Update on Colliot Limitation on Discretion for FBAR Willful Penalty (7/16/18; 7/18/18)

I have written on the Colliot summary judgment limiting the IRS FBAR willful penalty to $100,000.  United States v. Colliot (W.D. Texas No. AU-16-CA-01281-SS), here;  see District Court Caps IRS Authority to Assess Willful FBAR Penalty at $100,000 (Federal Tax Crimes Blog 5/19/18), here.  I have two follow through items.

1.  The Government is asserting in other cases that Colliot was incorrectly decided.  Kimble v. United States (Court Fed. Cl. Dkt. 170521 T, Dkt entry 29), here.

2.  In Colliot, the Government filed an Additional Memorandum dated 6/14/18, here, seeking to mitigate the damage caused by the opinion.  The Government argues that, based on the number and balances in the accounts, even applying the limitation imposed by the court in the opinion, the Government is entitled to most of the penalties assessed.  The key to the claim is that the FBAR willful penalty with the limitation imposed by the court is based per account per year.  Each account could, under the court's opinion, be assessed FBAR willful penalties as follows: (i) $100,000 penalty per account with an amount of $100,000 or more; (ii) the amount in the account when the amount is between $100,000 and $25,000, and (iii) $25,000 when the amount in the account is $25,000 of less.  In Colliot, the defendants had a number of accounts with varying amounts, so the disaggregation of the accounts makes a substantial difference.

The Government argues that the maximum allowed under the Colliot opinion for 14 of the 16 accounts involved would have been $871,300, but that, for those accounts, the Government only assessed $445,314.  (See Table on p. 6.)  The Government thus argues that for those 14 penalties, the assessments “are within the maximum limits set forth in the regulation, and remain unaffected by the Court’s Order” and thus the IRS did not act arbitrarily or capriciously in assessing those penalties.  Further, the Government argues (pp. 7-10), the Court’s order affects only two of the accounts to cap the penalty at $100,000 or $25,000, so that the total penalties assessed for those two accounts is $378,784 and the amount allowed under the court’s order is $125,000.  In net, under the Government’s calculations, the reduction in FBAR willful penalty for those two accounts would be $253,784.

Government Pushes the Envelope on the Meaning of Willfulness in FBAR Willful Civil Penalty (7/15/18)

A colleague called my attention to the Government's motion and brief for summary judgment in Kimble v. United States (CFC Dkt. no. 17-421 T), here.  The case is an FBAR willful civil penalty refund suit.  In the brief, the Government makes bold claims about the standard for what it must prove to establish a persons liability for the FBAR willful civil penalty.  The docket entries are here.  Mrs. Kimble has not yet filed a response.  I offer the following based on the Government's brief.

I start with the statute.  Section 5321(a)(5)(C) authorizes the civil FBAR willful penalty as follows against "any person willfully violating, or willfully causing any violation of, any provision of section 5314."  The latter section is the section imposing the requirement to file an FBAR.

Often where there is a significant civil penalty, there is a corresponding criminal penalty.  (See e.g., the income tax civil fraud penalty in § 6663 and the criminal tax evasion penalty in § 7201, imposing parallel penalties with the only material difference being the level of proof required (clear and convincing in the civil fraud instance and beyond a reasonable doubt in the criminal instance).)  Similarly, there is also a criminal penalty in 31 USC § 5322(a) imposed on "A person willfully violating this subchapter or a regulation prescribed or order issued under this subchapter."

Two things to observe about the criminal FBAR penalty.  First, the penalty is stated in the same words and cut from the same cloth.  By contrast the civil fraud income tax penalty is worded differently and interpreted the same as the criminal penalty for tax evasion. Second, the criminal penalty for tax evasion requires proof beyond a reasonable doubt, but the civil penalty requires proof by clear and convincing evidence.

The consensus of the decided cases for the civil FBAR willfulness penalty hold that the FBAR willful civil penalty requires that the government prove willfulness only by a preponderance of the evidence.  I think that holding is wrong, as I have previously asserted on this blog, but do not address that issue here.

What I want to address is the meaning of willfulness.  In Ratzlaf v. United States, 510 U.S. 135 (1994), the Supreme Court held that the same standard of willfulness applies to the FBAR criminal penalty as applies in federal tax crimes requiring willfulness -- "`voluntary, intentional violation of a known legal duty'" Cheek v. United States, 498 U.S. 192, 201 (1991) (a tax case).  Since the Supreme Court calibrated the definition of willfulness for FBAR criminal purposes to the definition of willfulness for criminal tax purposes, I have found the following explanation from Bryan v. United States, 524 U.S. 184 (1998) to be helpful:

The word “willfully” is sometimes said to be “a word of many meanings” whose construction is often dependent on the context in which it appears.  See, e.g., Spies v. United States, 317 U.S. 492, 497 (1943).  Most obviously it differentiates between deliberate and unwitting conduct, but in the criminal law it also typically refers to a culpable state of mind.  As we explained in United States v. Murdock, 290 U.S. 389 (1933), a variety of phrases have been used to describe that concept.  As a general matter, when used in the criminal context, a “willful” act is one undertaken with a “bad purpose.”  In other words, in order to establish a “willful” violation of a statute, “the Government must prove that the defendant acted with knowledge that his conduct was unlawful.” Ratzlaf v. United States, 510 U.S. 135, 137 (1994). 

* * * * 

In certain cases involving willful violations of the tax laws, we have concluded that the jury must find that the defendant was aware of the specific provision of the tax code that he was charged with violating.  See, e.g., Cheek v. United States, 498 U.S. 192 (1991).  Similarly, in order to satisfy a willful violation in Ratzlaf, we concluded that the jury had to find that the defendant knew that his structuring of cash transactions to avoid a reporting requirement was unlawful.  See 510 U.S. at 138, 149.  Those cases, however, are readily distinguishable.  Both the tax cases and Ratzlaf involved highly technical statutes that presented the danger of ensnaring individuals engaged in apparently innocent conduct.  As a result, we held that these statutes “carve out an exception to the traditional rule” that ignorance of the law is no excuse and require that the defendant have knowledge of the law.  The danger of convicting individuals engaged in apparently innocent activity that motivated our decisions in the tax cases and Ratzlaf is not present here because the jury found that this petitioner knew that his conduct was unlawful.

With that background of what the term willfully means in the parallel criminal FBAR penalty statute, let's turn to willfully in the civil FBAR willful penalty statute.

Tax Obstruction -- Is Marinello's Nexus Requirement Broader than Obstructing or Intending to Obstruct? (7/14/18)

United States v. Lawson, 2018 U.S. Dist. LEXIS 115310 (D. Alaska 2018), here, a U.S. magistrate judge rejected the defendant's claim that, as interpreted in Marinello v. United States, ___ U.S. ___, 138 S. Ct. 1101 (2018), § 7212(a), tax obstruction, requires the defendant's actions must intend to obstruct a pending IRS administrative proceeding.  The Court said that all Marinello requires is that the Government prove a nexus between the obstructive conduct and a pending proceeding.  I am struggling to understand how a person's conduct can have a nexus to a pending proceeding but the actor does not obstruct or intend to obstruct the proceeding.

By order dated 7/10/18, the district court adopted and accepted the magistrate judge's opinion in its entirety.  The docket entries are here.

I quote in full magistrate judge's order on the point (please note that I use the cleaned up procedure to strip out unnecessary portions):

C. The Mens Rea of § 7212(a) Requires Proof that the Defendant Acted with an Intent to Secure an Unlawful Benefit for Himself or Another 

Finally, Lawson argues that count five should be dismissed because the indictment fails to allege that he committed the obstructive acts with the intent to obstruct a specific IRS proceeding. (Doc. 208 at 1, 3). This claim is without merit. 

Prior to Marinello, the Ninth Circuit held that the elements of corruptly endeavoring to obstruct the due administration of the internal revenue code are: "(1) corruption ... and (2) an attempt to obstruct the administration of the IRS." The Ninth Circuit in turn defined "corruptly" under § 7212(a) as performed with the intention to secure an unlawful benefit for oneself or for another. Thus, it is clear that, at least prior to Marinello, that the mens rea of § 7212(a) only required proof that the defendant acted with an intent to secure an unlawful benefit, as opposed to an intent to obstruct an IRS investigation or proceeding. 

Nothing in Marinello suggests that the mens rea of § 7212(a) has changed. Summarizing its prior decision in Aguilar, the Marinello court stated: 

In interpreting that statute, we pointed to earlier cases in which courts had held that the Government must prove an intent to influence judicial or grand jury proceedings.  We noted that some courts had imposed a "'nexus' requirement": that the defendant's act must have a relationship in time, causation, or logic with the judicial proceedings. And we adopted the same requirement. 

Marinello v. United States, 138 S. Ct. 1101, 1106 (2018) (emphasis added). 

That is, the Aguilar court considered the possibility of requiring the government to prove that the defendant intended to obstruct a grand jury proceeding, but instead elected to join those courts holding that obstruction of justice requires proof of a "nexus" between the defendant's obstructive acts and a judicial proceeding. 

As the Supreme Court clearly stated in the conclusion of Marinello, 26 U.S.C. § 7212(a) requires the government to prove a nexus between the defendant's acts and an IRS proceeding that was either pending or reasonably foreseeable at the time of the obstructive acts. As construed in Marinello, § 7212(a) does not require explicit proof that the defendant intended to obstruct an IRS proceeding.

The Government's opposition, here, filed after the magistrate judge's decision (apparently for consideration by the district judge who, by the date of filing, had already adopted the magistrate judge decision.

NBP Neue Privat Bank (Category 1 Swiss Bank) Reported Ready to Settle with U.S. Prosecutors (7/14/18)

Finews reports that U.S. federal prosecutors have offered NBP Neue Privat Bank, Zurich, a nonprosecution agreement for payment of $5 million.  Peter Hody, Swiss Bank to Settle U.S. Tax Probe (Finews.com 7/13/18), here.

The paper reports that a "[a]  dozen Swiss banks are still waiting to settle a U.S. criminal probe into help tax dodgers and cheats."  These banks were in DOJ's category 1.  The paper reports that NBP was not originally in the first category, but moved into the category when U.S. prosecutors opened a criminal probe in 2013. 

Also, the other category 1 banks settling -- Credit Suisse and Julius Baer -- have been required to enter deferred prosecution agreements, whereas NBP will get a nonprosecution agreement.

It has been a while since I focused on Category 1 banks.  My list of Category 1 banks (including now NBP) shows 17 in that category.  I include my list below.  My list includes UBS which was resolved before the categories were established, but still I suspect that there may be some error there.  I would appreciate hearing from anyone with the complete definitive list of Category 1 banks.

Financial Institution or Facilitator

Bank Frey & Co. AG

Bank Hapoalim (Switzerland)

Bank Julius Baer

Basler Kantonalbank

Clariden Leu

Credit Suisse AG

HSBC Private Bank (Suisse)

Liechtensteinische Landesbank (Switzerland) Ltd.

Mizrahi-Tefahot (Switzerland)

NBP Neue Privat Bank, Zurich

Neue Privat Bank

Neue Zürcher Bank

Pictet & Cie

Rahn & Bodmer

UBS AG

Wegelin & Co.

Zürcher Kantonalbank

Court Affirms Holding Dismissing Damages Claim for IRS Failure to Obtain Court Approval for JDS (7/7/18)

I have previously blogged on the trial proceedings in Hohman v. United States, 2017 U.S. Dist. LEXIS 106439 (ED MI 2017) where the taxpayer sought damages for the IRS's improper use of a John Doe Summons ("JDS") under § 7609(f) without the necessary court approval.  See Court Dismisses Claims Where IRS Issued JDS Without Required Court Approval for JDS (Federal Tax Crimes Blog 7/20/17), here.  The Sixth Circuit has affirmed in Hohman v. Eadie, ___ F.3d ___, 2018 U.S. App. LEXIS 18269 (6th Cir. 2018), here.  Taxpayers have no remedy.

The interesting issue on the appeal is whether the Financial Privacy Act gave a remedy under 12 USC § 3417.  Under 12 USC § 3413, there is an exception for disclosure of records "in accordance with procedures authorized by Title 26." So, if the JDS had been valid, there would be no question that the taxpayers would have no remedy.  Does the IRS's failure to meet the requirements for JDS change the result?  Here is the court's identification of the issue and its decision to duck the issue:

The parties dispute the meaning of the "in accordance with" language. When confronted with this question, the district court stated that from a plain reading, the exception only applies to IRS summonses issued "in accordance with" procedures under the Code. The court reasoned that because the IRS failed to follow the requisite Code procedures by issuing summonses without first obtaining approval in federal district court, it was subject to the provisions of the Act, including damages claims. 

On appeal, Plaintiffs contend that the district court correctly determined that the plain meaning of this language is that the IRS has to act "in accordance with" the Code, or it is subject to the Act. In support, Plaintiffs cite Neece v. IRS, 922 F.2d 573, 577 (10th Cir. 1990). In Neece, the IRS made a similar argument when it asserted that it was allowed to informally review bank records under I.R.C. § 7602. The IRS referenced the same provision of the Act authorizing "disclosure of financial records in accordance with procedures authorized by [the Internal Revenue Code]." 12 U.S.C. § 3413(c). The Tenth Circuit disagreed and determined that while I.R.C. § 7602 permitted the IRS to issue a third-party summons, I.R.C. § 7609 set forth the procedure the IRS was required to follow. Neece, 922 F.2d at 577-78. The IRS had not followed the proper procedure under its own Code, and so the IRS was bound by the Act. Id. at 577. 

In response, the government argues that the Act has no application to any activities carried out under the Code, including the issuance and enforcement of IRS summonses. In support, it cites the legislative history to argue that Congress indicated that this exception was intended to exempt IRS summonses generally because they are governed by their own privacy regime. It also contends that Neece is distinguishable because it involved an instance where the IRS obtained records informally, instead of through the issuance of a summons. 

There are two possible ways to read the phrase "in accordance with." Congress either intended for this language to mean: (1) that the Code and not the Act governs the IRS, or (2) that the IRS must follow the procedures under the Code, or it is subject to the Act. A review of the relevant provision and legislative history indicates that Congress did not give any thought to or explain what it intended to have happen in a case like this. The House Committee Report states that under the exception, because IRS administrative summonses are already subject to the privacy safeguards of I.R.C. § 7609, they are exempted from the procedures of the Act. H.R. Rep. 95-1383, at 226 (1978). 

Because we uphold the district court's ruling on sovereign immunity grounds, however, there is no need for us to resolve this issue.

Dealing with Other Counts of Conviction After Vacating Tax Obstruction Based on Marinello (6/26/18)

I previously reported on United States v. Westbrooks, 858 F.3d 317 (5th Cir. 2017), where the Fifth Circuit joined the majority of circuits holding that tax obstruction, § 7212(a), did not require the Government show that the defendant knew of an IRS investigation that it was foreseeable for the defendant to obstruct.  See Fifth Circuit Joins Majority Decisions that § 7212(a) Requires No Pending Investigation (Federal Tax Crimes Blog 5/28/17), here.  That position was rejected in the subsequent Supreme Court case of Marinello v. United States, ___ U.S. ___, 138 S. Ct. 1101 (2018); see my blog post Supreme Court Holds that Omnibus Clause of the Tax Obstruction Crime (§ 7212(a)) Requires Awareness of Pending Tax-Related Proceeding (Federal Tax Crimes Blog 3/21/18; 3/22/18), here.  In subsequent proceedings in Westbrooks on remand from certiorari, the Government conceded that the tax obstruction must be vacated but that the defendant's other convictions for tax perjury should stand.  The Fifth Circuit agreed, rejecting Westbrooks' argument that the tax obstruction conviction contaminated the tax perjury convictions, thus permitting those convictions to stand.  United States v. Westbrooks, 2018 U.S. App. LEXIS 16943 (5th Cir. 2018) (unpublished), here.  The Court reasoned:

The disagreement between the parties is about what the vacatur of the obstruction conviction means for the three "false return" convictions. Westbrook contends that the improper obstruction count contaminated the false return counts. This same argument about "spillover prejudice" was raised in Governor Edwin Edwards's appeal of his convictions because an intervening Supreme Court decision had invalidated the legal basis for some of the mail fraud counts. United States v. Edwards, 303 F.3d 606, 638-40 (5th Cir. 2002) (citing Cleveland v. United States, 531 U.S. 12, 121 S. Ct. 365, 148 L. Ed. 2d 221 (2000)). We noted that the concept came from cases challenging a failure to grant a pretrial severance, and we had never decided whether "spillover from invalid claims can be a basis for granting a new trial." Id. at 639. We did not resolve that question in Edwards because even assuming the theory applied in this "retroactive misjoinder" situation, the improper taint exists only if the counts the jury should not have heard allowed the introduction of evidence that would not have otherwise been admissible. Id. at 640. That was not the case in Edwards, id., and it is not the case here. Evidence concerning cash payments, shoddy or nonexistent bookkeeping, and prior false returns was admissible even without the obstruction count as either intrinsic to the false return counts or permissible Rule 404(b) evidence that showed Westbrooks' plan, fraudulent intent, and absence of mistake. United States v. Morgan, 117 F.3d 849, 861 (5th Cir. 1997); Fed. R. Evid. 404(b). The testimony about Westbrook's false testimony at the show cause hearing was, as we have already explained, a permissible basis for the obstruction count and, even if not, would have been admissible as probative of Westbrook's intent. Because the now-invalid obstruction count did not allow the jury to consider evidence that would not have been allowed at a trial focused on just the false return counts, the latter will not be vacated. Edwards, 303 F.3d at 640.

The Court then turned to the sentencing and held:

The final question relates to the sentences for those false return convictions we are upholding. The government agrees that we should vacate those sentences and remand for resentencing in light of the vacatur of the obstruction count. That new sentencing will include but not be limited to reconsideration of the restitution amount which the government concedes should be reduced as it included amounts based on returns filed only during the time period covered by the obstruction count.

Quinnipiac University Law School Tax Crimes Conference Materials Available On Line (6/25/18)

Quinnipiac University School of Law held its 2nd Annual Criminal Tax Day on May 17th and has posted materials that readers may download.  The main site (with links) is here.

I could not get the video to work, but that my be my browser issue.  There are links to download the materials from the event.  For an introduction to the events, see the agenda here.  According to the agenda, the topics covered were:

• What’s New in Criminal Tax?
• Income Reconstruction: Methods, Approaches, and Defenses
• Dealing with the Undocumented Worker
• Taxpayer vs. Preparer: Who to Pursue? 
• Bringing Your Client in from the Cold
• The Criminal Prosecution: Strategies, Plea and Sentencing

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

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

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

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

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

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

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

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

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

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

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

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

1. Authenticity 

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

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

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

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

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

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

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

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

* * * * 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

JAT Comments:

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

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

The Topics covered are:

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

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

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

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

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

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

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

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

There are some limitations to the spreadsheet

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

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

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

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

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

Thanks to Caroline.

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

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

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

First, I offer the relevant documents as follows:

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

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

A. Legal Framework 

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

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

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

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

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

The Court summarizes its holding (p. 5):

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

JAT comments:

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

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

COUNTS 11-14: 31 U.S.C. §§ 5314 and

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

Failure To File Reports Of Foreign Bank

And Financial Accounts

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

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

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

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

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

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

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

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

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

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

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

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

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

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

CONCLUSION 

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

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

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

Key excerpts from the USAO press release:

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

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

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

JAT Comments: