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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Here is the panel’s discussion of that issue:

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

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

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

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

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

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

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

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

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

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

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

* * * *

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

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

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

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

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

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

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

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

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

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

The Court starts as follows:

I. Procedural Background 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

* * * *
[*76]

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

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

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

One basket of stocks. Abracadabra. Two refunds.

Another quote:

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

And another quote:

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

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

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

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

JAT Comment:

Microsoft Summons Enforcement on Transfer Pricing "Planning" - Mixed on Privilege Claims (1/22/20)

In United States v. Microsoft, 2020 U.S. Dist. LEXIS 8781 (W.D. Wash. 1/17/20), here, the district court resolved a contentious designated summons enforcement proceeding started in December 2014.  (See the CourtListener docket entries, here.)  Summons enforcement proceedings are supposed to be “summary in nature.”  United States v. Clarke, 573 U.S. 248, 254 (2014) (citing United States v. Stuart, 489 U.S. 353, 369 (1989)).  Why the extended time for resolution?

Well, one of the problems is that the transfer pricing "planning" was, as the court found, a KPMG promoted type of tax shelter from the era of KPMG's foray into bullshit tax shelters in the late 1999s and early 2000s.  (I am just saying that it was from that era, not that the KPMG promoted planning was a bullshit tax shelter; that is yet to be seen.)  In resolving the various privilege claims (work product, attorney-client and § 7525 Federally Authorized Tax Practitioner ("FATP") Privilege, the court did not resolve the ultimate audit for the tax years 2004-2006, but did find that KPMG's promoted transfer pricing "planning" was a tax shelter with some not Microsoft-favorable descriptions. 

I write on the case on my Federal Tax Procedure Blog.  See Microsoft Summons Enforcement on Transfer Pricing "Planning" - Mixed on Privilege Claims (1/22/20), here.

The Interplay of Restitution as Condition of Supervised Release and § 6201(a)(4) Restitution Based Assessment (1/19/20)

For many (perhaps most) federal crimes (certainly those in Title 18), the court "may order, in addition to or, in the case of a misdemeanor, in lieu of any other penalty authorized by law, that the defendant make restitution to any victim of such offense, or if the victim is deceased, to the victim’s estate."  18 USC 3663(a)(1)(A).  Restitution is mandatory in some cases, including tax cases with counts of conviction under Title 18 (such as conspiracy).  § 3663A. In tax crimes cases, the IRS is considered a victim for whom restitution may be imposed.  However, this mandatory or even permissive restitution does not apply to the Title 26 tax crimes.  Accordingly, for tax crimes, restitution may be imposed only if (i) "agreed to by the parties in a plea agreement" (18 USC 3663(a)(3)) or as a condition for supervised release or probation (18 USC. §§ 3563(b), 3583(d)).

DOJ CTM 44.00 Restitution in Criminal Tax Cases (Last Edited August 2018), here, has a good bullet-point summary of key restitution points in tax cases (some redundant from the opening paragraph to this blog):

• Restitution is statutory; district courts have no inherent power to order restitution absent statutory authorization.
• Restitution is limited to the actual loss caused by the count(s) of conviction, unless the defendant agrees to pay more.
• For Title 18 tax offenses, restitution as an independent part of the sentence is mandatory pursuant to 18 U.S.C. § 3663A.
• For Title 26 tax offenses, restitution may be ordered as an independent part of the sentence if the defendant agrees to pay restitution in a plea agreement (18 U.S.C. § 3663(a)(3)).
• For Title 26 cases in which the defendant has not agreed to pay restitution, restitution may be ordered as a condition of supervised release or probation (18 U.S.C. §§ 3563(b), 3583(d)).
• Prosecutors should seek prejudgment Title 26 interest in restitution in order to fully compensate the IRS.
• Use the Tax Division’s form plea language whenever possible (available at § 44.09, infra) 

CTM 44.01 Background provides:

Accordingly, in tax cases, the applicable statutes provide the following: (1) for tax offenses prosecuted under Title 18, restitution is mandatory and is ordered as an independent part of the sentence; and (2) for tax offenses prosecuted under Title 26, restitution is discretionary and is ordered as a condition of supervised release, but the defendant can agree to (and plea agreements should provide for) restitution ordered as an independent part of the sentence.  

Section 209 of the Mandatory Victims Restitution Act mandates that when negotiating plea agreements, prosecutors must give consideration “to  requesting that the defendant provide full restitution to all victims of all charges contained in the indictment or information, without regard to the counts to which the defendant actually plead[s].” Pub. L. No. 104-132 § 209; 18 U.S.C. § 3551 note; see also Attorney General Guidelines for Victim and Witness Assistance, Art. V(D) (May 2012); Principles of Federal Prosecution, USAM §§ 9-16.320. To assist prosecutors with this statutory and Department requirement, standard language for the restitution portion of plea agreements in tax cases is included in § 44.09, infra. 

Readers of this blog know that § 6201(a)(4)(A), here, requires the IRS to assess the amount of resitutition "for failure to pay any tax imposed under this title in the same manner as if such amount were such tax."

I focus this blog on the interplay of restitution as a condition of supervised release in Title 26 criminal cases and § 6201(a)(4)(A)'s mandate for assessment.  The impetus for this blog is PMTA 2018-19 (8/23/18), here.  I find that, although that PMTA was in my research "pile," I had not focused on it before.  The PMTA concludes bottom-line that

Marinello in the Courts – An Update (1/18/20)

Jeremy Temkin, a prominent tax/white collar crime attorney, has published this excellent article:  Two Years Later: Have Defendants Benefited From ‘Marinello’?, 263 NYLJ No. 11 (1/16/20), here.  The law firm posting regarding the article with the link is here.  Temkin’s bio is here.

The article is short, so all interested in the current state of Marinello in the courts should read the article.

JAT Comments:

1.  Temkin reports that results in the cases are mixed.  Marinello has not produced a wave of reversals.  Of course, the Government might have conceded many § 7212(a), tax perjury, convictions that never produced opinions published in the various legal publications.

Some of the cases, like Takesian, which I wrote on recently, did not produce a reversal because ““Takesian could reasonably foresee that an IRS investigation of him was (in Marinello's phrasing) ‘at least . . . in the offing,’” See First Circuit Affirms Tax Obstruction Conviction (Federal Tax Crimes Blog 1/9/20), here.

2.  Marinello-based reversals or Government concessions of the tax obstruction count often would have no bottom-line effect because of other counts of conviction.  In order to test this, the actual sentencing calculations and the Court’s discretionary Booker variances would have to be considered.  I have not done that.  But I did previously note that in Marinello itself, the other counts of conviction likely would permit the same sentencing result.  See 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, point 4 in JAT comments; see also Dealing with Other Counts of Conviction After Vacating Tax Obstruction Based on Marinello (Federal Tax Crimes Blog 6/26/18), here.

3.  One interesting point that Temkin makes is the issue of whether the Marinello interpretation of tax instruction to require a pending investigation (or expectation of one) is an element of the offense that must be pled in a certain way in the indictment and proved at the trial beyond a reasonable doubt.  Temkin reports that the Government’s position is that the Marinello interpretation is not an element of the crime but rather “establishes an evidentiary and level-of-proof benchmark that the Government must meet at trial.”  I just point readers to Temkin’s discussion. I haven’t fully thought through that issue, so will not comment.

4.  On a related point of the Marinello's effect on Government charging decisions, obviously for tax prosecutions since Marinello, we should expect that the charges made will reflect the decision.  In most cases, the Government has other tax-related crimes it could charge, so that eliminating tax perjury in cases where there is no actual or expected investigation may just mean that the target gets charged anyway with other counts (of a type that might have been charged anyway along with tax perjury) and, given the way the Sentencing Guidelines work, will likely receive the same sentence if convicted.  In other words, the Guidelines are indifferent as to the number of counts, provided that the resulting sentencing range (driven principally by the tax loss for counts of conviction and relevant conduct) is not in excess of the aggregate sentence allowed by the counts of conviction. 

5.  In the latter regard as to charging decisions, keep in mind that the conduct criminalized under § 7212(a), tax perjury, even under the pre-Marinello interpretation substantially overlapped with the Klein / defraud conspiracy, 18 USC 371, as interpreted.  In a prior version of the DOJ Criminal Tax Manual (CTM), DOJ Tax asserted that tax obstruction may be charged where the Klein / defraud conspiracy is “unavailable due to insufficient evidence of conspiracy.”  CTM 17.02 (2001 ed.).  That statement is now omitted in the 2012 edition and, I think, in the 2008 edition.  I don't think that omission is a concession of the point that the conduct criminalized as tax perjury substantially is the same as the conduct criminalized as the Klein / defraud conspiracy, so that if the prosecutor can identify (conjure up) at least two actors in the conduct, it can essentially charged the equivalent of the tax perjury crime without Marinello's limitations to the pending investigation.  I have argued that Marinello's reasoning might apply to the Klein / defraud conspiracy.  What Are the Implications for Marinello on the Defraud / Klein Conspiracy? (3/24/18), here.  The Courts, however, have not (yet) accepted that expansion of Marinello.   See e.g., United States v. Flynn (D. Minn. Decision dated 1/8/19), GS here; United States v. Parlato (W.D. N.Y. Decision dated 2/28/19), GS here; and United States v. Herman (W.D. Tex. opinion dated 4/24/19), GS here.  So, based upon the trajectory to date, my argument is wrong.  But, what that opens up is the possibility that conduct now proscribed by Marinello as tax perjury can be charged as Klein / defraud conspiracy--just find one more actor, called a co-conspirator.

Criminal Tax Evasion and Civil Fraud–If Found by the Trier, Can There be a Reasonable Cause/Good faith Defense (1/16/20; 1/17/20)

I have blogged several times on my Federal Tax Crimes Blog about how the “good faith” defense is subsumed in the definition of willfulness for tax crimes.  Willful is the intentional violation of a known legal duty.  If a trier of fact determines that the defendant intentionally violated a known legal duty, then per se that person did not have a good faith defense.  Accordingly, if the trial court in a criminal case where willfulness is an element of a tax crime properly instructs the jury on the willful element, the fact that the judge did not separately instruct the jury that good faith (such as reliance on tax professional) is a “defense” is not error or, at least not reversible error.  Simply put, proof of willfulness negates the good faith defense.  The defendant cannot have intended to violate a known legal duty and then have reasonable cause/good faith in violating that known legal duty.  Accordingly, for example, consider the following:  "[T]o prove willfulness beyond a reasonable doubt, the Government would have to negate the taxpayer's claim that he relied in good faith on the advice of his accountant.”  United States v. Stadtmauer, 620 F3d 237, 257 n. 22 (3d Cir. 2010).

Now I want to move this concept to the civil arena.  Section 6663, here, imposes a civil fraud penalty.  The conduct penalized under § 6663 is “fraud.”  Basically, the conduct penalized under § 6663 is the same conduct that is tax evasion in the criminal context – intentional violation of a known legal duty.  (There may be different verbal formulations, but that is the essence of it in both the criminal and civil arenas.)  So, if proof of tax evasion negates a reasonable cause defense, one would think that proof of civil fraud negates a reasonable cause defense.

Although I think this logic is irrefutable, some courts nevertheless act like they believe otherwise.  For example, in Purvis v. Commissioner, T.C. Memo. 2020-13, at *33-*48, here, the Tax Court found that the taxpayers committed civil fraud subject to the penalty under § 6663.  The Court concluded after 15 pages analyzing the evidence (*48):   “Accordingly, we hold that petitioners are liable for the section 6663(a) fraud penalties for the years at issue.”

The Court then  (at *49-*50) considered the reasonable cause defense.  But why did the Court do that after the Court found that the taxpayer had intended to violate a known legal duty?

One reason is the way the statutory provisions are written.  Specifically, § 6663 imposes the penalty for fraud but then, § 6664(c)(1), here, states (emphasis supplied): “No penalty shall be imposed under section 6662 or 6663 with respect to any portion of an underpayment if it is shown that there was a reasonable cause for such portion and that the taxpayer acted in good faith with respect to such portion.”  But, as established in the criminal context, the taxpayer (called defendant in a criminal context) cannot have intended to violate a known legal duty if he had a reasonable cause/good faith defense.  That surely must be true in the civil context as well.

I would appreciate readers view on this issue.  Specifically, is it possible for the Government (the IRS in a Tax Court case) to prove civil fraud by clear and convincing evidence and the taxpayer then establish a reasonable cause/good faith defense?

One other thought.  The regulations for the reasonable cause defense under § 6664 on only address the accuracy related penalty under § 6662.  See Regs. § 1.6664-4, titled "Reasonable cause and good faith exception to section 6662 penalties." I suspect that this analysis is the reason.  The reasonable cause defense is an oxymoron if § 6663 civil fraud is proved.  But § 6664(c) is not the only time that Congress has legislated an oxymoron.

Addendum 1/17/20 12:00pm:

Anesthesiologist Sentenced for Tax Perjury (1/16/20)

DOJ Tax announced today the sentencing of a Pennsylvania anesthesiologist, James G. Allen, Jr. To 30 months in prison.  See Pennsylvania Anesthesiologist Sentenced to Prison for Tax Fraud (1/16/20), here.

The key excerpts are:

A Pennsylvania anesthesiologist was sentenced to 30 months in prison today for filing a false income tax return, announced Principal Deputy Assistant Attorney General Richard E. Zuckerman of the Justice Department’s Tax Division. 

From 2010 through 2018, James G. Allen Jr., 54, filed and caused the filing with the Internal Revenue Service (IRS) of sixteen false tax returns for himself and his wife.  On these tax returns, Allen did not report more than $3 million in income that the pair earned as anesthesiologists.  In addition to filing false tax returns, Allen took steps to conceal the couple’s assets and income from the IRS, including depositing money in an offshore bank account held in the Bailiwick of Jersey, wiring money to Columbia to purchase a house, purchasing cryptocurrency and gold, and registering a vehicle in the name of a purported church. In total, Allen caused a tax loss of more than $900,000 to the United States. 

In addition to the term of imprisonment, U.S. District Judge Arthur J. Schwab ordered Allen to serve a one year term of supervised release and pay restitution to the IRS in the amount of $ 1,084,658.52.  

JAT Comments:

Texas Lawyer and Client Convicted for Conspiracy (1/15/20)

DOJ Tax has announced this conviction:  Jury Finds Texas Attorney and Client Guilty of Conspiring to Defraud the Internal Revenue Service (1/15/20), here.  See CourtListener docket entries here.

Key excerpts.

A federal jury convicted a Texas attorney John O. Green and his client Thomas Selgas today for conspiring to defraud the United States, announced Principal Deputy Assistant Attorney General Richard E. Zuckerman of the Justice Department’s Tax Division. The jury also convicted Selgas of tax evasion. Selgas’s wife, Michelle Selgas, was acquitted of conspiring to defraud the United States and tax evasion. 

According to the evidence presented at trial, Selgas conspired with Green, an attorney licensed to practice in Texas, to defraud the United States by obstructing the Internal Revenue Service (IRS) from assessing and collecting Selgas’s taxes. Selgas and his wife owed approximately $1.1 million in outstanding taxes that Selgas refused to pay. When the IRS made efforts to collect the outstanding taxes, Selgas concealed funds by using Green’s Interest on Lawyers Trust Account (IOLTA) rather than using accounts in his own name. An IOLTA is a bank account used by a lawyer to hold money in trust for clients. From 2007 to 2017, Selgas deposited proceeds from the sale of gold coins and other income into Green’s IOLTA and Green would then pay the Selgases personal expenses, including their credit card bills, from that account. Selgas and Green also filed a false tax return on behalf of MyMail, Ltd., an intellectual property development and licensing partnership Selgas co-founded, omitting a substantial portion of the partnership’s income.

JAT Comments:

Eleventh Circuit Affirms Conviction of Another Congressman (1/14/20; 1/16/20)

In United States v. Brown, ___ F.3d ___, 2020 U.S. App. LEXIS 556 (11th Cir. 2020), 11th Cir. here and CL here, Brown, a former congresswoman, was charged with 24 counts for a melange of crimes, including mail and wire fraud and conspiracy to commit, false statements, tax obstruction (§ 7212(a), one count) and tax perjury (§ 7206(1), three counts).  The jury convicted of all except 4 of the fraud counts.  On appeal, Brown argued that the trial judge had improperly dismissed a juror who, another juror reported, stated to the jurors at the beginning of deliberations that (Slip Op. 12-15):

"A Higher Being told me Corrine Brown was Not Guilty on all charges". He later went on to say he "trusted the Holy Ghost". 

The judge then questioned the juror outside the hearing of the other jury members.

Court: Okay. That's fine. So let me get a little more specific with you. Have you expressed to any of your fellow jurors any religious sentiment, to the effect that a higher being is telling you how—is guiding you on these—on these decisions, or that you are trusting in your religion to—to base your decisions on? Have you made any—can you think of any kind of statements that you may have made to any of your fellow jurors along those lines? 

Juror: I did, yes. 

Court: Okay. Can you tell me, as best you can, what you said? 

Juror: Absolutely. I told them that in all of this, in listening to all the information, taking it all down, I listen for the truth, and I know the truth when the truth is spoken. So I expressed that to them, and how I came to that conclusion. 

Court: Okay. And in doing so, have you invoked a higher power or a higher being? I mean, have you used those terms to them in expressing yourself? 

Juror: Absolutely. I told—I told them that—that I prayed about this, I have looked at the information, and that I received information as to what I was told to do in relation to what I heard here today—or this past two weeks. 

Court: Sure. When you say you received information, from what source? I mean, are you saying you received information from— 

Juror: My Father in Heaven.

Fifth Circuit Affirms Republican Congressman Conviction for Crimes Including Tax Perjury (1/14/20)

In United States v. Stockman, ___ F.3d ___, 2020 U.S. App. LEXIS 851 (5th Cir. 2020), here, the Fifth Circuit affirmed Stockman’s convictions of four counts of mail fraud, three counts of wire fraud, two counts of making false statements in FEC filings, eleven counts of money laundering, one count of conspiracy to make conduit campaign contributions and false statements, one count of causing an excessive campaign contribution, and one count of filing a false tax return.  Stockman was a former congressman (Republican).

The only item that I found interesting, more as a reminder rather than as new to readers of this blog, was the rejection of Stockman’s complaint that he should have received a “good faith” instruction for crimes (including the tax crime) with willful conduct as an element of the crime.  Stockman alleged his “good faith” reliance on his tax professional.  The relevant discussion from the Fifth Circuit opinion is (Slip Op. at 17-19 (cleaned up)) :

We next consider Stockman's argument that his tax and campaign finance convictions under Counts 10, 11, 12, and 28 of the indictment were tainted by the district court's refusal to instruct on "good faith." Stockman points to evidence that he relied on an accountant who "wrongly advised him that having aides contribute money to his congressional campaign in the name of their parents was permissible." He also points to evidence that Stockman and Posey intentionally omitted words of express advocacy from The Conservative News in order to comply with FECA. He asserts that in this context and where willfulness is required, a good faith instruction should have been given. 

Again, we disagree. Although the parties dispute the standard of review applicable to the district court's refusal to instruct on good faith, decisions of this court and the Supreme Court show that the refusal was not erroneous, whether reviewed de novo or for plain error. See United States v. Pomponio, 429 U.S. 10, 11-12 (1976); United States v. Simkanin, 420 F.3d 397, 409-11 (5th Cir. 2005). Stockman argues that a good faith instruction should have been issued because the tax and campaign finance offenses [*18]  in question all require a showing of "willfulness." 

But it is precisely that requirement that renders any such instruction unnecessary. The Supreme Court held in Pomponio that an additional good faith instruction is not required when the charge already requires proof of "willfulness," properly cabined to cover only voluntary, intentional violations of known legal duties. In so holding, the Court gave its approval to a charge that did not instruct on good faith but did instruct on the need for proof of a "willful" act, meaning an act done voluntarily and intentionally and with the specific intent to do something which the law forbids, that is to say with the bad purpose either to disobey or disregard the law.  Drawing from Pomponio, we held in Simkanin that a "specific instruction" on good faith is not required when the concept is sufficiently subsumed by a general instruction on "willfulness." Simkanin, like Pomponio, approved of instructions alerting the jury to the fact that a "willful" act is done voluntarily and deliberately, with the intention of violating a known legal duty. 

Here, the district court's instructions [*19]  mirrored those in Pomponio and Simkanin. With respect to Counts 10, 11, and 12, the district court instructed the jury that to act "willfully," the defendant must act "voluntarily and purposely, with the specific intent to do something the law forbids, that is, with the bad purpose either to disobey or disregard the law." With respect to Count 28 [the tax perjury count], the district court instructed the jury that it could not convict unless it found that Stockman acted "with intent to violate a known legal duty." We find no merit in Stockman's "good faith" argument.

JAT Comments:

Court Enters Default Judgment in FBAR Willful Penalty Collection Suit (1/10/20)

In United States v. Lanz, 2019 U.S. Dist. LEXIS 222922 (D. N.J. 2019), CL here, the district court entered default judgment against the defendant, Lanz, in an FBAR willful penalty collection suit.  The judgment is for "$544,731.73 for the penalties assessed against him under 31 U.S.C. § 5321(a)(5), accrued interest on such penalties, late payment penalties, and further statutory additions thereon as allowed by law from August 19, 2015, to the date of payment."

The key excerpts are:

Third, the Court finds that the Complaint states a sufficient cause of action. Plaintiff alleges that Defendant violated the reporting requirements of 31 U.S.C. § 5314, as implemented under 31 C.F.R. § 1010.350 and 31 C.F.R. § 1010.306(c), for calendar years 2006, 2007, and 2008. (Compl. ¶ 20). As Plaintiff explains, "[a]ll citizens and residents of the United States who have a financial interest in, or signatory or other authority over, any foreign financial account that had a maximum value greater than $10,000 during the calendar year are required to file an annual report disclosing the existence of each account." (Compl. ¶ 5 (citing 31 U.S.C. § 5314 & 31 C.F.R. § 1010.350)). That annual report—known as a Report of Foreign Bank and Financial Accounts ("FBAR")—is due no later than June 30th of the year following the calendar year. (Id. ¶ 6 (citing 31 C.F.R. § 1010.306(c)). Plaintiff alleges that Defendant was subject to these reporting requirements because Defendant was a U.S. citizen who held a foreign bank account, and the aggregate amount in that account exceeded $10,000 in U.S. currency during 2006, 2007, and 2008. (Compl. ¶¶ 9-12). Plaintiff further alleges that Plaintiff failed to (i) report the income generated in the Account on his federal income tax returns; (ii) [*7]  file an FBAR as required for 2006, 2007, and 2008; and (iii) report having an interest in a foreign bank account on Schedule B of his income tax returns for at least 2006 and 2008. (Id. ¶¶ 13-15). Based on these allegations, the Court finds that Plaintiff has sufficiently stated a cause of action for failure to comply with the reporting requirements of 31 U.S.C. § 5314. 

Moreover, the Court finds that the Complaint provides sufficient basis for the Court to determine that Defendant's failure to report was willful. Willfulness covers both knowing and reckless violations, and "may be proven through inference from conduct meant to conceal or mislead sources of income or other financial information." United States v. Williams, 489 F. App'x 655, 658 (4th Cir. 2012). Here, Plaintiff alleges several facts suggesting that Defendant acted willfully: (i) Defendant took steps to hide his ownership of the Account by telling UBS AG to hold all correspondence relating to the Account (Compl. ¶ 9); (ii) Defendant falsely told the IRS twice that he did not own a foreign bank account, and signed an affidavit stating that he did not have a foreign bank account during 2008 (id. ¶ 17); and (iii) Defendant eventually transferred the Account that he held in his name to another bank and [*8]  put the Account in the name of another person (id. ¶¶ 10-11). These actions suggest that Defendant acted willfully in failing to report his ownership and interest in the Account. See United States v. Brandt, No. 17-80671, 2018 U.S. Dist. LEXIS 226286, 2018 WL 1121466, at *4 (S.D. Fla. Jan. 24, 2018) (finding a willful reporting violation under similar circumstances).