2010, LITTLE also earned other legal fees, along with hundreds of thousands of dollars more in fees for his work on behalf of the Seggerman family.  LITTLE failed to file any tax returns with the IRS between 2005 and 2010.  He further failed to file, for years 2007 through 2010, annual Reports of Foreign Bank and Financial Accounts (“FBARs”) in connection with foreign bank accounts he controlled, which held in excess of $10,000 each year. 

Pretrial Order Excluding Government Evidence in Criminal Tax Case for Offshore Accounts (4/22/18)

In United States v. Doyle, 2018 U.S. Dist. LEXIS 66980 (S.D. N.Y. 2018), here, the defendant had been charged in a superseding indictment for tax obstruction (§ 7212(a)), tax perjury (§ 7206(1)), and conspiracy (18 USC § 371).  The superseding indictment is here; the docket entries as of yesterday are here.  "These charges allege that Defendant and others unlawfully hid Defendant's foreign bank accounts from the IRS from approximately 2003 to 2017."

The Court describes the primary allegations as:

In 2003, Defendant's father died and left her an inheritance of over $4 million. Id. ¶¶ 23-25, 29, 34. The Defendant, who was also executor of her father's estate, made court filings falsely stating under penalty of perjury that the total value of her father's estate was under $1 million when, in fact, it was more than four times that amount. Id. In 2006, the Defendant sought the help of Beda Singenberger, a Swiss citizen who ran a financial advisory firm, to open a Swiss bank account into which the inheritance was deposited. Id. ¶ 34. To conceal the existence of the account, the Defendant and Singenberger established a trust in Lichtenstein named Gestino Stiftung ("Gestino" or "Gestino Foundation") to hold the Swiss bank account in its name. Id. As of December 31, 2008, the account held currency and financial instruments valued at approximately $3,548,380. Id. ¶ 41. In 2010, Gestino re-domiciled from Lichtenstein to Panama. Id. ¶¶ 45, 47. As of December 31, 2016, Gestino maintained assets in various Swiss bank accounts in the amount of at least approximately $3,028,562. Id. ¶ 53. 

The Defendant is alleged to have used this arrangement to unlawfully and fraudulently avoid paying over $1.5 million dollars in United States taxes resulting from the inheritance. For each of the tax years from 2004 through 2009, the Defendant failed to report any income from foreign accounts in her tax filings, and also stated in those filings that she did not have an interest in or signatory or other authority over a financial account in a foreign country (the "Foreign Accounts Question"). Id. ¶ 63.

The motions resolved by the court related to

(i) Tax Return Issue.  The Defendant claimed the Fifth Amendment on her federal income tax returns after she became a target of investigations of her interest in foreign accounts; the issue is whether the tax returns can be admitted in evidence by the Government in support of the tax obstruction and conspiracy charges; and
(ii) Subpoena Litigation Issues.  Represented by Counsel, the Defendant continued to resist the subpoenas, raising, through her then counsel, variations of the Fifth Amendment argument and lack of possession or control of the subpoenaed documents.  The Government asserted the resistance was evidence of unlawful conduct and thus admissible in support of the charge of tax obstruction.  

The Tax Return Issue:

The Court describes the facts succinctly as follows:

from 2004 to 2009, Defendant answered "no" to the Foreign Accounts Question. However, after Defendant received a grand jury subpoena, she did not check either a "yes" or "no" in response to the Foreign Accounts Question on her 2010 through 2015 returns. Rather, she wrote "See Attached Statement" and attached a "Disclosure Statement" stating: "In the context of an on-going federal criminal grand jury investigation being undertaken in the Southern District of New York, under the auspices of the United States Attorney's Office for that District, Lacy D. Doyle hereby asserts her rights and privileges under the Fifth Amendment not to incriminate herself by responding to [the Foreign Accounts Question]." 

The defendant moved "to preclude the Government's use of her answer to the Foreign Accounts Question on her 2010-2015 tax returns in its direct case."

The Government wanted to show that "the defendant never disclosed her foreign accounts to the IRS during that time period." The Government proposed to redact any reference to her assertion of privilege on the return and simply show the foreign account question on Schedule B was blank.

The Court's resolution of the issue:

Reliance on Counsel "Defense" and Jury Instructions (4/17/18)

I just read an interesting article -- Stephen A. Saltzburg, Evidence Supporting Advice of Counsel Defense (ABA Criminal Justice Spring 2018) [no link available].  Saltzburg. here, is a prominent law professor and expert on rules of evidence in criminal trials; he makes his publications available on his publications page here, but this article does not appear yet.

The article discusses United States v. Scully, 877 F.3d 464 (2d Cir. 2017), here, a significant opinion on the reliance on counsel defense.  Scully was not a tax case, but, as readers know, this defense (sometimes in a broader category of reliance on professional) often arises in tax cases to, if successful, defeat the government's evidence of willfulness.

Saltzburg concludes his discussion with the following "Lessons:"

1. A defendant is entitled to rely on an advice of counsel defense provided there is some evidence to support the elements of that defense.
2. In proving the advice of counsel defense, the defendant may testify to what counsel advised, may call counsel to testify about the advice, and may both testify and call counsel to testify in order to establish the defense.
3. The advice provided by counsel is not offered for its truth, but to explain the defendant's state of mind, and is therefore not hearsay.
4. An advice of counsel defense waives attorney-client privilege.  So, in Scully's case, the government could call Tomao [the lawyer] as a witness even if Scully did not.
5. The government has the burden of proving beyond a reasonable doubt that the defendant acted willfully and knowingly, and the advice of counsel defense does not shift the burden of persuasion to the defense.
6. Jury instructions should make clear how the defense relates to the government's burden of persuasion.

My only quibble with these numbered bullet points is that paragraph 1 seems to suggest that defendant must prove the defense.  True, paragraph 5 says that the government must prove beyond a reasonable doubt that the defendant acted willfully and knowingly (which would be willfully in tax crimes).  As Scully makes clear, the advice of counsel defense is not really an affirmative defense that the defendant must prove in order to prevail.  Rather, the defendant must prove only to the extent of creating doubt that the government had proved its case beyond a reasonable doubt.  In this regard, the Scully court said:

While “the prosecution must prove guilt beyond a reasonable doubt,” “the long-accepted rule was that it was constitutionally permissible to provide that various affirmative defenses were to be proved by the defendant.” Patterson v. New York, 432 U.S. 197, 211 (1977). An affirmative defense is “[a] defendant’s assertion of facts and arguments that, if true, will defeat the plaintiff’s or prosecution’s claim, even if all the allegations in the complaint are true.” Black’s Law Dictionary 451 (8th ed. 2004); see also Saks v. Franklin Covey Co., 316 F.3d 337, 350 (2d Cir. 2003). In a fraud case, however, the advice-of-counsel defense is not an affirmative defense that defeats liability even if the jury accepts the government’s allegations as true. Rather, the claimed advice of counsel is evidence that, if believed, can raise a reasonable doubt in the minds of the jurors about whether the government has proved the required element of the offense that the defendant had an “unlawful intent.” United States v. Beech-Nut Nutrition Corp., 871 F.2d 1181, 1194 (2d Cir. 1989). The government must carry its burden to prove Scully’s intent to defraud, and that burden does not diminish because Scully raised an advice-of-counsel defense. Accordingly, the district court must advise the jury in unambiguous terms that the government at all times bears the burden of proving beyond a reasonable doubt that the defendant had the state of mind required for conviction on a given charge. 

That said, defendants are entitled to an advice-of-counsel instruction only if there are sufficient facts in the record to support the defense. United States v. Evangelista, 122 F.3d 112, 117 (2d Cir. 1997). There must be evidence such that a reasonable juror could find that the defendant “honestly and in good faith sought the advice of counsel,” “fully and honestly laid all the facts before his counsel,” and “in good faith and honestly followed counsel’s advice.” United States v. Colasuonno, 697 F.3d 164, 181 (2d Cir. 2012) (brackets and internal quotation marks omitted). Once the evidence meets that threshold, it is for the government to carry its burden of proving fraudulent intent beyond a reasonable doubt and for the jury to decide whether that burden was met. It is therefore potentially confusing to instruct the jury that the defendant “has the burden of producing evidence to support the defense” n5 or must “satisfy” the elements of the defense, or that it is the jury’s job to determine whether the defense was “established.” App’x 368–70.
   n5 The "burden of producing evidence," App'x 368, simply means that the issue is not for the jury's consideration at all absent some evidence of the required facts. Whether that burden is met is thus, in the first instance, for the court to decide. See, e.g., United States v. Bok, 156 F.3d 157, 164 (2d Cir. 1998). It is generally preferable, in our view, not to use the language of "burden of production" in jury instructions for fear that it would confuse the jury about the all-important burden of proof that remains on the prosecution.  

Now, the defendant's burden is really to introduce enough evidence as to the reliance on counsel that the court will submit to the jury a jury instruction on how the jury deals with the "defense."  The Scully Court said on the instructions:

In drafting a more appropriate instruction on the advice-of-counsel defense, it may be tempting to turn to the Supreme Court’s century-old formulation, adopted by this Court in Beech-Nut: 

[I]f a man honestly and in good faith seeks advice of a lawyer as to what he may lawfully do . . . , and fully and honestly lays all the facts before his counsel, and in good faith and honestly follows such advice, relying upon it and believing it to be correct, and only intends that his acts shall be lawful, he could not be convicted of [a] crime which involves willful and unlawful intent[,] even if such advice were an inaccurate construction of the law. But, on the other hand, no man can willfully and knowingly violate the law and excuse himself from the consequences thereof by pleading that he followed the advice of counsel.  

871 F.2d at 1194–95 (alterations in original), quoting Williamson v. United States, 207 U.S. 425, 453 (1908). But that language, like many excerpts from appellate opinions articulating legal principles for an audience of judges and lawyers, is unwieldy for a jury instruction. 

More manageable contemporary formulations are available. The treatise on jury instructions authored by the late Leonard B. Sand, a wise and experienced trial judge, and his colleagues, offers the following template that translates the Williamson/Beech-Nut formulation into clearer language:  

You have heard evidence that the defendant received advice from a lawyer and you may consider that evidence in deciding whether the defendant acted willfully and with knowledge. 

The mere fact that the defendant may have received legal advice does not, in itself, necessarily constitute a complete defense. Instead, you must ask yourselves whether the defendant honestly and in good faith sought the advice of a competent lawyer as to what he may lawfully do; whether he fully and honestly laid all the facts before his lawyer; and whether in good faith he honestly followed such advice, relying on it and believing it to be correct. In short you should consider whether, in seeking and obtaining advice from a lawyer, the defendant intended that his acts shall be lawful. If he did so, it is the law that a defendant cannot be convicted of a crime that involves willful and unlawful intent, even if such advice were an inaccurate construction of the law. 

On the other hand, no man can willfully and knowingly violate the law and excuse himself from the consequences of his conduct by pleading that he followed the advice of his lawyer Whether the defendant acted in good faith for the purpose of seeking guidance as to the specific acts in this case, and whether he made a full and complete report to his lawyer, and whether he acted substantially in accordance with the advice received, are questions for you to determine. 

1 Leonard B. Sand, et al., Modern Federal Jury Instructions: Criminal, Instruction 8-4, at 8-19 (2017). 

We also refer district courts to the model instructions drafted by our sister circuits, particularly the Seventh Circuit’s model, which reads as follows:  

If the defendant relied in good faith on the advice of an attorney that his conduct was lawful, then he lacked the [intent to defraud; willfulness; etc.] required to prove the offense[s] of [identify the offense] charged in Count[s] __. 

The defendant relied in good faith on the advice of counsel if: 

1. Before taking action, he in good faith sought the advice of an attorney whom he considered competent to advise him on the matter; and 

2. He consulted this attorney for the purpose of securing advice on the lawfulness of his possible future conduct; and 

3. He made a full and accurate report to his attorney of all material facts that he knew; and  

4. He then acted strictly in accordance with the advice of this attorney. 

[You may consider the reasonableness of the advice provided by the attorney when determining whether the defendant acted in good faith.] 

The defendant does not have to prove his good faith. 

Rather, the government must prove beyond a reasonable doubt that the defendant acted [with intent to defraud; willfully; etc.] as charged in Count[s] __.  

Seventh Circuit Pattern Criminal Jury Instructions, § 6.12 (2012 ed.). 

Neither of these instructions muddles the question of burden of proof by injecting the concept of a “burden of production” or asserting that a defendant must “show” or “establish” or “satisfy” the jury about particular facts. The last paragraph of the Seventh Circuit instruction, which explicitly informs the jury that a defendant need not establish her good faith, seems to us a valuable final reminder of the burden of proof that the prosecution must carry and should be included in any instruction to the jury on the advice-of-counsel defense.

The advice of counsel defense is very much like the good faith defense, also often used in tax crimes cases.  The defendant will want the good faith defense instruction as well and the basis for obtaining the instruction is basically the same.  See Good Faith as a Defense to Tax Crimes (Federal Tax Crimes Blog 2/9/13), here.  In that blog entry, I quote Professor Buell as follows (Samuel W. Buell, Good Faith and Law Evasion, 58 UCLA L. Rev. 611, 639 (2011), here:

The federal courts have repeated innumerable times the black-letter principle that a defendant's good faith negates the specific intent to defraud. With proper record evidence, a defendant in a criminal fraud trial is entitled to a jury instruction on good faith, or at least an instruction defining fraudulent intent that sufficiently encompasses the idea that to act in good faith is to act without such intent. This is not an affirmative defense. A good faith claim is a factual assertion that, if believed (or, more accurately, if raising a reasonable doubt), makes it impossible to conclude that the defendant had the specific intent to defraud. 

Finally, I cannot pass up the opportunity to pass on a joke about the reliance on professional defense:

First man: I have a CPA do my income tax return.
Second man: Why do you do that?
First man: It saves me time. Second man: How much time?
First man: Maybe 5 to 10 years.
-Old Joke

Quoted in Burgess J.W. Raby and William L. Raby, Penalty Protection for the Taxpayer: Circular 230 and the Code, 2005 TNT 105-65.