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

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 LEXIS 10556 (9th Cir. 2017) (unpublished), here, the Ninth Circuit affirmed Rodriguez's "convictions for (1) conspiracy to defraud the United States by impairing and impeding the Internal Revenue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

I address only one issue.  The Court said:

2. Although Rodrigues does not dispute that NADN's sale of Tax Break constituted a conspiracy to defraud the United States, he argues that the government failed to meet its burden of proving that he became a member of this conspiracy. "Once the existence of a conspiracy is established, evidence establishing beyond a reasonable doubt a connection of a defendant with the conspiracy, even though the connection is slight, is sufficient to convict him with knowing participation." United States v. Lane, 765 F.2d 1376, 1381 (9th Cir. 1985).

The highlighted sentence reminded me of the now discredited formulation of what is known as the "slight evidence" rule.  Here is a problematic example:  "Once a  conspiracy  is established, even slight evidence connecting a defendant to the  conspiracy  may be sufficient to prove the defendant's involvement." United States v. Pullman, 187 F.3d 816, 820 (8th Cir. 1999); see also United States v. Wright, 215 F.3d 1020, 1028 (9th Cir. 2000).  The proper statement of the rule would include the requirement included in the 9th Circuit quote that the defendant's connection be proved beyond a reasonable doubt.   In  other words, the connection may even be marginal or not central, but the connection and the conspiracy still must be proved beyond a reasonable doubt.  See The "Slight Evidence" and Similar Formulations for Connection to a Conspiracy (Federal Tax Crimes Blog 2/19/11), here.

I note that the current version of the DOJ CTM says (23.05[2] Proof of Membership, here):

Although the government must prove that a defendant was a member of a conspiracy, this requirement may be satisfied by a showing of even a "slight connection" to the conspiracy, so long as the connection is proven beyond a reasonable doubt. [citations omitted]

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

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

JAT comments:

1.  Kroupa's submission calculates the Guidelines range at 30 to 37 months based on the following:

Ms. Kroupa pled guilty to conspiracy to defraud the United States beginning in or before 2004 and continuing at least through in or about 2012, in violation of 18 U.S.C. § 371. Pursuant to the plea agreement, the base offense level is 18. A 2-level increase applies for abuse of position of public trust. An additional 2-level increase applies for obstruction to justice. The Government recommends a 3-level reduction for acceptance of responsibility. Based on the total offense level of 19 and a criminal history category of I, the guideline range of imprisonment is 30 to 37 months. Ms. Kroupa asks the Court to vary from the Sentencing Guidelines for a sentence of 20 months.

2.  The Government defers recommending a sentence until it has reviewed Kroupa's submissions.  The docket entries do not reflect that the Government has yet made its recommendation.

3.  As one would expect, Kroupa's submission plays up the factors that could cause a sentencing judge to make a variance.  There is considerable discussion of a long history of psychological and emotional issues.  This is, of course, standard fare in appealing to the considerable variance discretion that a sentencing judge has under 18 USC § 3553(a) and United States v. Booker, 543 U.S. 220  (2005).  Some other interesting points in the submission are:

On June 14, 2014, she retired as a Tax Court Judge due to a permanent disability. Attached are her letter and the letter of Dr. Pak supporting her resignation due to a permanent disability. All this took place after the search warrants were executed and it became apparent Ms. Kroupa was a target of the criminal investigation. This understandably caused extreme and additional stress. It exacerbated her long-standing psychological and emotional issues for which she has sought treatment.

* * * * 

Tax Court Denies Claim in Offshore Account Case with Very Unusual Facts Because the Information Did Not Produce Collected Proceeds (6/16/17)

In Awad v. Commissioner, T.C. Memo 2017-108, here, a whistleblower case, the following is the key time line:

Date	Event
11/18/2008	Awad files WB claim (Form 211) identifying husband and wife (TH and TW, respectively) and their three adult children as owners of undisclosed foreign bank account.
2/?/2009	WBO assigns to LB&I
	LB&I Agent reviews returns and decides to accept as filed based on insufficient information
8/?/2009	TH dies.
1/?/2010	TW and children file "voluntary disclosures pertaining to a previously undisclosed account at the same foreign bank" Awad had disclosed.to WBO
??/??/2010	SB/SE opens exam incident to voluntary disclosure
7/?/2010	LB&I returns the case to WBO (although a year after LB&I made decision not to pursue)
9/?/2010	WBO discovers SB/SE exam and forwards information to SB/SE for possible use in examination
??/??/2010	SB/SE Agent interviews Awad by telephone; Awad provides additional information
??/??/2010	SB/SE advises WBO that the information did not assist in the audit
8/??/2011	IRS enters closing agreement on the voluntary disclosure requiring tax, penalties (including MOP) in excess of $2M for TW and estate
9/??/2013	WBO learns of estate tax exam for TPH and refers information to SB/SE Estate and Gift Tax
1/28/2014	WBO denies award.

There are some significant, scantily explained, time lapses in the foregoing, but they are not relevant to the outcome because the examining agents involved in LB&I and SB/SE all attested that the Form 211 information did not contribute to the ultimate outcome -- the acceptance of the TH Estate and TW's voluntary disclosure.  After all, for collection, the information does have to contribute to collected proceeds to permit a WB award.

The thing that is curious to me is that there were no procedures to flag the matter when the WBO first assigned it to LB&I so that, after that date, the taxpayers could not qualify for voluntary disclosure.  It is true that the procedure assumes disqualification only after the IRS has flagged the taxpayer for audit.  (I have had one client thus disqualified even though the IRS had never notified him of the audit.)  I understand that LB&I had not yet decided to audit, but it seems to me that there should be some way to disqualify once WBO decides the information has sufficient gravitas to refer to Examination, at least while it is in that status.  Just my view.

Court Dismisses Government Complaint for FBAR Willful Penalty with Leave to Amend for Failure to Allege Facts Supporting Willfulness (6/12/17)

We have this unusual order dismissing the Government case seeking to reduce the FBAR assessment to judgment in United States v. Pomerantz (6/8/17 WD WA 2:16cv00689), here.  The Complaint in the case is here; the docket entries as of today are here.  The judge dismissed with leave to amend because the Government failed to plead facts from which a fair inference could be drawn that the defendant acted willfully in failing to file the FBAR.  The Court also denied Pomerantz' motion to dismiss for improper venue and his motion to transfer the case to the District of Columbia.  The latter holdings are unexceptional.  However, under the notice pleading environment, it would be the rare case that would be dismissed for failure to state a claim, so I will just provide excerpts from the opinion on that issue.

The FBAR willful penalty requires, well, willfulness.  If the Government wants a judgment for the willful penalty, the Government must allege and prove that the defendant acted willfully.  The Government did allege willfulness but ---

[I]n order to state a claim to reduce a civil penalty to a judgment, the Government must allege sufficient facts to support a reasonable inference that (1) the government assessed a civil penalty, and (2) the penalty was valid. To adequately allege that the penalty was valid, the Government must allege facts supporting each element of the underlying penalty. 

* * * *  

The Government alleges that Mr. Pomerantz’s failure to timely file FBAR Forms “was willful within the meaning of 31 U.S.C. § 5321(a)(5),” implying that Mr. Pomerantz had either constructive or actual knowledge of the reporting duty. (Id. ¶¶ 23, 37, 45.) However, these allegations are precisely the “threadbare recitals of the elements of a cause of action, supported by mere conclusory statements” that are insufficient to state a claim. Iqbal, 556 U.S. 662, 678, (2009) (citing Twombly, 550 U.S. at 555). They do not plausibly support the inference that Mr. Pomerantz knew of the reporting duty. Instead, the Government must allege sufficient facts to plausibly support the inference that Mr. Pomerantz knew—actually or  constructively—of the reporting requirement. United States v. Williams, 489 F. App’x 655, 659 (4th Cir. 2012). 

i. Actual Knowledge 

Actual knowledge of the duty to report may be inferred from a course of conduct that demonstrates a conscious attempt to conceal the failure to report. See United States v. Sturman, 951 F.2d 1466, 1476 (6th Cir. 1991) (citing Spies v. United States, 317 U.S. 492, 499 (1943)). The Government alleges that the company Mr. Pomerantz used to open the Swiss accounts—Chafford Limited—“conducted no active business, but was a shell entity used to hold and manage [Mr.] Pomerantz’ personal investments.” (Compl. ¶¶ 6-7.) 

Similar allegations, combined with the taxpayer’s failure to pursue knowledge of further reporting requirements, sufficiently supported a finding of “willfulness” in Sturman. See 951 F.2d at 1476-77. The court can plausibly infer an intent to evade the foreign bank account reporting requirement based on the creation of foreign bank accounts in the name of a shell company. See id. Thus, with regard to the Chafford Limited Accounts, the Government has adequately pleaded facts supporting the inference that Mr. Pomerantz knew of his duty to report. 

However, Mr. Pomerantz opened the CIBC Accounts in his own name. (Compl. ¶ 5.) The accounts were opened prior to January 1, 2001, well before the allegedly “duplicitous” actions occurred. (Id.) The Government makes no allegations that Mr. Pomerantz took steps to conceal or mislead sources of income by opening the CIBC Accounts, and since the accounts were created well before the allegedly “duplicitous” actions occurred, the court cannot infer a confiscatory intent with regard to the CIBC Accounts. (See id.) The court declines to infer from Mr. Pomerantz’s creation of the Chafford Limited Accounts knowledge of the duty to file FBAR Forms for the CIBC Accounts. The Government has not provided the court with any authority in which a court inferred from obfuscating conduct with no connection to a particular account an intent to evade a reporting obligation for that account, and the court finds such an inference implausible. (See generally Resp.) Thus, with regard to the CIBC Accounts, the Government makes only speculative and conclusory allegations regarding Mr. Pomerantz’s actual knowledge. 

ii. Constructive Knowledge 

Knowledge of the duty to report may be actual or constructive. Williams, 489 F. App’x at 659. Taxpayers who are willfully ignorant of the reporting requirement are treated as if they knew of the requirement, under the theory of constructive knowledge. Id. The Government alleges that Mr. Pomerantz “failed to report income deposited into, and/or received from, the foreign accounts.” (Compl. ¶¶ 22, 36, 44.) The Government argues that the court can reasonably infer from this allegation that Mr. Pomerantz was willfully ignorant of the FBAR reporting obligation. (Resp. at 4.) 

However, the cases the Government cites in support of this argument have found “willful ignorance” of the FBAR reporting duty because the government showed that the taxpayer was on inquiry notice of the duty due to specific language on a Schedule B tax form, which directs filers to the FBAR filing instructions and requirements. See
Williams, 2010 WL 3473311, at *4 (imputing knowledge of the FBAR reporting requirement to a taxpayer who completed a Schedule B form); McBride, 908 F. Supp. 2d
at 1197-98 (same); Sturman, 951 F.2d at 1476 (imputing knowledge of the FBAR reporting requirement to a taxpayer who was “aware of” the Schedule B form’s contents). 

Here, in contrast, the Government does not allege that Mr. Pomerantz filled out a Schedule B Form or was otherwise aware of its contents and instructions regarding the FBAR reporting requirement. (See generally Compl.) Nor has the Government alleged any other basis to infer willful ignorance. (Id.) Accordingly, the court cannot reasonably infer that Mr. Pomerantz was willfully ignorant of the FBAR duty to report. 

Based on the foregoing analysis, the court concludes that the Government fails to sufficiently plead that any failure of the duty to report with regard to the CIBC Accounts was willful. The court cannot disaggregate the amount of the penalty that resulted from the failure to report the CIBC accounts from the failure to report the Chafford Limited Accounts. Because the CIBC Accounts were part of the basis for levying each of the penalties that the Government seeks to reduce to judgment, the court accordingly dismisses the entire complaint as to all three penalties. (Compl. ¶¶ 24, 46, 48.)

JAT Comments:

Prepared Testimony of Acting Assistant Attorney General to House Judiciary Subcommittee (6/11/17)

I offer the prepared testimony of David A. Hubbert Acting Assistant Attorney General, DOJ Tax, before the House Judiciary Committee Subcommittee on Regulatory Reform, Commercial & Antitrust Law at a Hearing on Oversight of the Tax Division, here.  The video of the hearing is here.  The minute marks for Hubbert's comments are:  1:08:53 - 1:13:21 (reading from opening statement) and 1:27:00 - 1:28:08  (on SIRF), a light day.

EXCERPTS RELATED TO DOJ TAX'S CRIMINAL TAX ENFORCEMENT

To help achieve uniformity in nationwide standards for criminal tax prosecutions, the Division’s criminal prosecutors are broken into three geographic sections and authorize almost all grand jury investigations and prosecutions involving violations of the internal revenue laws nationwide. The Division authorizes between 1,300 and 1,600 criminal tax investigations annually. These crimes are prosecuted by Division attorneys or Assistant U.S. Attorneys, either working alone or in partnership with Division attorneys, after determining that there is a reasonable probability of conviction based on the existence of sufficient admissible evidence to prove all of the elements of the offense charged. Our Criminal Appeals and Tax Enforcement Policy Section handles all appeals from cases assigned to Division prosecutors, as well as selected cases assigned to the Offices of the U.S. Attorneys. 

Criminal Investigation and Prosecution

Criminal Trial. In addition to our extensive civil practice, the Division authorizes all prosecutions arising under the federal tax laws except for excise taxes and criminal disclosure violations. The Division’s criminal enforcement goals are to prosecute criminal tax violations and to promote uniform nationwide criminal tax enforcement. In many cases, the Division receives requests from the IRS to prosecute violations after the IRS has completed an administrative investigation. In other cases, the IRS asks the Division to authorize grand jury investigations to determine whether prosecutable tax crimes have occurred. Division prosecutors review, analyze, and evaluate referrals to ensure that uniform standards of prosecution are applied to taxpayers across the country. In the past few years, the Division has authorized between 1,300 and 1,600 criminal tax investigations and prosecutions each year. After tax charges are authorized, cases are handled by a U.S. Attorney’s Office, by a Division prosecutor, or by a team of prosecutors from both offices. Division prosecutors also conduct training for IRS criminal investigators and Assistant U.S. Attorneys, and provide advice to other federal law enforcement personnel, such as the Drug Enforcement Administration and the FBI. 

The crimes investigated and prosecuted by the Division include attempts to evade tax, willful failure to file returns, and submission of false returns, as well as other conduct designed to violate federal tax laws. The crimes may be committed by individuals, business entities, or tax preparers and professionals. These cases often encompass tax crimes where the source of the individual or business income is earned through legitimate means – as examples, a restaurateur who skims cash receipts; a self-employed individual who hides taxable income or inflates deductions; or a corporation that maintains two sets of books, one reporting its true gross receipts and the other – used for tax purposes – showing lower amounts. Prosecutions in these cases often receive substantial attention in the local and national media, and convictions remind law-abiding citizens who pay their taxes that those who cheat will be punished.
It is also not uncommon for tax crimes to be committed during the course of other criminal conduct, such as securities fraud, bank fraud, identity theft, bankruptcy fraud, heath care fraud, organized crime, public corruption, mortgage fraud, and narcotics trafficking. Division prosecutors work closely with the U.S. Attorneys’ Offices on these issues. 

As tax crimes have become more complex and international in scope, so has the workload of Division prosecutors. Division prosecutors investigate and prosecute domestic tax crimes involving international conduct, such as the illegal use of offshore trusts and foreign bank accounts used to conceal taxable income and evade taxes. In addition to the traditional cases involving unreported legal source income, over the last several years a greater proportion of our cases involve high net-worth taxpayers and tax professionals who sell and implement dubious tax schemes. For FY16, Division prosecutors obtained 131 indictments and 145 convictions (not including the additional criminal tax prosecutions handled exclusively by U.S. Attorneys’ Offices). The conviction rate for cases brought by Division prosecutors generally exceeds 95 percent.
Criminal Appeals. The Division’s Criminal Appeals and Tax Enforcement Policy Section (CATEPS) handles appeals in criminal tax cases prosecuted by Division prosecutors, as well as some appeals from criminal tax cases handled by U.S. Attorneys’ Offices. The appellate-level review provided by CATEPS attorneys plays a vital role in promoting the fair, correct, and uniform enforcement of federal tax law. CATEPS is also charged with developing criminal tax enforcement policy and provides technical guidance on issues, including the sentencing guidelines and restitution in tax cases. CATEPS’s international team serves as a resource to Division attorneys and IRS agents on international matters arising in civil and criminal cases and provides information and technical expertise on matters involving international tax information agreements and treaties. 

It is apparent from this brief overview that Division attorneys are involved in every facet of federal tax enforcement. I would like to take a moment to highlight six areas of enforcement that are among our highest enforcement priorities – abusive tax shelters, abusive promotions, offshore tax evasion, employment tax enforcement, stolen identity refund fraud, and tax defiers. 

Abusive Tax Shelters

On Chevron and Lenity (6/6/17; 6/7/17)

Note:  I made a mistake in the text toward the end of this blog.  The mistake involved Regs. 1.6662-3(b)(2).  On 6/7/17, I corrected the mistake on 6/7/17 by revising the blog below and the the linked full text with footnotes.  Apologies to readers.

I am in the process of revising my Federal Tax Procedure Book in  anticipation of the next edition in August 2017.  I have spent inordinate amounts of time on Chevron and the APA.  In the process, I added one section dealing with lenity and Chevron.  I thought I would post that section here because the text (absent the footnotes) is relatively short and on topic for the Federal Tax Crimes Blog.  For those who can't live without footnotes (or question whether I can support the statements in the text), I offer the text with footnotes here.

By way of introduction, Chevron and its progeny hold that agency regulations adopting a reasonable interpretation of ambiguous statutory text will control, even if the interpretation is not the only reasonable interpretation or even the best reasonable interpretation.  That is a greatly simplified statement of the rule, but it should work for this posting.  The application of Chevron is usually viewed as adopting requiring two steps.  I offer the following from the text of the book (without the footnotes):

• The First Step – often called Step One – inquires whether the meaning of the statute is unambiguous?  (Other synonyms for unambiguous used in this First Step are plain and clear; one does not get past Step One if the text is unambiguous, is plain or is clear; I will generally use the word unambiguous but readers should be alert to the synonyms plain and clear used by other authors, some of whom I quote.)  If so, the regulation is irrelevant because the unambiguous meaning of the statute itself pre-empts the interpretive field.  A regulation inconsistent with the unambiguous meaning is invalid.
• The Second Step – often called Step Two – reached only if the text is determined to be ambiguous in Step One is whether the agency interpretation is unreasonable? Under this Second Step reached if the text is ambiguous, the agency’s interpretation in the regulations is given deference so long as it is not arbitrary, capricious or manifestly contrary to the statute it seeks to interpret (I generally just truncate this litany to “unreasonable”; so that, in Step Two, deference is given if the agency interpretation is reasonable and is not given if the agency interpretation is unreasonable.). In other words, the agency may choose between or among reasonable interpretations within the scope of the statutory ambiguity (sometimes referred to as the Chevron space). Some have argued that, in practice, the Chevron two-step inquiry is often conflated into a single inquiry – deference is given if the regulation is reasonable without first doing the Step One drill; but, at least in my observation, Courts will pay homage to Step One before determining reasonableness which is the Step Two inquiry.  This Step Two reasonableness analysis appears to be the same or at least coextensive with the APA requirement that the agency have engaged in reasoned decision-making so as to avoid being characterized as arbitrary and capricious, an inquiry short-handed to State Farm named for the leading case.

I would appreciate comments from readers, particularly challenging what I say or offering corrections to substance, presentation or syntax.  You can offer such comments either by comment here or by email to me (jack@tjtaxlaw.com).

Here is the text without footnotes:

(8) Chevron, the Rule of Lenity and Criminal and Civil Penalties.

“The rule of lenity requires ambiguous criminal laws to be interpreted in favor of the defendants subjected to them.”  This sounds like a Chevron Step One inquiry for criminal laws, albeit through another interpretive technique.  Lenity requires that the ambiguous statute be interpreted in the defendant’s favor;  Chevron, if applicable, would require that the ambiguous criminal statute must be interpreted as the agency interprets it in regulations unless the interpretation is unreasonable.  Now, I think that everyone would agree that the agency cannot interpret an ambiguous criminal statute in a way adverse to a criminal defendant.  Lenity trumps Chevron.  For example, in the tax area, the IRS could not by a regulation interpret the willfulness element of tax crimes different from the definition developed by the Supreme Court – intent to violate a known legal duty. Thus, it appears that, in tax crimes requiring willfulness or some equivalent of willfulness, the rule of lenity, if it applied, and the willfulness element fully or substantially overlap to assure that a defendant cannot be convicted if the criminal statute is ambiguous.

The finer question is whether an agency could, by regulation interpret a substantive provision that it administers which could then cause a violation of a criminal statute.  Focusing on that crimes with a willfulness element, if the substantive law is not clear (i.e., ambiguous), the taxpayer cannot have intended to violate that law and thus cannot be guilty of a crime requiring willfulness – intent to violate a known and knowable legal duty.  For that reason, the Government only prosecutes where the substantive legal duty allegedly violated is clear (unambiguous).  Here too, the rule of lenity and the criminal tax willfulness element of intent to violate a known and knowable legal duty overlap and assure ambiguous substantive tax provisions are not the basis for criminal prosecution.  The question then is whether facially ambiguous statutory text can be made unambiguous by an agency regulation entitled to Chevron deference and thus form the basis for a criminal tax prosecution which requires intent to violate a known and knowable legal duty.  For example, the IRS can adopt a regulation interpreting a substantive tax provision, such as § 162 for trade or business expenses, and that interpretation will be entitled to Chevron deference within the Chevron space.  If the regulations’ interpretation resolving the statutory ambiguity is entitled to Chevron deference, does that interpretation then set the legal duty that could give rise to a tax willfulness crime if the taxpayer intentionally violates the law as thus interpreted?  I think the answer to that question is yes, but doubt that the interpretive choice even if applicable retroactively for civil tax purposes would be retroactive for criminal tax purposes.  There are many permutations of this issue that I have just not thought through yet, but this should give a sense of the issues involved.

The Whistleblower Behind Caterpillar Tax Commotion (6/2/17)

I wrote before on the execution of a search warrant on Catepillar' Headquarters.  Search Warrant Executed Against Caterpillar HQ, Apparently Related to Tax (Federal Tax Crimes Blog 3/6/17; 3/8/17), here.  I concluded that discussion with the following speculation:

I will raise one possibility, though, and I caution that this is entirely speculation.  I wonder whether her report could have been submitted along with a whistleblower claim?  I have no idea, but given the numbers involved, a whistleblower claim is likely to be very lucrative indeed.  But, I certainly have no idea whether that is the case.

Bloomberg reports that a whistleblower claim is behind the Caterpillar commotion.  Bryan Gurley, David Voraceos and Joe Deaux, The Whistleblower Behind Caterpillar's Massive Tax Headache Could Make $600 Million (BloombergBusinessweek 6/1/17), here.

The article identifies the whistleblower as Daniel Schlicksup, a Caterpillar accountant, and summarizes his saga from company curmudgeon trying to get the attention of superiors on the matter to finally whistleblower.  A very good read.

Schlicksup's journey is consistent with my experience with whistleblowers or persons considering becoming whistleblowers.  All too often the company is just not interested in listening before the problems get out of hand.  The wizards in the company buttressed by their outside professional enablers will not listen to naysayers, and often the internal mechanisms to elevate problems can be thwarted by power structures in the firm.  That is not the way it is supposed to work, particularly for public companies, but unfortunately that is the way it sometimes works.

Now, for a brief review of the tax whistleblower possibilities.  Section 7623(b), here, allows whistleblower awards of from 15% to 30% of collected proceeds from the whistleblower information.  In this case, the collected proceeds would include the tax, the interest on the tax, any penalty (either 20% or 40% accuracy related penalty under § 6662, here, or the 75% civil fraud penalty under § 6663) and interest on the penalty, here).  The article says that the underlying tax bill may be $2 billion and apparently derives a $600 million potential reward based on the maximum award of 30% of that amount.  Of course, the amount of the reward between 15% and 30% is discretionary (although subject to review by the Tax Court), but my experience suggests that an award in this case would probably be at least 22.5% (splitting the difference for a rough and ready solution).  And, of course, if the $2 billion amount does not include interest or penalties, then the reward base would be increased.  In any event, assuming the same $2 billion base, even a 15% reward of $300 million would be sweet.

For more discussion of the whistleblower reward program, see Michael Saltzman and Leslie Book, IRS Practice and Procedure, ¶ 12.05[4][a][iv] Informants (including whistleblowers seeking rewards) (Thomsen Reuters 2015) (online edition).  (Note, I am the principal author of that Chapter of the Saltzman and Book text).

Yet Another Offshore Account Conviction But With DOJ Agreement of No Sophisticated Means (5/29/17; 5/31/17)

DOJ Tax announced Friday here the guilty plea of Joyce Meads of College Station, TX.  Meads was charged in SD FL.  Meads pled to one count of the Klein / defraud conspiracy, a five-year felony.  I link the following document:  docket entries as of today here; the guilty plea here. and the Stipulated Facts here. Notice from the docket sheet that she was charged by information and that she waived indictment, which use indicate a plea agreement in the making.

The key items in the plea agreement are

1. Tax Loss:  Between $250,000 and $550,000.

2.  Sophisticated Means:  "[T]he defendant's efforts to defraud the United States did not involve sophisticated means' within the meaning of the Sentencing Guidelines."  (See my comment below.)

3.  No other factors that would increase the offense level.  Of course, she will get the acceptance of responsibility adjustment (2 or 3 level downward adjustment).

On the basis of the foregoing, my rough and ready calculation of the offense level is 15 with an indicated sentencing range of 18-24 months.  Based on the same calculation, if the sophisticated means adjustment were to apply, the offense level would be 15 with an indicated sentencing range of 24-30 months.

Key items in the stipulated facts, which are pretty much bare bones, are:

1. From 1997 to 2010, Meads "conspired with co-conspirators Marc Harris, Boyce Richard Griffin, and others to defraud the United States."  I will provide some additional information Harris and Griffin at the end of this blog.  One of the others is a person identified as "C.M." with Harris' entity, The Harris Organization in Panama City, Panama.

2. Meads sought to avoid tax on her income from U.S. oil royalties she had recently received from her parents as a gift and would receive as a gift.

3. Harris and the Harris Organization set up entities to implement the offshore structure.  The entities included a Delaware corporation and a Panama corporation.  Meads transferred her royalty interest to the Delaware corporation and he parents transferred to remaining interest to the Delaware corporation.  The royalty income apparently flowed through the Delaware corporation and then out to the Panama corporation.  In 1998, she caused the Panama corporation to distribute $25,000 to her disguised as a scholarship.

4.  In 1999, Meads shifted the operation from the Harris Organization to Griffin's Offshore Management Alliance Ltd., which, like the Harris Organization, assisted U.S. persons seeking to avoid U.S. tax.  Apparently, incident to that shift, Meads caused the royalty payor (Chesapeake Energy) to forward royalty checks to a private post box in Miami.  The royalty checks were forwarded by to Panama where Griffin deposited them in a Panamanian bank account for Meads' benefit.

5.  Meads failed to report the income on her 1997-2009 1040s and, as a result, filed false tax returns.

JAT Comments:

Fifth Circuit Joins Majority Decisions that § 7212(a) Requires No Pending Investigation (5/28/17)

In United States v. Westbrooks, ___ F.3d ___, 2017 U.S. App. LEXIS 9073 (5th Cir. 2017), here, the Fifth Circuit held that (1) § 7212(a), here, tax obstruction, requires no pending investigation and (2) restitution for a tax crime based solely as a condition of supervised release cannot require restitution prior to the supervised release.

All the commotion was created by the Sixth Circuit's holding in See United States v. Kassouf, 144 F.3d 952, 955-58 (6th Cir. 1998), subsequently reaffirmed in United States v. Miner, 774 F.3d 336, 345 (6th Cir. 2014).  But, since Kassouf, every court other than the Sixth Circuit that has addressed the issue has disagreed with Kassouf.

There is nothing particularly newsworthy in the holding other than the Fifth Circuit joining the majority of courts which it lists as follows (bold face supplied by JAT):

United States v. Floyd, 740 F.3d 22, 32, 32 n.4 (1st Cir. 2014) ("A conviction for violation of section 7212(a) does not require proof of either a tax deficiency . . . or an ongoing audit," so "the filing of false tax documents" or "concealment of income or other assets from the IRS can form the basis for a violation of the statute"); United States v. Marinello, 839 F.3d 209, 222 (2d Cir. 2016) ("[S]ection 7212(a)'s omnibus clause criminalizes corrupt interference with an official effort to administer the tax code, and not merely a known IRS investigation."); United States v. Massey, 419 F.3d 1008, 1010 (9th Cir. 2005) ("[T]he government need not prove that the defendant was aware of an ongoing tax investigation to obtain a conviction under § 7212(a); it is sufficient that the defendant hoped 'to benefit financially' from [his] conduct."); United States v. Sorensen, 801 F.3d 1217, 1232 (10th Cir. 2015), cert. denied, 136 S. Ct. 1163, 194 L. Ed. 2d 176 (2016) ("7212(a) does not require an ongoing proceeding . . . .'").

The Court also rejected the argument that the holding rendered § 7212(a) unconstitutionally vague.  That was a concern that contributed to the Kassouf holding.  The Fifth Circuit rejected it, reasoning in part:

Westbrooks rightly argues that, after Johnson v. United States, 135 S. Ct. 2551, 192 L. Ed. 2d 569 (2015), section 7212(a) is not saved by the fact that some conduct clearly falls within a statute's prohibition. Id. at 2561. But as several circuits have held, Johnson did not change the rule that a defendant whose conduct is clearly prohibited cannot be the one making that challenge. See United States v. Bramer, 832 F.3d 908, 909 (8th Cir. 2016) ("Though Bramer need not prove that § 922(g)(3) is vague in all its applications, our case law still requires him to show that the statute is vague as applied to his particular conduct."); Arrigoni Enters., LLC v. Town of Durham, 629 F. App'x 23, 26 (2d Cir. 2015); Maages Auditorium v. Prince George's Cty., 2017 U.S. App. LEXIS 4532, 2017 WL 1019060, at *6 (4th Cir. Mar. 15, 2017); United States v. Huff, 630 F. App'x 471, 487 (6th Cir. 2015); United States v. Zagorovskaya, 628 F. App'x 503, 504 (9th Cir. 2015); Miranda v. U.S. Att'y Gen., 632 F. App'x 997, 1000 (11th Cir. 2015); Flytenow, Inc. v. FAA, 808 F.3d 882, 895 (D.C. Cir. 2015).

Finally, as to the restitution issue, the Court held that Title 26 tax crimes do not permit restitution unless agreed to in a plea agreement or as a condition for supervised release.  The sentencing court had ordered restitution as a condition of supervised release after incarceration but ordered restitution to commence while incarcerated.  The Fifth Circuit said that was not consistent with the condition.

Wells Fargo Wins Some, Loses Most in its Iteration of the Stars Bullshit Tax Shelter (5/28/17)

In Wells Fargo & Company v. United States, 2017 U.S. Dist. LEXIS 80401 (D MN 2017), here, the court held that yet a tax shelter -- the Stars variety often discussed on this blog --  was, well, bullshit.  Actually, the jury had previously held that the transaction was sham (a politically correct euphemism for the concept embodied in the concept of bullshit as I and Vinny use it (for Vinny's iteration, see here)).  In short, Wells Fargo reached for the Stars, but its reach exceeded its grasp (well, it got the Stars, it just did not get the  principal tax benefit).  Its loss of the principal substantive tax benefit is not particularly exceptional (the appellate courts addressing the gambit had denied the principal benefit, but even without the benefit of those decisions, a taxpayer considering the shelter should have known it was bullshit, which raises the penalty issue also resolved in the case, which, to me, is the more important issue.

The decision gives Wells Fargo, part of the loaf, although not nearly half, on the substantive tax benefits claimed from the overall transaction.  How so?  The credit gambit in the overall transaction was done via a trust that the jury declared sham.  So, Wells Fargo  lost that part of the transaction (although I suspect it will renew the almost inevitable quixotic appeal).  The part it won was the interest deduction part.  The Court found that there was a real loan transaction with economic substance.  This was consistent with the jury's partial verdict and consistent with the holdings in the other courts of appeals' cases.  In this regard, the Court complimented the jury as follows (fn 4):

   n4 The Court pauses to note that a jury of laypersons resolved this case in a manner that parallels the decisions of three separate federal appellate panels in similar cases—a credit to how seriously the jurors took their responsibilities and how hard they worked to understand the extremely complicated evidence.

As an aside, that has been my experience with juries -- both as an advocate and as a juror.  They don't necessarily always reach the right result, but they do always work very hard  and most of the time get the right -- or at least a fair -- result.

The Court then moved to the issue:

Notwithstanding the fact that all three courts of appeals to have considered its argument have rejected it, the government continues to insist that the loan is a sham and that Wells Fargo is not entitled to deduct its interest expenses. The government contends that, even if a transaction has objective economic substance, it must be treated as a sham unless the taxpayer actually had at least one subjective, non-tax business purpose. To resolve this issue, it is necessary to predict which approach to the sham-transaction doctrine the Eighth Circuit will choose to adopt. 

Having considered the parties' arguments, the Court concludes that the Eighth Circuit is likely to treat the objective and subjective components of the sham-transaction test as two factors in a single flexible analysis rather than as two separate, rigid tests. After all, courts created the sham-transaction doctrine in recognition of the fact that taxpayers display endless ingenuity in exploiting the tax code, making it impossible for Congress to anticipate and prevent all abuse. A doctrine that is intended to counter the creative and ever-evolving abuse of the tax code must necessarily be flexible. Reducing the sham-transaction doctrine to two mechanical, all-or-nothing tests would deprive the doctrine of the flexibility needed to accomplish its purpose. n5
   n5 The Court acknowledges that, after Wells Fargo's STARS transaction concluded, Congress codified what the government calls the "conjunctive" approach—that is, a requirement that a transaction have both objective economic substance and a subjective non-tax business purpose. See 26 U.S.C. § 7701(o)(1). Importantly, however, the statute states that it applies "[i]n the case of any transaction to which the economic substance doctrine is relevant," and goes on to say that "[t]he determination of whether the economic substance doctrine is relevant to a transaction shall be made in the same manner as if this subsection had never been enacted." 26 U.S.C. § 7701(o)(1), (o)(5)(C). This suggests some flexibility in determining a threshold requirement of relevance before applying the doctrine.

Restitution Permits Double Assessments But Only One Collection (5/21/17)

In Muncy v. Commissioner, T.C. Memo. 2017-83, here, the Court updated its prior opinion in Muncy v. Commissioner, T.C. Memo 2014-251, because of a reversal and remand in Muncy v. Commissioner, 637 Fed. Appx. 276 (8th Cir. 2016).  Now that's a lot of commotion, and I don't intend here to get into the twists and turns.  Suffice it to say that the issue on remand was whether the IRS had shown that the person issuing the notice of deficiency had the proper delegated authority to do so.  For purposes of this blog (and my interest), the more important part of the current opinion was what it  repeats from its prior opinion that I had not previously paid sufficient attention to.  And, what I discuss here is all in the most recent opinion linked above, so I do not provide links to the prior opinions.

In high-level summary, the taxpayer had been convicted for tax crimes (which ones are not important here), with a punishment including restitution for tax.  The IRS summarily assessed the restitution as permitted by § 6201(a)(4) and §6213(b)(5), which avoids the necessity for a notice of deficiency and prevents the taxpayer form contesting the assessment.  Then, determining that the taxpayer owed more tax for the periods than reflected in the restitution award that had been assessed (this is not uncommon since the restitution amount is often less than the total tax deficiency), the IRS issued the taxpayer a notice of deficiency.  In issuing the notice of deficiency, however, the IRS reduced the amount of the deficiency by the restitution assessed, so that the amount of deficiency in the notice was for the net amount.  The taxpayer petitioned the Tax Court for redetermination.  The IRS moved to increase the deficiency to eliminate the reduction for the restitution assessment.

The problem with which the Court grappled, at bottom, was whether so increasing the deficiency amount to include the amount already assessed would permit the IRS to assess the increased amount if "redetermined" by the Court and thus have two assessments that, in part, are for the same tax liability.  Bottom line, without getting into the technical maze the Court navigated, the Court held that the deficiency was the gross amount rather than the net amount.  That will mean that the amount determined in the Tax Court's decision document that is then assessed will be doubled up, but the Court said (bold-face supplied by JAT):

This leaves us with the question of whether respondent should reduce his deficiency determinations by amounts of restitution previously ordered by the District Court. The restitution statute expressly contemplates that a civil claim may be brought after the criminal prosecution by providing that the amount paid under a restitution order "shall be reduced by any amount later recovered as compensatory damages for the same loss by the victim in * * * any Federal civil proceeding". 18 U.S.C. 3664(j)(2)(A) (2012). The reverse applies as well: Any amount paid to the IRS as restitution for taxes owed must be deducted from any civil judgment the IRS obtains to collect the same tax deficiency. United States v. Tucker, 217 F.3d 960, 962 (8th Cir. 2000). Accordingly, a civil judgment must be entered before the IRS reduces a taxpayer's tax liability by amounts of restitution paid.

So, bottom-line, the defendant will not have to pay twice for the same tax amounts due.

Article on Justice Gorsuch's Approach to Criminal Tax Cases (5/20/2017)

I think readers will be interested in this excellent article by Jeremy Temkin:  Reading Tea Leaves: Justice Gorsuch and Criminal Tax Cases, 257 NYLJ (5/18/17), here.  The data set for the article is slim -- principally  United States v. Farr, 536 F.3d 1174 (10th Cir. 2008), here (note that the link is to the case on the UVA Law School website titled the Neil Gorsuch Project).  I have written before on the subsequent trajectory in Farr and provide the principal blog links at the end of this blog. Basically, in the 2008 case decided by then Judge Gorsuch, Farr argued successfully on the appeal that the charging document incorrectly charged her for evading "her" employment taxes (which were not her liability) rather than the trust fund penalty for which she was liable.

Here is an excerpt from Temkin's Lessons Learned:

It is, of course, necessary to exercise caution in reading tea leaves, and a narrow  sampling of cases is insufficient to conclude with confidence that Justice Gorsuch will show the same willingness as Justice Scalia to defend (certain) criminal rights. After all, Farr was a fairly unusually (sic) case, and Judge Gorsuch left open the possibility that the government could have avoided the constructive amendment problem that it had created by drafting a bare-bones indictment. That solution, of course, will not help criminal defendants who will be forced to rely on rarely granted bills of particulars to draw out the government’s case. 

In that way, Farr presents an interesting tension with Justice Scalia’s dissent in United States v. Resendiz-Ponce, 549 U.S. 102, 111 (2007). Resendiz-Ponce was convicted of illegally attempting to reenter the country based on an indictment that failed to allege that he had committed any overt act in connection with his reentry. An eight-justice majority concluded that the indictment was sufficient, reasoning that “attempt” necessarily connotes both intent and some overt act. Justice Scalia refused to give the government the benefit of that doubt. Instead he found the indictment faulty on the straightforward view that it failed to satisfy the requirement that it allege the two elements of  attempted reentry: both intent to commit the underlying crime and some act toward its commission. Thus, while both Judge Gorsuch in Farr and Justice Scalia in Resendiz-Ponce showed themselves  committed to construe indictments strictly, the former did so by encouraging the government to allege fewer particulars, while the latter concluded that more details were necessary.

JAT Note:  Of course, Farr could have been convicted of evading the employer's employment taxes (including even the employer's portion), but the charging document should not have said she evaded "her" taxes.

Prior blogs on Farr:

• Charging Decisions for Trust Fund Tax Violations (Federal Tax Crimes Blog 11/17/16), here.
• Charging Decisions for Trust Fund Tax Crimes - 7202 or 7201 (Federal Tax Crimes Blog 12/22/12), here.
• Evasion of Trust Fund Taxes and Charging Decisions (Federal Tax Crimes Blog 1/23/2012), here.
• Tenth Circuit Summarizes Double Jeopardy in Rejecting the Argument (Federal Tax Crimes Blog 1/16/10), here.

CCA on Application of Refund Statute of Limitations in OVDP (5/15/17)

In CCA 201719026 (4/12/17, released 5/12/17), here, an IRS Senior Technician Reviewer responds to the following:

Your office has received a number of questions from OVDP examining agents about taxpayers who report additional income and tax on their amended returns for most of the years in the disclosure period, but report an overpayment on their amended return for at least one of the years at issue. A typical fact pattern might involve a taxpayer for whom the disclosure period is tax years 2003 through 2010. For tax years 2003 through 2007 and 2009 and 2010, the taxpayer reports additional income and tax. But the amended return submitted for tax year 2008 includes a large loss, resulting in an overpayment for that tax year. After reviewing the amended return, the examining agent confirms the claimed loss and the resulting tax computations show an overpayment for tax year 2008. The taxpayer then requests that the overpayment for tax year 2008 be credited against increases in tax for the other tax years in the disclosure period or the miscellaneous offshore penalty. You have asked for advice regarding how I.R.C. §§ 6511 and 6514 affect the Service’s ability to credit the overpayment as requested by the taxpayer.

The author then discusses the law apply under certain possible scenarios.  Since the analysis is succinct, I will just refer readers to it.

A short summary of the answer to the "typical fact pattern" disclosed is that, assuming the original 2008 return was timely filed, the period for claiming a the refund expires 3 years after the date of the filing (or deemed filing).  Hence, if the amended return filed in OVDP was submitted on or before that 3 year period expired, then the refund is timely and the refund can be resolved in the OVDP proceeding (either by refund or credit against other years).  And, depending upon the facts, the filing of the claim for refund by amended return in the OVDP proceeding might be timely.

Although the author of the CCA does a very good job of discussing the rules, I offer the following from the current operating draft for the next edition of my Federal Tax Procedure book:

Just as there are statutes of limitation on assessment and collection taxes, there are also statutes of limitation on taxpayers claiming tax refunds from the Government.  There are two applicable rules. 

First, there is a statute of limitations for filing the claim for refund.  A claim for refund must be filed within three years from the date the return was filed or two years from the date the tax was paid, whichever is later, and, if no return is filed, within two years from the date of payment.  § 6511(a).  Read literally, this means that a taxpayer can file a return 40 years late and qualify under this first rule. I hope readers will instinctively say something must be missing here, for statutes of limitations do not normally allow such lengthy lapses before the claim must be pursued.  The answer to that concern is in the second rule to which I now turn. 

Second, there is a statute of limitations on the amount of tax that can be refunded if the claim is timely under the first rule.  The IRS may only refund the amount of tax paid within three years plus the period of any extension and, if the foregoing rule does not apply, then it may only refund the tax paid within two years of the date of the claim.  § 6511(b)(2).  This is called the “lookback” rule. 

District Court Denies Sufficiency Motion for Tax Evasion and Tax Obstruction (5/13/17)

In United States v. Pflum, 2017 U.S. Dist. LEXIS 72422 (D KS 2017), here, Pflum had been convicted of two counts - evasion, § 7201, and tax obstruction, § 7212(a).  In a prior prosecution in 2004, Pflum had been convicted of "multiple tax code violations, including three counts of failing to file income tax returns for the tax years 1997 through 1999."  As a condition of supervised release on that conviction, the court ordered Pflum to file "truthful and complete federal and state income tax returns in a timely manner, according to law, and cooperate with the Internal Revenue Service and state tax authorities regarding any manner related to the defendant's past or present tax liability during the term of supervision."  As recounted in the facts in the current case, Pflum continued to misbehave.  Hence, Pflum was again indicted, this time for evasion and tax obstruction.  During the pretrial proceedings, Pflum thrashed around in various ways, including representing himself pro se at times. The jury convicted.  Pflum filed post-trial motions.  In the order linked above, the Court denied the post-trial motions.

The only part Memorandum and Order that I think worthy of comment is the denial of the Motion for Acquittal based on insufficiency of the evidence.  Before excerpting that portion of the Order, I first offer the following regarding the jury verdict from the factual background:

After the court submitted the case, the jury deliberated and returned guilty verdicts for both of the counts charged in the Indictment. Doc. 179. The jury completed a special verdict form for each charge. The jury agreed that Mr. Pflum had committed affirmative acts to evade the payment of income taxes by submitting false financial statements, instructing third parties to ignore IRS collection efforts, and threatening legal action against third parties who complied with the IRS's collection efforts. Id. at 2-3. The jury also agreed that Mr. Pflum committed affirmative acts to obstruct the due administration of the Internal Revenue laws by submitting false financial statements, filing a grant deed attempting to transfer ownership interest of property located at 500 MacDonald, San Juan, Washington, instructing third parties to ignore IRS collection efforts, and threatening legal action against third parties who complied with the IRS's collection efforts. Id. at 6-7.

Now, turning to the excerpt where the Court discusses and denies the Motion for Acquittal.

Mr. Pflum asserts that the government presented insufficient evidence for a rational jury to convict him beyond a reasonable doubt of the counts charged. The court addresses the two counts of conviction separately, below. 

1. Count 1: Attempting to Evade and Defeat the Payment of Income Tax 

Count 1 charged Mr. Pflum with attempting to evade and defeat the payment of income tax in violation of 26 U.S.C. § 7201. To secure a conviction under § 7201, the government must prove beyond a reasonable doubt that: (1) the defendant owed substantial income tax; (2) the defendant intended to evade and defeat the payment of that tax; (3) the defendant committed an affirmative act in furtherance of this intent; and (4) the defendant acted willfully, that is, with the voluntary intent to violate a known legal duty. See 10th Cir. Crim. Pattern Jury Instruction No. 2.92 (2011); see also United States v. Meek, 998 F.2d 776, 779 (10th Cir. 1993) ("To obtain a conviction for evasion, the government must prove three elements: 1) the existence of a substantial tax liability, 2) willfulness, and 3) an affirmative act constituting an evasion or attempted evasion of the tax.") 

For the first element, the government need not prove the exact amount of the tax due—just that the tax liability is substantial. See United States v. Mounkes, 204 F.3d 1024, 1028 (10th Cir. 2000) (holding that the government had proved substantial tax liability because the "evidence showed that the [defendants'] bank deposits and cash expenditures exceeded their reported income after adjustments for applicable exemptions and deductions. Such evidence supports an inference that defendants had unreported income."). "Whether the tax evaded was substantial is a jury question and generally not susceptible to a precise definition." 10th Cir. Crim. Pattern Jury Instruction No. 2.92 cmt. (2011); see also Canaday v. United States, 354 F.2d 849, 851-52 (8th Cir. 1966) ("The word 'substantial,' as applicable here, is necessarily a relative term and not susceptible of an exact meaning."). 

The third element—the requirement of an affirmative act—"distinguishes the offense of evasion from the misdemeanor offense of willful failure to file a tax return." Meek, 998 F.2d at 779. "An affirmative act requires more than the passive failure to file a tax return; rather, it requires a positive act of commission designed to mislead or conceal." Id. The misstatement of one's income is an affirmative act sufficient to sustain a jury's conviction for tax evasion. See United States v. Jones, 816 F.2d 1483, 1488 (10th Cir. 1987) ("Defendant's filing of his tax returns with the knowledge that he should have reported more income is sufficient to sustain the jury's conclusion that defendant willfully attempted to evade taxes." (citing Sansone v. United States, 380 U.S. 343, 351-52, 85 S. Ct. 1004, 13 L. Ed. 2d 882 (1965))). 

Here, the government presented evidence sufficient for a reasonable jury to find that the government proved each one of the elements essential to a tax evasion conviction under 26 U.S.C. § 7201. At trial, the government presented evidence that Mr. Pflum owed substantial income tax. The evidence included the federal income and employment tax returns that Mr. Pflum had filed for tax years 1997 through 2007. By his own admission, the tax returns reported Mr. Pflum's total income as $7,700,494.00 and claimed he owed $2,663,854.23 in federal income and employment taxes. The government also presented evidence that Mr. Pflum had earned income from the sale of his business in 2006. The government thus presented sufficient evidence of the first element. 

The government also presented sufficient evidence of the second, third, and fourth elements. The government presented evidence that Mr. Pflum committed affirmative acts in furtherance of his intent to evade and defeat the payment of the tax that he owed the government. And, the jury could infer from the circumstantial evidence that Mr. Pflum's conduct was willful. Indeed, the jury specifically found that the government had presented evidence of and proved beyond a reasonable doubt that Mr. Pflum committed certain affirmative acts. Specifically, this evidence included the affirmative acts of: (1) "submitting false financial statements claiming $472.75 in assets and $470.00 per month income, when in truth and in fact [Mr. Pflum] owned over $2 million in real estate and received monthly income of over $16,000;" (2) "instructing third parties, such as renters, potential buyers, and others indebted to [Mr. Pflum] to ignore collection efforts by the Internal Revenue Service;" and (3) "threatening legal action against third parties who complied with the Internal Revenue Service's collection efforts." Doc. 179 at 2-3. Viewing the evidence in the light applied to a Rule 29(c) motion, the court concludes that a rational jury could have reached the very same verdict that this jury reached. 

2. Count 2: Corruptly Endeavoring to Obstruct and Impede the Due Administration of the Internal Revenue Laws 

New DOJ Charging and Sentencing Recommendation Guidance (5/12/17)

AG Sessions has issued a new Memorandum, dated May 10, 2017, titled Department Charging and Sentencing Policy.  The memorandum is here, and the DOJ press release is here.

The memorandum is short, so readers might want to go directly to it.  My bullet points as to what is covers:

• "[P]rosecutors should charge and pursue the most serious, readily provable offense."  That is stated as a general rule for which exceptions may be allowed if approved.
• "[P]rosecutors must disclose to the sentencing court all facts that impact the sentencing guidelines or mandatory minimum sentences, and should in all cases seek a reasonable sentence under the factors in 18 U.S.C. § 3553."  Sentencing recommendations to the court within the guidelines range are appropriate, with recommendations for departures and variances requiring approvals.

From some of the early comment on the new guidance:

Joseph Tanfani, Sessions orders return to tough drug war policies that trigger mandatory minimum sentences (LA Times 5/12/17), here.

He [AG Sessions] rescinded two policy memos signed by a predecessor, former Atty. Gen. Eric H. Holder Jr., that told prosecutors to be cautious in their use of methods that can produce dramatically harsher jail terms. 

In a memo released Friday, Sessions instructed Justice Department lawyers to “charge and pursue the most serious, readily provable offense." 

By definition, he added, the most serious offenses “carry the most substantial guidelines sentence, including mandatory minimum sentences.” 

* * * * 

With the rise of federal mandatory sentencing laws in the 1980s and 1990s, judges were stripped of much of their discretion on how to sentence drug users. 

Decisions made by prosecutors often effectively determine how long offenders will spend in prison. 

For example, if federal prosecutors include the amount of drugs in their written charges, that can trigger a mandatory minimum sentence. 

They also have the discretion to file motions for so-called sentence “enhancements,” which can effectively double drug sentences for repeat offenders. 

Some prosecutors use these tough tools as a hammer in plea negotiations, or to force offenders to cooperate. 

Starting in 2013, Holder instructed federal prosecutors to use that power more sparingly and to reserve the toughest charges for high-level traffickers and violent criminals. 

“As a nation, we are coldly efficient in our incarceration efforts,” Holder said in a speech decrying the growth in America’s prison population. 

The Obama-era policies led to a sharp decline in the number of drug offenders hit with mandatory minimum sentences, from 62% in 2013 to 44% last year, according to U.S. Sentencing Commission data compiled by a sentencing reform group, Families Against Mandatory Minimums. 

Government FBAR Willful Penalty Suit Survives Motion to Dismiss (5/9/17)

In United States v. Toth, 2017 U.S. Dist. LEXIS 66664 (D MA 2017), here, the Court denied the defendant's motion to dismiss the Government suit for judgment on a FBAR willful penalty.  I attach the docket entries, here, which indicate that the Government filed the case in September 2015 and there have been many twists and turns to the date of the order.  Among those twists was a default judgment because Toth did not accept or avoided service of the complaint.  And, perhaps driving the twists and turns is that in this suit involving an FBAR willful penalty of $2,173,703, Toth is representing herself pro se. (I suppose there is redundancy there but I wanted it to be clear.)

According to the complaint, here:

• Toth opened the UBS account in 1999 and it had remained open continuously since.  
• At all times, Toth had control and a financial interest in the account.  
• "The balance of the Account in calendar year 2007 was approximately $4,000,000."  
• "As of June 30, 2008, the balance of the Account was at least $4,347,407."  
• The FBAR penalty is $2,173,703, which is 50% of the amount on 6/30/08.  
• The complaint contains two spare statements of the basis for liability:

21. Monica Toth failed to file an FBAR disclosing the existence of the Account for the 2007 calendar year on or before June 30, 2008.
22. Monica Toth voluntarily and intentionally violated a known duty to appropriately and timely disclose the existence of the Account to the Internal Revenue Service and the Department of the Treasury.
23. The failure of Monica Toth, to timely file the FBAR with regard to the 2007 calendar year was willful within the meaning of 31 U.S.C. § 5321(a)(5).

I don't think Toth filed an answer.  At least my search of the docket entries did not pick one up.  However, she did file the motion to dismiss which led to the order.

There is nothing in the order particularly important other than to the litigants.  Apparently in the mix, however, was whether the FBAR willful penalty violated the 8th Amendment's Excessive Fines prohibition.  On that issue, the court said:

Toth also argues that the fine imposed by the Government violates the Excessive Fines Clause of the Eighth Amendment. "The Secretary of the Treasury may impose a civil money penalty on any person who violates, or causes any violation of, any provision of section 5314." 31 U.S.C. § 5321(a)(5)(A). The penalty may not exceed $10,000 unless the violation is willful. Id. § 5321(a)(5)(B)—(C). Whether Toth, in fact, violated § 5314, and, if so, whether that violation was willful is a question of fact that the Court cannot resolve at this stage. Accordingly, the Court does not address whether the fine to be imposed, if any, violates the Eighth Amendment.

For further context on the 8th Amendment, I attach the Government's Opposition, here, addressing the Eight Amendment issue.  The Opposition is dated December 14, 2016. The opening of that Opposition says:

By way of background, the United States alleged in the complaint that defendant Monica Toth willfully failed to file an FBAR as required by statute because she had a bank account in Switzerland which contained over $4 million. Ms. Toth moved to dismiss the action on several theories, from defective service of process, to delayed service, to failure to state a claim on which relief could be granted. These are meritless and were addressed in a prior brief filed by the United States. But Ms. Toth also argued in one or two sentences that the Excessive Fine Clause in the 8th Amendment to the U.S. Constitution precluded judgment from being entered. She cited no authority for her argument. 

Undersigned counsel recognized that a similar argument was pending before the Ninth Circuit and sought (and received) an extension of time to brief the issue until the briefs were filed in the Ninth Circuit to ensure that the Tax Division was taking a consistent position. The Ninth Circuit brief has now been filed and this brief thus responds to the 8th Amendment issue Ms. Toth raised. The remainder of the arguments presented by Ms. Toth were addressed in a prior filing by the United States. For the reasons set forth below, the Excessive Fines Clause of the U.S. Constitution does not preclude entry of judgment of approximately $2 million against Ms. Toth for willfully failing to file an FBAR.

The Opposition then sets forth the Government's detailed argument that on which the Court deferred action.

One issue that struck me was that the Government demanded a jury in its original complaint.  I just wonder whether, strategically, demanding a jury is a good idea in any penalty case and particularly where there is a pro se defendant.  At a minimum, with a jury, the demands of the case will go up and efficiency will be sacrificed.  Of course, the defendant could have demanded a jury if the Government did not and, in any event, the parties can waive the jury later.

Lawyer, Alleged Offshore Account Enabler, Loses Motion to Dismiss Indictment (5/6/17)

I have previously written about Michael Little, a British and U.S. lawyer and U.S. permanent resident, who was indicted for enabling offshore evasion for U.S. taxpayers.  (I list at the end of this blog entry the principal prior blog entries mentioning Little.)  The superseding indictment is here; the extensive docket entries in the case are here.  The superseding indictment charges:

• Count 1 Tax Obstruction, § 7212(a) (Pages 1-10)
• Counts 2 through 7 Failure to File for 2005-2010, § 7203 (Page 11)
• Count 8 Willful Failure to File FBAR, 31 USC § 5313 and 5322(a); Title 31 CFR §§ 103.24, 103.27(c,d) and 103.59(b); 18 USC § 2. (Page 12)
• Count 9 Conspiracy (Pages 12-16
• Counts 10-19 Aiding and Assisting the filing of false Forms 3520, § 7206(2) (Pages 16-18)

In United States v. Little, 2017 U.S. Dist. LEXIS 67580 (SD NY 2017), here, the Court denied Little's motion to dismiss.  The gravamen of the Court's action is stated in the opening paragraph:

Defendant Michael Little moves for partial dismissal of the Second Superseding Indictment on the grounds that his prosecution for failure to file individual income tax returns and Reports of Foreign Bank and Financial Accounts ("FBARs") would deprive him of due process of law in violation of the Fifth Amendment to the United States Constitution. Little asserts that at the time of the events charged in the indictment he was a U.K. citizen and a lawful permanent resident of the U.S. He argues that the statutes and regulations requiring U.K. citizens with permanent residence status under U.S. immigration law to file U.S. income tax returns and FBARs, when read in conjunction with the U.S./U.K. Tax Treaty (the "Treaty"), are ambiguous, such that a person of ordinary intelligence lacks notice as to what constitutes compliance with the law. The Court finds that none of the relevant statutes or regulations, whether read in isolation or together, or in conjunction with the Treaty, are so ambiguous that they could properly be found unconstitutionally vague as applied to the charged conduct. Defendant's motion for partial dismissal of the indictment is thus denied.

The standard for void for vagueness is stated:

"As generally stated, the void-for-vagueness doctrine requires that a penal statute define the criminal offense with sufficient definiteness that ordinary people can understand what conduct is prohibited and in a manner that does not encourage arbitrary and discriminatory enforcement." United States v. Rybicki, 354 F.3d 124, 129 (2d Cir. 2003) (quoting Kolender v. Lawson, 461 U.S. 352, 357, 103 S. Ct. 1855, 75 L. Ed. 2d 903 (1983)). Because the First Amendment is not implicated, the Court assesses Little's challenge as applied, i.e., "in light of the specific facts of the case at hand and not with regard to the statute's facial validity." Id. (quoting United States v. Nadi, 996 F.2d 548, 550 (2d Cir. 1993)). Courts examine as-applied vagueness claims in two steps: "a court must first determine whether the statute gives the person of ordinary intelligence a reasonable opportunity to know what is prohibited and then consider whether the law provides explicit standards for those who apply it." Rubin v. Garvin, 544 F.3d 461, 468 (2d Cir. 2008) (quoting Farrell v. Burke, 449 F.3d 470, 486 (2d Cir. 2006)). The "novelty" of a prosecution does not bolster a vagueness challenge, for the lack of a prior "litigated fact pattern" that is "precisely" on point is "immaterial." United States v. Kinzler, 55 F.3d 70, 74 (2d Cir. 1995). 

"A scienter requirement may mitigate a law's vagueness, especially where the defendant alleges inadequate notice." Rubin, 544 F.3d at 467 (citing Vill. of Hoffman Estates v. Flipside, Hoffman Estates, Inc., 455 U.S. 489, 499, 102 S. Ct. 1186, 71 L. Ed. 2d 362 (1982)). Where "the punishment imposed is only for an act knowingly done with the purpose of doing that which the statute prohibits, the accused cannot be said to suffer from lack of warning or knowledge that the act which he does is a violation of law." United States v. Tannenbaum, 934 F.2d 8, 12 (2d Cir. 1991) (quoting Screws v. United States, 325 U.S. 91, 102, 65 S. Ct. 1031, 89 L. Ed. 1495 (1945) (plurality opinion)) (Bank Secrecy Act provision requiring reporting by financial institutions not void for vagueness when applied to an individual because the Act defined financial institutions to include "[a] person who engages as a business in dealing in or exchanging currency" and defendant knew he was "committing a wrongful act.")

Fascinating Case on Jury Instructions on Definition of Element of the Crime Beyond the Statutory Definition (5/2/17)

Today's case, United States v. Hastie, ___ F.3d ___, 2017 U.S. App. LEXIS 7237 (11th Cir. 2017), here, is a criminal case, but is not a tax case.  I offer it because the most interesting holding in the case involved a prior tax crimes case and the setting of when a jury instruction might turn into  a directed verdict.

The Driver's Privacy Protection Act ("DPPA), 18 U.S.C. § 2721(a), here, provides that "A state department of motor vehicles and any officer, employee or contractor thereof, shall not knowingly disclose "personal information," which is defined as "information that identifies an individual."

Hastie was the License Commissioner of Mobile County, Alabama.  The License Commissions issues driver's licenses and auto titles for the county.  The Commission maintains a website for online transactions.  Use of the website requires the user to provide his or her email addresses.  In addition, the tellers in the office are instructed to obtain email addresses for in-office transactions.  Both the website and the policy manual for the Commission advise about the DPPA.

Hastie, asked the Commission's information technology guy to do a mass email with her endorsement for mayor.  That, of course, was not Commission business.  He refused to do so, but did provide her a flash drive with the email addresses.  Hastie provides the email address to the candidate's campaign and the campaign emailed the endorsement.

Hastie was indicted for 18 counts.  Count 17 charged violation of the DPPA.  (I don't know the other counts.)  The statute defines "personal information" as (18 U.S.C. § 2725(3)):

information that identifies an individual, including an individual's photograph, social security number, driver identification number, name, address (but not the 5-digit zip code), telephone number, and medical or disability information, but does not include information on vehicular accidents, driving violations, and driver's status.

Note that the statutory definition does not specify email addresses as personal information.  But, the district court instructed the jury as follows (bold-face supplied by JAT):

The term "personal information" means information that identifies an individual, including an individual's E-mail address, photographs, Social Security number, driver's license, name, address, telephone number, medical or disability information. Personal information does not include information on vehicular accidents, driving violations, and a driver's status.

The Jury then asked the judge whether "whether it had to follow the definition of "personal information" found in the DPPA or the definition set forth in the jury instructions."  This interesting fact is found in the dissent's opinion in a footnote (fn. 3 on p. 29, the end of the dissenting opinion).  There is no indication of the judge's answer to the jury.  (I am surprised that this fact was not mentioned by the majority and more prominently by the dissent.)

After first determining that the License Commission was a "State Department of Motor Vehicles" as used in the statute, the Court turned to the issue of whether email addresses are "personal information" under the statute.  In fairly straight-forward statutory interpretation, the Court held that "personal information" did or at least could include emails.  I urge readers to review that portion of the decision (pp. 9-15).

The Court then turned to the subtler issue of whether the wording of the specific instruction improperly directed a verdict on that question.  On that issue, the majority and the dissent turned to a tax case,  United States v. Goetz, 746 F.2d 705 (11th Cir. 1984), here, a tax case involving whether a crank return was a return requiring that it not be a return to support a failure to file conviction.  The majority discussed that issue as follows: