Saturday, September 20, 2014

Kathy Keneally, Former DOJ Tax AAG, joins DLA Piper (9/20/14)

Former DOJ Tax AAG, Kathryn Keneally, will join DLA Piper.  Aruna Viswanatha, Former top U.S. tax prosecutor joins DLA Piper (Reuters 9/18/14), here.  Excerpts:
The former top U.S. tax prosecutor who helped secure $2.6 billion in penalties and a guilty plea from Credit Suisse AG on charges the Swiss bank helped Americans hide money overseas, joined the law firm DLA Piper, the firm said on Thursday. 
* * * * 
In an interview, Keneally said she expected the Justice Department to use more of the information it received through the program to pursue enforcement actions against banks in other parts of the world, which took the offshore accounts once they left Switzerland.
Prosecutors have brought cases involving secret accounts in India, Israel, and elsewhere. 
"The Swiss bank program was designed to get information from the banks about where else in the world the money went," Keneally said. 
"I think what you will see next is the department using the information they are getting from Swiss banks for a greater global expansion of enforcement," she said.

Trial Management of the Cheek Good Faith Defense (9/20/14)

I think all persons familiar with Cheek's requirements for asserting a good faith defense know that a good faith belief that the the tax law did not impose on defendant a duty to pay tax is properly presented to a jury but a good faith belief that the tax law is unconstitutional is not a good faith defense.  See Cheek v. United States, 498 U.S. 192 (1991), here. So, if the taxpayer makes a good faith defense that can easily be classified as one or the other, the gate keeping for avoiding improper consideration by the jury can be easily handled at trial by including or excluding the evidence, by proper cautions to the jury at the time improper evidence comes in, or in the final jury instructions.

The problem, of course, is that sometimes the distinctions are not so crisp.  When does a defense that the taxpayer in good faith believed he did not owe the tax blend into an argument that the tax in good faith believed that the tax was unconstitutional?

In United States v. McBride, 2014 U.S. Dist. LEXIS 126876 (D UT 2014), the Government filed a motion in limine to preclude the taxpayer from asserting a good faith defense that implicated the constitutionality of the tax.  The Court granted the motion, in a way, by advising the defendant in advance that it was going to seriously manage the evidence at trial to insure that the jury is not presented the claim that the defendant acted in good faith because he believed the tax was unconstitutional.  The defendant represented in the case that, even without the motion and order, he would make no such claim.

I am not sure the Court would have to do that by pre-trial order, but it did.  Here is the cut and paste of the order (one footnote omitted):

This matter is before the Court on the government's Motion in Limine to Preclude Defendant from Introducing Evidence of Disagreement with the Tax Laws of the United States.1 
The government seeks to exclude Defendant from presenting (1) evidence of the Defendant's views of the legality and proper interpretation of U.S. tax law, and (2) evidence that Defendant held a good-faith belief that the Internal Revenue Code did not apply to him and that his conduct was legal. 
The government asserts that Defendant has represented to the IRS various arguments about U.S. tax law. Specifically, the government contends that Defendant may seek to introduce at trial evidence of Defendant's view that money received from various limited liability companies and from private real estate transactions is not considered income for purposes of tax liability. Rather, in Defendant's view, only money received from federal government entities is taxable. The government contends that evidence demonstrating Defendant's views of U.S. tax law should be excluded under Federal Rule of Evidence 403, because presenting evidence containing improper statements of law would confuse and mislead the jury. 
Defendant explains that he intends to introduce evidence demonstrating his belief that his wages were not considered to be income and that he was not required to pay income tax under U.S. tax law. Defendant also explains that it does not plan to argue that provisions of the tax code are unconstitutional. 
Federal Rule of Evidence 403 provides, "The court may exclude relevant evidence if its probative value is substantially outweighed by a danger of one or more of the following: unfair prejudice, confusing the issues, misleading the jury, undue delay, wasting time, or needlessly presenting cumulative evidence."  
"'[I]t is well established that the good faith defense encompasses misunderstanding of the law,' [but] does not encompass 'disagreement with the law.'"n2 "[A] defendant's views about the validity of the tax statutes are irrelevant to the issue of willfulness and need not be heard by the jury, and if they are, an instruction to disregard them would be proper."n3 "[A] person who has a good faith belief that under the tax law he is not required to file any return, is to be distinguished from the person who knows that under the applicable tax law he is required to file a return, but believes, even in good faith, that the law is unconstitutional." n4 "[N]either a defendant's disagreement with the law, nor his belief that such law is unconstitutional no matter how earnestly held constitute a defense of good faith misunderstanding or mistake." n5
   n2 United States v. Lesoon, 190 F. App'x 622, 625 (10th Cir. 2006) (quoting United States v. Schiff, 801 F.2d 108, 112 (2d Cir. 1986)).
   n3 Cheek v. United States, 498 U.S. 190, 207 (1991).
   n4 United States v. Payne, 800 F.2d 227, 228 (10th Cir. 1991) (emphasis omitted).
   n5 United States v. Ware, 608 F.2d 400, 405 (10th Cir. 1979). 
To the extent that Defendant seeks to present a good-faith defense based upon his belief that certain U.S. tax laws are unconstitutional or based upon his disagreement with the tax law, well-established precedent prevents him from doing so. 
Evidence demonstrating that Defendant held a good-faith misunderstanding of the proper interpretation of the tax code, however, would be probative of a good-faith defense to the charged offenses. But if, at trial, Defendant presents evidence of his purported good-faith misunderstanding of the tax code that appears to stem from Defendant's disagreement with the law, the danger of confusing and misleading the jury would substantially outweigh the probative value of such evidence. Consequently, the Court finds that only evidence carefully limited to Defendant's good-faith misunderstanding of U.S. tax law is admissible, while evidence indicating Defendant's disagreement with U.S. tax law is inadmissible. Should Defendant bring such evidence to establish a good-faith defense, the Court notes that the government would be permitted to bring rebuttal evidence in an attempt to demonstrate Defendant's willfulness. 
It is therefore 
ORDERED that the government's Motion in Limine to Preclude Defendant from Introducing Evidence of Disagreement with the Tax Laws of the United States (Docket No. 56) is GRANTED IN PART AND DENIED IN PART. 
DATED this 9th day of September, 2014. 
/s/ Ted Stewart
Ted Stewart
United States District Judge
I guess what troubles me about the order is that it can subtly constrict the defendant's freedom to assert aggressively a proper Cheek good faith defense, because it could be read as a warning that testimony that does not clearly and unequivocally meet the Cheek requirement with be rejected and treated as a violation of the pre-trial order.  In my mind that does not recognize the subtlety that can be involved when the positions blend, and then the court should deal with the issue only at trial and not in some generic type of pre-trial order.

Judicial Estoppel of Tax Liability Based on Plea Agreement (9/20/14)

Guilty pleas and the resulting admissions in guilty plea allocutions do have collateral consequences.  Most immediately, guilty pleas and allocutions can be preclusive or or evidence in later civil proceedings.  In the current draft of my Federal Tax Crimes book, I caution as follows (footnotes omitted):
K. Collateral Consequences of Plea Agreements and Allocutions. 
Defense attorneys should always keep in mind that the criminal trial and particularly convictions can have collateral consequences to defendants.  Most immediately in a tax setting, a conviction can be proof or, at least, evidence of fraud so as to open up tax years otherwise closed by the statute of limitations and support the 75% civil fraud penalty.  I discuss elsewhere the collateral estoppel consequences of convictions for tax evasion.  Other tax crimes – most prominently tax perjury, § 7206(1) – do not per se have such preclusive collateral estoppel effects.  However, particularly in the plea agreement and in allocutions, there is some context for the bare, general count(s) of conviction.  That context may offer specific admissions of fraud or conduct from which a fair inference of fraud can be made.  If defense counsel wants to hold open the defendant’s opportunity to avoid civil fraud, the defense attorney must be careful to shape the admissions and other evidence to mitigate the risk of it being conclusive or persuasive as to fraud.
In this blog, I discussed the damaging effect of allocutions in an earlier case, the now infamous Williams case holding the hapless J. Bryan Williams liable for the willful FBAR penalty.  United States v. Williams, 489 Fed. Appx. 655 (4th Cir. 2012), here.  As I said in my blog on Williams (Fourth Circuit Reverses Williams on Willfulness (Federal Tax Crimes Blog 7/20/12; revised 7/24/12), here).
13.  The second aspect, which I think is inseparable from the first, is the particular plea allocution Williams made at his sentencing for the crime.  Essentially, the majority reads the plea allocution as an admission of willfulness in failing to file the 2000 FBAR in question.  The dissent reads the allocution differently, so we have a Clintonian situation as to the conclusion depending upon what the definition of is is.  Then, of course, as noted by the dissent, questions of collateral and judicial estoppel may apply.  I won't go into this further because, if indeed (as the majority read the tea leaves), the defendant admitted willfulness, then, of course, the district court was wrong in finding that the Government had not proved willfulness.
The majority opinion in Williams said this about the allocution (two footnotes omitted):

Monday, September 15, 2014

More on the Warner Sentencing Appeal (9/15/14)

Readers will recall the Ty Warner saga -- the wealthiest guy yet caught playing the offshore evasion game.  My key prior blogs on this saga are listed at the end of this blog.

I was speaking today with someone writing on the Warner saga.  I cited to him the role of sentencing in tax crimes, citing the opening commentary to Chapter Two, Part T.1, of the Sentencing Guidelines, here, and the Fourth Circuit case of United States v. Engle, 592 F.3d 495 (4th Cir. 2009), here.  So, I offer them to the readers:

Chapter Two Part T of the Sentencing Guidelines opens as follows:
Introductory Commentary 
The criminal tax laws are designed to protect the public interest in preserving the integrity of the nation's tax system.  Criminal tax prosecutions serve to punish the violator and promote respect for the tax laws.  Because of the limited number of criminal tax prosecutions relative to the estimated incidence of such violations, deterring others from violating the tax laws is a primary consideration underlying these guidelines.  Recognition that the sentence for a criminal tax case will be commensurate with the gravity of the offense should act as a deterrent to would-be violators.
Now, on the Engle case.  I have previously blogged on the Engle case and will just link to that discussion here.  Fourth Circuit Cites S.G. Tax Sentencing Policy in Reversing Sentencing Variance (1/16/10), here.  For  present purposes, just know that the Fourth Circuit took the rare step -- rare under the Booker regime -- of reversing and remanding a sentence.

As in Warner, Engle was a government appeal from a Booker sentencing variance.  According to the Fourth Circuit opinion, Engle evaded tax of more than $600,000 (the opinion says that the total with penalties and interest exceeded $2 million, but penalties and interest are not considered tax loss for sentencing purposes).  With the benefit of his guilty plea, Engle's total offense level was 17; so the Guidelines sentencing range was 24-30 months. (This was after a reduction of his Criminal History from II to I.)

Engle's sentencing saga is a story in itself, I won't get into the details here, but the Government wanted a sentence in  the advisory guidelines range.  The sentencing judge, however, was concerned that any sentence of incarceration would prevent Engle from continuing his business and thus prevent him from paying the unpaid tax, penalties and interest.  The sentencing judge thought that permitting Engle to work and pay those amounts would meet the deterrent needs for sentencing.   So, the sentencing judge sentenced to "fours years probation, 18 months house arrest on electronic monitoring with work release, and he will be permitted to make trips to China as demanded by his employer."  The Government appealed.

Based in significant part on the policy in the Introductory Comment quoted above, the Court of Appeals reversed and remanded for resentencing.  On remand, the sentencing judge sentenced Engle to 60 months incarceration.  See Criminal Case No. 3:04cr55-FDW-DCK-1, Doc. No. 43: Amended Judgment), as referenced in Engle v. United States, 2014 U.S. Dist. LEXIS 8298 (WD NC 2014) (a Section 2255 proceeding).  According to the Court of Appeals' opinion, Engle's Guideline range was 24-30 months, so it would appear that the sentence was an upward variance, rare in tax cases.

Friday, September 12, 2014

More on Bullshit Corporate Tax Shelters (with Some Rantings) (9/12/14)

Today, I posted a blog entry titled Another Bullshit Tax Shelter Bites the Dust on Appeal Also (9/12/14), here, in that article I addressed, perhaps obliquely, the IRS propensity to assert only accuracy related penalties for tax shelters that are nothing more than scams and raids on the fisc by playing the audit lottery.  I said:
Excepting civil fraud penalties that perhaps ought to come along with such scams, the penalties at play in these well-papered and well-lawyered scams are the accuracy related penalties of 20% or in particularly egregious cases 40%.
Now, I want to focus on the fraud penalties (with a brush at criminal fraud) and the broader environment.  The background for this blog entry is a recent book on the dynamics that played out as prominent tax professional firms -- accounting and law firms -- became an integral part of the tax shelter scams to raid the fisc.  See Ramina Rostain and Milton C. Regan, Jr., Confidence Games: Lawyers, Accountants and the Tax Shelter Industry (The MIT Press 5/2/14), here on Amazon.  For a good summary of the principal thrust of Confidence Games, I cite readers to Dana A. Remus, Confidence Breach: A Breakdown in Professional Self-Regulation, 92 Texas L. Rev. 1599 (2014), here.

Probably, the best I could do is to just point readers to these sources and stop.  This would be a good blog if I did stop.  But, I won't stop, recognizing that I may not improve on the blog.

Let me add some comments.

1. One of the core insights in the book and the article is that there were institutional and organizational contributors that permitted individuals to push the envelop into inappropriate behavior.

2. The large(r) Accounting firms developed substantial practice groups that, overtime (over time also), became an echo chamber that caused or contributed to individuals doing things that they would not do individually.  (For background, this is a major reason that conspiracy is a separate crime.)  Because individuals in these groups were in a echo chamber, they slowly begin to believe the bull shit of the echo chamber.  Had they not been in the echo chamber, they likely would not have done what they did.  But they were in the echo chamber; conduct become less evil or illegal or morally wrong because all these smart people and honorable people were participating in the venture.  Of course, the views of those at senior and more experienced levels were often substantially influenced by the extravagant money that could be made by participating.

3. Even within the institutions, those who did not participate had a number of warning signals (excess revenue and profits) for these groups shrouded in some secrecy that they chose to ignore because they participated directly or indirectly in the excess revenue and profits.  In the Government's expansive imagination of willful blindness, those in an oversight function in these institutions may have deliberately ignored the criminality inherent in the practices.

4. The shelters that constitute the background for Confidence Games were principally shelters promoted to very wealthy individuals.  However, as Professor Remus notes, there are other shelters that are promoted to corporations (or other analogous entities) where the in-house counsel serve much the same role as law firms in advising the corporate client.  And corporations participated in shelters that were equally as egregious the individual tax shelters. Under the guidance of corporate in-house and out-house counsel, the corporations attempted to exploit those bullshit shelters, seeking in the final analysis to win the audit lottery or, if they lost the audit lottery, at least avoid penalties for tax shelters that were nothing more than shams / scams.  (I could not find that those two words were etymological cognates or otherwise related, but in this context, I am not sure there is an practical difference even if ultimate not traceable to the same Indo-European word.)

Another Bullshit Tax Shelter Bites the Dust on Appeal Also (9/12/14; 9/20/14)

In Chemtech Royalty Associates v. United States, 2014 U.S. App. LEXIS 17490 (5th Cir. 2014), here, the Fifth Circuit rejected another audit lottery attempt in the guise of a bullshit tax shelter of the smoke and mirrors variety.  For my blog entry on the district court opinion, see Yet Another Bullshit Tax Shelter Bites the Dust (Federal Tax Crimes Blog 2/27/13), here.  This shelter was was hawked to Dow Chemical by the venerable financial wizardry firm of Goldman Sachs, here.  As with bullshit tax shelters generally, it was know by an acronym -- SLIPs for Special Limited Investment Partnerships.  And as with many bullshit tax shelters it needed one or more tax indifferent parties to appear to earn the taxable income that offset of the tax benefits the taxpayer claims.  The tax indifferent parties for many of the bullshit tax shelters are foreign banks some of whom appear more than willing, for a fee, to assist U.S. taxpayers raid the federal fisc.  (I am not sure how these banks can be distinguished from the Swiss banks that the U.S. DOJ has hammered.)  At any rate, the case was about the U.S. taxpayer at the center of this scam -- called by the courts a sham.  The U.S. taxpayer lost.

An issue ever present when taxpayers do such scams is the penalty exposure.  As readers of this blog know, when such sophisticated taxpayers enter such scams, they look to minimize their penalty exposure with tax opinions from tax professionals upon which they claim to have "relied."  If they can convince a court that they relied, then the cost of playing the audit lottery via the scam is just paying the taxes they owed anyway, interest during the period they used the fisc's money, and the exorbitant fees they paid to implement the scam.  So, as is typical,. this taxpayer got an opinion letter from a prominent law firm, Andrews & Kurth, here, which had helped Goldman Sachs conceptualize the scam.  By the time of trial, for some unexplained reason, the taxpayer did not rely upon the opinion for penalty relief.  The district court in its opinion (fn. 4) said:  "Dow does not rely on the opinion of Andrews & Kurth in this case, and the Court does not take it into consideration in this opinion."

So, after rejecting the scam, the Fifth Circuit turned to the issue of whether the taxpayer could avoid the penalties that come along with bullshit tax shelters.  Excepting civil fraud penalties that perhaps ought to come along with such scams, the penalties at play in these well-papered and well-lawyered scams are the accuracy related penalties of 20% or in particularly egregious cases 40%.  The district court imposed the 20% penalty for (i) negligence and (ii) substantial understatement.  The district court declined to assert the gross valuation misstatement penalty based upon outlier Fifth Circuit authority that suggested that, when the shelter was so stinky as a matter of law that it had no substance whatever, any gross misvaluation or basis overstatement can be ignored so the grosss valuation misstatement did not apply.  After the district court so held, the Supreme Court decided United States v. Woods, ___ U.S. ___, 134 S. Ct. 557 (2013), here, which rejected that notion.  For my blog entry on Woods, see Supreme Court Applies 40% Penalty to Bullshit Basis Enhancement Shelters (Federal Tax Crimes Blog 12/3/13), here. Accordingly, the Fifth Circuit remanded to the district court to reconsider its penalty conclusions in light of Woods.

Addendum 9/20/14 3:00 pm:

As in many bullshit tax shelters, the phantom income that is the consequence of phantom tax benefits need to be deflected, otherwise if that income were left with the taxpayer playing the game, the benefits would be reversed.  So, as is typical, the hunt is on in these deals for a tax indifferent party who can "suffer" the phantom income with no tax cost.  Foreign banks are real accommodating in that respect.  They were ubiquitous in the tax shelter shenanigans of the 1990s and early 2000s, both the individual mass (somewhat) marked individual shelters and the corporate shelters that I have discussed in this blog.  Needless to say they were prominent in Chemtech.  From the Fifth Circuit opinion:
This appeal concerns the tax consequences of two transactions undertaken by Dow Chemical Company  ("Dow") and a number of foreign banks n1 from 1993 through 2006. During those years, Dow and the foreign banks purported to operate two partnerships that generated over one billion dollars in tax deductions for Dow.  * * * *
   n1 Bank of Brussels Lambert, Dresdner Bank A.G., Kredietbank N.V., National West-minster Bank plc, and Rabo Mercent Bank N.V. (collectively, "the foreign banks"). 
Third, the corporation had to entice foreign entities to participate in the transaction. The tax benefits generated by the partnership could be attained only if the partnership's income could be assigned to a tax-indifferent party.
The foreign banks were the tax indifferent parties.  Hence, they entered fake transactions to assist the taxpayer in raiding the fisc.  Shame on them.  Why not more consequences than shame?  At least in the individual tax shelter cases, major penalties were imposed on some of the banks for facilitating the bullshit tax shelters other than the taxpayers suffered any costs for enabling the bullshit tax shelters, except perhaps reputational when called out by name in cases such as Chemtech.  And the corporate tax shelter taxpayers only paid the tax, often a 20% penalty and sometimes a 40% penalty, and interest on the tax and penalty, costs hardly sufficient on a cost benefit basis to really discourage the benefits of winning the audit lottery.  How many of these deals and at what cost to the fisc that were never discovered or if discovered to complex to understand in the blizzard of contrivances in which they were packaged?

Former US Ambassador Investigated for Money Laundering and Tax Evasion (9/12/14)

The New York Time reports that, according to a report in an Austrian magazine,a former U.S. Ambassador to Afghanistan and the United Nations, Zalmay Khalilzad, " is under investigation by the Justice Department for possible tax evasion and money laundering."  Alison Smale, Former Envoy Reported Facing a Federal Inquiry (NYT 9/8/14), here.

His background:
Born in Afghanistan in 1951, Mr. Khalilzad studied at the American University in Beirut, where he met Ms. Benard, and later earned a doctorate from the University of Chicago. He first worked for the State Department in the 1980s, serving under President Ronald Reagan and President George Bush. 
After the Sept. 11, 2001, terrorist attacks, Mr. Khalilzad became a trusted adviser to President George W. Bush on Afghanistan and was formally appointed ambassador to Kabul in 2003, serving in that post until 2005. He then became ambassador to Iraq, where he stayed until 2007, when he won congressional approval as the American envoy to the United Nations. After Barack Obama won the 2008 presidential election, Mr. Khalilzad entered private business.
The case, reported to involve the transfer of $1.4 million, apparently came to light after a blogger discovered documents from the Austrian state prosecutors’ office and a Vienna court in a garbage dump in Vienna between March and August. The blogger published several of the papers he found on his website recently. 
The Austrian weekly newsmagazine Profil reported that the cache of papers included a document from the Justice Department, citing its investigation of Mr. Khalilzad, 63, concerning accounts belonging to Mr. Khalilzad’s wife, the social scientist and author Cheryl Benard.
The caution, of course, is that this is just a report of an investigation and, even if true, it is just an investigation.  Apparently no charges have been brought by either the U.S. or by Austria.  Austria, however, did put a hold on one account.  But an Austrian court subsequently lifted the blog.  Alison Smale, Austrian Court Unblocks Assets of Former U.S. Ambassador’s Wife (NYT 9/11/14), here.

Saturday, September 6, 2014

Request to Readers for Help on Copyright Violations and Plagiarism (9/6/14)

I write today to note that I am aware that certain other tax professionals have published works (such as blogs) that have copied or paraphrased, often with minimal changes, significant portions of my blog entries without quotations or attribution of the source.  Such or paraphrasing copying can be either or both copyright violations or plagiarism.  I know that some readers of this blog read other materials available on the web and thus might have some opportunity to identify such behavior and advise me of it either by comment on this blog or by email to

I think it helpful to give some short definition of the key terms -- copyright violations and plagiarism.

Copyright Violations

Copyright violations are violations of the U.S. law governing copyrights.  The Wikipedia Entry, here, titled "Copyright law of the United States of America," offers a good summary of the U.S. law, with appropriate links for further study.

Copyright law law is complex,  but in part relevant to this request for help, the key to copyright law  is that ideas are not protected but expressions of ideas are protected.  "Others are free to express the same idea as the author did, or use the same facts, as long as they do not copy the author's original way of expressing the ideas or facts."

As Judge Posner explains in his book, The Little Book of Plagiarism, 12-13 (Knopf Doubleday Kindle Edition 2009):
Copyright law does not forbid the copying of ideas (broadly defined to include many features of an expressive work besides its precise words or other expressive details, such as genre, basic narrative structure, and theme or message), or of facts. Only the form in which the ideas or the facts are expressed is protected.
Further from the Wikipedia link:
A paper describing a political theory, for example, is copyrightable; it may not be reproduced without the author's permission. But the theory itself (which is an idea rather than a specific expression) is not copyrightable. Another author is free to describe the same theory in their own words without infringing on the original author's copyright. In fact, the second author does not even need to credit the original author (although failing to credit the source of an idea may be plagiarism, an ethical transgression).
One way subsequent authors attempt to avoid copyright violations is to paraphrase, so that, they hope, they are merely expressing the idea (not copyrightable) and not the earlier author’s expression of the idea (copyrightable).  But, as Wikipedia notes, here, in its entry on Paraphrasing of copyrighted material:

Friday, September 5, 2014

Offshore Enabler Nabbed in Sting Operation Sentenced (9/5/14)

DOJ Tax has announced here the sentencing of Joshua Vandyk, an investment advisor, to 30 months in prison for conspiring to launder monetary instruments.   The key excerpts (actually most of the press release) are:
Vandyk, a U.S. citizen, and Eric St-Cyr and Patrick Poulin, Canadian citizens, were indicted by a grand jury in the U.S. District Court for the Eastern District of Virginia on March 6, and the indictment was unsealed March 12 after the defendants were arrested in Miami.  Vandyk, 34, pleaded guilty on June 12, St-Cyr, 50, pleaded guilty on June 27, and Poulin, 41, pleaded guilty on July 11.  St-Cyr and Poulin are scheduled to be sentenced on Oct. 3.

According to the plea agreements and statements of facts, Vandyk, St-Cyr and Poulin conspired to conceal and disguise the nature, location, source, ownership and control of property believed to be the proceeds of bank fraud, specifically $2 million.  Vandyk, St-Cyr and Poulin assisted undercover law enforcement agents posing as U.S. clients in laundering purported criminal proceeds through an offshore structure designed to conceal the true identity of the proceeds’ owners.  Vandyk and St-Cyr invested the laundered funds on the clients’ behalf and represented that the funds would not be reported to the U.S. government.
According to court documents, Vandyk and St-Cyr lived in the Cayman Islands and worked for an investment firm based there.  St-Cyr was the founder and head of the investment firm, whose clientele included numerous U.S. citizens.  Poulin, an attorney at a law firm based in Turks and Caicos, worked and resided in Canada as well as Turks and Caicos.  His clientele also included numerous U.S. citizens.  Vandyk, St-Cyr and Poulin solicited U.S. citizens to use their services to hide assets from the U.S. government, including the IRS.  Vandyk and St-Cyr directed the undercover agents to create an offshore corporation with the assistance of Poulin and others because they and the investment firm did not want to appear to deal with U.S. clients.  Vandyk, St-Cyr and Poulin used the offshore entity to move money into the Cayman Islands and used Poulin as a nominee intermediary for the transactions.

According to court documents, Poulin established an offshore corporation called Zero Exposure Inc. for the undercover agents and served as a nominal board member in lieu of the clients.  Poulin transferred approximately $200,000 that the defendants believed to be the proceeds of bank fraud from the offshore corporation to the Cayman Islands, where Vandyk and St-Cyr invested those funds outside of the United States in the name of the offshore corporation.  The investment firm represented that it would neither disclose the investments or any investment gains to the U.S. government, nor would it provide monthly statements or other investment statements to the clients.  Clients were able to monitor their investments online through the use of anonymous, numeric passcodes.  Upon request from the U.S. client, Vandyk and St-Cyr liquidated investments and transfered money, through Poulin, back to the United States.  According to Vandyk and St-Cyr, the investment firm would charge clients higher fees to launder criminal proceeds than to assist them in tax evasion.

Thursday, September 4, 2014

Article on Swiss Banks in U.S. DOJ Program (9/4/14)

I direct readers to a very good recent article discussing the end game for Category 2 Swiss banks and those who did not join.  Matthew Allen, Banks Agonize Over Us Tax Evasion ‘Guilt’ ( 9/2/14), here.

The article discusses banks that have announced or are rumored to be considering dropping out of the U.S. DOJ program.
So why should a bank virtually accuse itself of aiding tax cheats one day and the next walk away from a treaty that protects it from potentially ruinous criminal indictment? 
Part of the reason can be traced back to the birth of the Swiss-US non-target letter deal in August 2013, a period of intense uncertainty and danger for the whole Swiss banking sector.
In January 2012, Wegelin was found guilty of aiding tax cheats by a US court and ended its 273-year existence. In the summer, the Swiss parliament rejected a government proposal to end the long-running tax evasion dispute by handing over client details to the US. 
The scene looked set for more Wegelin-style casualties, a dire outlook that was brought into sharper focus when Bank Frey ceased operations in October because it could not afford to fight the US authorities. 
The country’s regulator, the Swiss Financial Market Supervisory Authority (FINMA), urged banks to swiftly join the non-target letter programme despite protests that the details were too vague and that banks needed time to comb through their accounts for US tax cheats.
In addition, the article addresses banks that never joined as Category 2.
However, the suspicion remains that other banks are playing a far more dangerous game by never entering the scheme in the first place. 
“Certain banks may have decided not to register in the programme on the basis of a cost-versus-risk assessment,” said Troller. “Their rationale being that if they should ever get prosecuted, then the fines or other consequences would be more manageable than the cost of entering the system in the first place.” 
The DoJ made it very clear on brokering the non-target letter deal that non-compliant banks could face serious sanctions if they do not admit the error of their ways and are caught.
And, caught in the middle are innocent U.S. taxpayers:
Caught in the crossfire of these strategies, however, are thousands of bank clients who are either innocent of tax evasion offences or were unaware of their reporting responsibilities.
These include US citizens living and working in Switzerland who cannot open bank accounts or take out mortgage loans. In some cases they have been expelled by their banks as involving too much unwanted paperwork and risk. 
A number of dual Swiss/US citizens have also complained at being unnecessarily dragged into the row and have been saddled with competing a time-consuming and expensive paper trail proving that they have never worked – or indeed in some cases never lived – in the US.

Wednesday, September 3, 2014

PWC Report on the State of Swiss Private Banking, Including Impact of U.S. DOJ Program (9/3/14)

PWC has issued this report: Private Banking Switzerland: from Yesterday to the Day after Tomorrow:  Eight theses on Swiss Private Banking,  The summary page with the link to the report is here; the report itself is here.  The overall report exams some common statements about Swiss banks and analyses their accuracy.  

Thesis 4 on p. 12 of the Report is:

The fines paid as part of the US tax programme are a massive burden on the equity capital of Swiss private banks.
Some PWC comments from  the report:
Fig. 5 makes clear that the burden the US tax programme is expected to have on Swiss private banks does not threaten their existence. Of the 86 banks reviewed, 20 have not formed “Other provisions” for fiscal 2013 at all. At 36 banks, the new “Other provisions” corresponds to up to 2.5% of their equity capital. At 20 banks, the amounts are between 2.5% and 10% of their equity capital. They exceed a quarter of equity capital (31.0% and 50.8%) at only two banks. 
What we think 
The legal, audit and consultancy costs as well as fines as a result of the US tax programme will have an impact on the financial results of Swiss private banks but not overly burden most banks. In general, the amounts for “Other provisions” as a percentage of equity capital are low. However, Swiss private banks have likely been conservative in forming their provisions in order to avoid an implicit admission of guilt. As a result, the actual burden is expected to be clearly higher. However, the US tax programme will not trigger a wave of consolidation within the sector. Yet the costs of the US tax programme, which are set to be in the millions, could act as a “fuse” for the exit from the Swiss private banking business, particularly for smaller foreign banks that generally question the sense of private banking in Switzerland.

Tuesday, September 2, 2014

Proof Beyond a Reasonable Doubt - Ramblings (9/1/13)

I am writing a chapter in a publication.  My chapter is on tax crimes.  It is too long.  I am having to cut.  So, today, I am cutting the discussion on beyond a reasonable doubt.  It is an important criminal law concept, but not enough tax specific to leave in a chapter that is already too long.  But since it is my latest ramblings on the subject, I am going to offer the materials here.  

The text with the footnotes is here.

The text without the footnotes is:
[a] Beyond a Reasonable Doubt. 
In a criminal tax prosecution, just as any other criminal prosecution, the Government bears the burden of proving guilt beyond a reasonable doubt.  
There is no universally accepted jury instruction defining reasonable doubt.  Some courts and commentators urge that the bare words – beyond a reasonable doubt – should be used with no attempt to further define the term.  Other offerings of instructions provide more words, without perhaps more guidance and clarity.  Some perhaps would argue that this is a good state of affairs, for it permits the jury in its collective wisdom to shape the fact finding process to its perception of the needs of the community and the individual charges and defendant.  
Trial lawyers love to describe burdens in percentage terms: 
  Consider what “proof beyond a reasonable doubt” actually mandates that the jury do. Surely it requires more proof than the preponderance of the evidence standard, which governs in civil cases. As commonly explained to civil juries, the preponderance standard is quantified as any amount of certainty greater than 50%, and proof beyond a reasonable doubt must mean more than that.  But how much more proof than a preponderance is needed in a criminal case? The quantity of certainty is never quantified; instead, it is kept quite vague. Is 90% certainty required? 95%? 99%? Or could the amount of certainty be much lower, say perhaps 75%?
Indeed, whatever the “percentage” level of certainty imagined to be inherent in the standard, it is reported that “research has consistently shown that the jurors in criminal cases will often be satisfied with much less certainty than is conventionally assumed.” 
Consider the following from Judge Posner: 

Saturday, August 30, 2014

Taxpayer Denied Bankruptcy Discharge For BLIPS Related Tax Liability (8/30/14)

11 U.S.C. Section 523(a)(1)(C), here, provides in relevant part that a taxpayer may not be discharged in bankruptcy for a tax debt if one of two circumstance exist:  (i) "with respect to which the debtor made a fraudulent return" or (ii) the debtor "willfully attempted in any manner to evade or defeat such tax."

In In re Vaughn, ___ F.3d ___, 2014 U.S. App. LEXIS 16417 (10th Cir. 2014), here, the Court denied Vaughn a discharge for his tax debt arising from the bullshit tax shelter (the BLIPS variety).  In so doing, the court affirmed the bankruptcy court and the district court below.

It appears that, in denying the discharge, the courts relied principally upon the second basis for denial of discharge -- "willfully attempted in any manner to evade or defeat such tax."  The 10th Circuit found that Vaughn participated in a shaky shelter and then voluntarily depleted his assets during the long period of time before the Government finally assessed the tax liability.  (Readers will recall that substantial periods of time can elapse from  the time an  unreported tax liability arises and when it finally is assessed.)  The taxpayer claimed that his conduct was negligent at best, but not willful as required by the text of the statute, because it was before the IRS assessed the tax.  The 10th Circuit rejected the argument, holding as it had previously held that assessment of the tax is not required for the denial of discharge to apply.

Although the 10th Circuit apparently did not rely upon the first basis -- the taxpayer made a fraudulent return -- it appears from the history of BLIPS that the return was fraudulent because the BLIPS shelter was fraudulent.  I have noted that in another context -- Section 6501(c)(1), here, which has an unlimited statute of limitations "In the case of a false or fraudulent return with the intent to evade tax."  See for the most recent discussion, BASR Briefs On Issue of Unlimited Statute of Limitations for NonTaxpayer Fraud (Federal Tax Crimes Blog 8/27/14), here.  There is no textual requirement in Section 6501(c)(1) that the taxpayer make the fraudulent return; the text only requires that the return be fraudulent.  Taxpayers, of course, argue that, despite the lack of a textual requirement that the taxpayer be complicit on the fraud on the return, the text properly interpreted has an implicit requirement that the taxpayer have known the return was fraudulent and thus made a fraudulent return.  The few courts that have addressed the issue are split, with, as of now, the weight of authority that the taxpayer's fraud is not required.

In any event, the bankruptcy provision does seem textually to require the taxpayer's fraud.  Promoter or preparer fraud without the taxpayer's fraud is not sufficient to deny discharge.  So, that is not an issue.  And, as noted, the 10th Circuit seemed to have relied upon the taxpayer's fraud.  Nevertheless, the 10th Circuit did seem to at least advert to the issue of some culpability on Vaughn's part in filing the return claiming the fraudulent benefits of BLIPS (emphasis supplied):
Second, Appellant argues his "reliance on the advice of KPMG, his longtime tax advisor, that the BLIPS transaction was an aggressive but ultimately legitimate tax position might have been at worst unreasonable under the circumstances, making [Appellant] negligent," but not willful. (Appellant's Opening Br. at 23.) Appellant contends that because he innocently, even if unreasonably, relied on KPMG's advice, he cannot be found to have acted willfully. We find this argument unpersuasive under all of the circumstances in this case, particularly in light of the bankruptcy court's finding that Appellant's assertion of innocent reliance was "simply not credible." In re Vaughn, 463 B.R. at 548.

Friday, August 29, 2014

New IRS Internal Guidance on Processing Streamlined Submissions (8/29/14; 8/30/14)

A commenter called attention to an IRS internal procedure guidance with IRM changes dated 8/13/14.  That guidance is numbered WI-21-0814-1244 and titled  Streamline Filing Compliance Procedures for Accounts Management International IMF.  The guidance is here.

I have just looked through the guidance.  I have not studied it closely.  The key point that caught my eye on this review is that there are procedures established for some preliminary vetting of the documents that are filed under the SFOP and SDOP procedures.  I quote some of them and then offer comments.
IRM Adjusting Streamlined Filing Compliance Domestic Accounts
- (Streamlined Domestic Offshore - SDO) 
3. LB&I will review the submissions for statute considerations. LB&I will complete the "AM Streamline Coversheet" and attach it to the package notating their statute recommendations regarding open statutes and statute extensions.
The IRS must determine if the certification is complete -- a table checklist is provided in paragraph 7.

One thing they check for is an open examination. (See par. 8, table).
9. To complete adjustments on Form 1040X filed under the SDO:  
6. After making the assessment, refer any case with 5 or more foreign information returns (Forms 3520, 3520-A, 5471, 5472, 8938, 926, or 8621) by e-mailing the CIS ID number to "*LB&I OVDP Compliance" with an explanation that the case is being forwarded due to 5 or more foreign information returns. Enter CIS notes indicating the case was referred to *LB&I OVDP Compliance "5 or more foreign income statements"  
NOTE: The total of 5 forms is a combination of all years filed. For example submissions containing 3 Forms 5471 for 2011 and 3 Forms 5471 for 2012 would be referred since the total is 6. Submissions with a combination totaling less than 5 would not be referred.
JAT Comment: The latter requirement for forwarding returns with 5 or more information returns is obviously a critical one in terms of trying to anticipate what the IRS might do.  I don't think that less than 5 will mean the taxpayer certifying nonwillfulness has no risk.  The returns could be picked up under the regular IRS procedures which, inter alia, score returns for factors unrelated to offshore accounts.  Then, once an audit starts, the assumption would be that some level of audit of the certification will take place.  But, given the uncertainty in all this process, I personally believe it would be a mistake to make an aggressive certification of nonwillfulness even if the taxpayer can imagine that he understands his audit risk factors.  I don't understand audit risk factors, at least not well enough to take any important action based on the understanding.  The proper way to analyze this is that you should not certify if you are making a false certification or, if you can't calibrate nowillfulness exactly, a certification of nonwillfulness when the facts put you toward the willful end of the spectrum.  That is not legal advice to anyone, for I do not provide legal advice on this blog without specific engagement of my services.  This is just a cautionary concern that I think readers should consider.

Wednesday, August 27, 2014

Comments Going to Spam Folder (8/27/14)

Over the past couple of weeks, some comments went to the spam folder and I did not catch them until today.  I have reviewed the items in that spam folder and have approved the comments that are helpful to readers.

I will try to be more diligent about reviewing the spam folder and approving the appropriate emails.  Sorry for the inconvenience.

I do not know the algorithms the service provider uses for directing comments to the spam folder, so cannot offer any tips that would prevent that from happening.

Tuesday, August 26, 2014

Procedurally Taxing Blog on Statutes of Limitations with Respect to Tax Collected on Noncitizen Nonresidents (8/26/14)

Procedurally Taxing, the premier Tax Procedure Blog (in my opinion), has this great post that a number of readers of this blog may be interested in:  Boeri: Not a citizen, never lived or worked in the US? IRS will still keep your money (Procedurally Taxing 8/26/14), here.  Here is the teaser paragraph:
The facts of the case are as follows, and I have lifted much of this from the Federal Circuit Court of Appeals holding.  Mr. Boeri was an Italian citizen who was never a citizen of the United States, never worked in the United States, and never was a resident of the United States. Mr. Boeri was employed by GTE and Verizon for over thirty five years (located in Italy, Brazil, Argentina, and the Dominican Republic).  In 2003, Mr. Boeri accepted a voluntary buy out, and received close to $250,000 in two payments in March and August of 2004.  In those distributions, Verizon withheld around $70,500 in US income tax withholdings, Social Security tax, and Medicare Tax.  There is no dispute that Mr. Boeri was not originally liable for those taxes.  In March of 2009, Mr. Boeri filed non-resident income tax returns for 2004, seeking a refund of the taxes withheld by Verizon…And you can imagine where this was headed.
Click on the  link above for more.  I could not state it better than the author, Stephen Olsen; indeed,  without even trying, I could state it  much worse.

The discussion  is really technical, but for a person who may not be subject to the jurisdiction of the U.S. to tax, the discussion could be very important if there is any way that the IRS ends up with that person's money in the guise of a tax.

This is all to emphasize that statute of limitations to pursue claims -- whether in a tax context or otherwise -- are important.  Valid claims in any context can be cut off by statutes of limitations.  Pay attention.

BASR Briefs On Issue of Unlimited Statute of Limitations for NonTaxpayer Fraud (8/26/14)

I have previously written on the Allen issue -- whether Section 6501(c)(1)'s unlimited statute of limitations may be triggered by fraud on the return that is not the taxpayer's fraud.  See Allen v. Commissioner, 128 T.C. 37 (2007), here.  (For my blogs on the issue, see here.)

Since Allen, the courts addressing the issue have been  sparse, but seemed to accept the validity of Allen's holding that fraud on the return triggers the unlimited statute of limitations even if it was not the taxpayer's fraud.  Allen involved a run of the mine fraudulent preparer, but the more prominent instances where the holding could apply involves the plethora of bullshit / fraudulent tax shelters that were popular with the wealthy in the 1990s and in the early 2000s.  Apparently not anticipating the holding in Allen, the IRS walked away from making adjustments to taxpayers investing in those shelters where it could not find an open statute of limitations under the other rules.  The IRS did try to get some relief by asserting the 6 year statute, but came up short on that in  U.S. v. Home Concrete & Supply, LLC, ___ U.S. ___, 132 S.Ct. 1836 (2012), here.  (See The Supreme Court Blesses Taxpayers Sheltering and Hiding Income from Six-Year Statute of Limitations (Federal Tax Crimes Blog 4/25/12), here.) Then, the IRS belatedly discovered the implications of Allen.

In BASR Partnership v. United States, 113 Fed. Cl. 181 (9/30/13 Filed; As Revised 10/29/13), here, the Court of Federal Claims rejected Allen and held that the unlimited statute in Section 6501(c)(1) required the taxpayer's fraud.  That holding, of course, warmed the hearts of taxpayers who invested in bullshit / fraudulent tax shelters -- a win on the audit lottery they willing and  joyously played.  For prior discussions of BASR, see Court of Federal Claims Holds that Unlimited Civil Statute of Limitations Requires Taxpayer's Fraud (Federal Tax Crimes Blog 10/3/13), here,  and Judge Holmes of the Tax Court Sets up the Allen Issue Conflicts (Federal Tax Crimes Blog 11/14/13; revised 11/16/13), here.

The  Government appealed BASR to the Court of Appeals for the Federal Circuit.  That case is now pending.  But it has been briefed.  I offer today in this blog entry the briefs of the parties and of Amicus Curiae (arguing that the Allen holding is incorrect).  Those briefs are:
  • Government Opening Brief, here.
  • BASR Answering Brief, here.
  • Amicus Curiae Brief, here.
  • Government Reply Brief (Responding to BASR Brief and Amicus Brief), here.

I will cut and paste the Summaries of the Arguments in the Briefs:

Sunday, August 24, 2014

Criminal Justice Article of U.S. Global Tax Enforcement (8/24/14)

Jay Nanavati, here, and Justin Thornton,  here, have authored an article on the DOJ and IRS offshore tax initiative.  "DOJ and IRS Use 'Carrot 'n Stick' to Enforce Global Tax Laws" , Criminal Justice, Vol. 29, No. 2, Summer 2014, here.  Most readers of this blog probably already know most of the contents of the article, but it is a good succinct summary of the developments.

I will quibble with their premise stated early in the article:  "The OVDP, currently in its third iteration, is the closest thing to a "carrot" that the government has offered taxpayers to induce compliance."  Of course, a command to get right going forward with no penalty for those who do get right into the future would induce a lot of compliance.  But OVDP does have a significant penalty structure.  With that penalty structure, OVDP is a carrot only for those willful actors for whom the penalties -- particular the FBAR penalties -- could be a lot greater.  But, for nonwillful actors for whom the penalties -- particularly the FBAR penalties -- should be a lot less, it  is not a carrot.  The carrot for them is the streamlined procedures, as recently revised, including the streamlined transition procedures for those in OVDP who would have opted out anyway because they were not willful.  This is just a quibble, though.  The article is good.