Another Plea to Offshore Account Tax Crimes (9/28/16; 9/29/16)

DOJ Tax announced here a new information, here, and guilty plea today.  Excerpts:

New York City Resident Pleads Guilty to Using Sham Foreign Entity and Secret Foreign Accounts in Switzerland and Israel to Evade Taxes 

Used Secret Foreign Accounts to Hide over $7 Million in Funds and Evade Taxes
A New York City man pleaded guilty today to a criminal information charging him with tax evasion for tax years 2003 through 2005 and 2007 through 2010, announced Principal Deputy Assistant Attorney General Caroline D. Ciraolo, head of the Justice Department’s Tax Division, and U.S. Attorney Robert L. Capers of the Eastern District of New York. 

“Mr. Hager concealed over $7.3 million in undeclared foreign accounts in Switzerland and Israel and used a sham British Virgin Island entity in order to evade over $650,000 in U.S. taxes,” said Principal Deputy Assistant Attorney General Ciraolo. “As this case demonstrates, the Department and the Internal Revenue Service (IRS), together with our global partners, are successfully working on a daily basis to locate such undeclared accounts, identify those responsible and hold them accountable.” 

According to information presented in court, between 1987 through 2011, Markus Hager, 68, utilized a series of undeclared foreign financial accounts to evade his individual income taxes by concealing assets and income from the IRS in those accounts.  Between 1987 and 2008, Hager maintained several undeclared accounts at UBS, including two numbered accounts and an account held in the name of Contactus Partnership Associated S.A. (Contactus), a sham British Virgin Islands entity.  By the close of 2004, the value of Hager’s undeclared accounts at UBS exceeded $7.3 million.  

Hager closed the UBS accounts in 2008 and transferred the assets to a newly opened account at Clariden Leu, which he controlled and held in the name of Contactus.  Shortly thereafter, Hager closed the Contactus account at Clariden Leu and transferred the assets to a newly opened account held in the name of the same sham entity at a different Swiss bank.  Hager caused that Swiss bank to falsely record Hager’s Belgian cousin as the owner of the assets in the Contactus account.  Approximately six months later, Hager closed the Contactus account at the Swiss bank and transferred the assets to an account at a bank in Israel that Hager caused to be opened in the name of a different Belgian cousin.
From 2005 to 2011, Hager also controlled an undeclared account at Bank Leumi in Israel, which he falsely held under the name of a relative who was not a U.S. person and who resided outside the United States.  In February 2010, after obtaining an Israeli Identity Card, Hager opened an account in his own name at Bank Leumi in Israel but falsely reported that he lived in the United Kingdom and signed a document, under the penalties of perjury, on which he falsely claimed that he was not a U.S. citizen.
According to the information filed, Hager repatriated funds from his undeclared foreign financial accounts by having an attorney draft a sham loan agreement between himself and Contactus and wiring funds from some of his undeclared foreign financial accounts into his attorney’s escrow account. 

According to the information filed, Hager filed false federal and New York State income tax returns on which he failed to report the income from his foreign financial accounts and failed to pay tax on that income.  According to the information, Hager evaded approximately $652,580 in federal taxes for tax years 2003 through 2005 and 2007 through 2010.  Hager also failed to report his ownership and control of his foreign financial accounts to the Department of the Treasury on a Report of Foreign Bank and Financial Account even though an accounting firm had informed Hager of his obligation to do so and advised him of the civil and criminal penalties he could suffer for the failure to do so. 

* * * * 

Sentencing has been set for ­Jan. 4, 2017.  Hager faces a statutory maximum sentence of five years in prison, as well as a term of supervised release and monetary penalties.  According to the plea agreement, Hager agreed to pay restitution to the IRS.

JAT Comments (as amended 9/29/15 12:00pm):

1.  The information to which Hager pled, here, shows a single count.  After reciting the facts, the single charge is

TAX EVASION 

15. The allegations contained in paragraphs one through 14 are realleged and incorporated as if fully set forth in this paragraph. 

16. On or about and between January 1, 2003, and April 20, 2012, both dates being approximate and inclusive, within the Eastern District of New York and elsewhere, the defendant MARKUS HAGER did knowingly and willfully attempt to evade and defeat substantial income tax due and owing by him to the United States of America for the tax years 2003 through 2005 and 2007 through 2010, to wit: approximately $652,580, by various means, including, among others, concealing assets and income in foreign financial accounts, concealing assets and income in the names of nominees and sham corporations, filing and causing to be filed U.S. Individual Income Tax Returns, Forms 1040, for himself and his spouse with the IRS for the calendar years 2003 through 2005 and 2007 through 2010, that falsely and fraudulently omitted income generated by assets concealed in foreign financial accounts, and causing false statements to be made to an Internal Revenue Service Revenue Agent.

Note that Hager is subject to a single 5 year penalty that the multi-year charge of tax evasion was packed into a single count.  Most often, when evasion charges are made for multiple years, each year is charged as a separate count.  I have seen multi-year single counts of evasion, but there is usually a story behind that type of charge.  One thing that strikes me is the statute of limitations.  Are statute issues avoided by packing all years into a single count where some of the years might be outside the statute?  More likely, his actions, such as false statements to a revenue agent, after the years that appear to be outside the 6-year statute of limitations (e.g., 2003) may have refreshed the statute of limitations so that all years would be within the statute of limitations.  See United States v. Beacon Brass Co., Inc., 344 U.S. 43 (1952).  Of course, the single five-year count will likely permit the judge sufficient leeway under the Sentencing Guidelines to impose an appropriate Guidelines sentence, whether or not a Booker variance is made.

2. There is no indication that the FBAR penalty has been resolved by the plea.  (Caveat, I don't have the plea agreement; that plea agreement apparently is not available through Pacer, so I have made a request to the prosecutor for it; whether I will get it is another thing.)  However, the press release does state one high amount of over $7.3 million, which would mean that the usual plea requirement of a 50% penalty would require a $3.65 penalty and that would be the penalty normally required for the willful FBAR penalty in audits pursuant to the recent guidance now contained in the IRM.  But, that is the penalty normally applied and the IRS can go higher.  His conduct is pretty egregious, but I think his lawyers would have pressed as a condition of the plea agreement that the penalty not exceed 50% of the high amount.  I will also update this comment based on subsequent information.

Update on Judge Kroupa Prosecution - Her Husband Pleads Guilty (9/26/16; 9/27/16)

This blog entry has been substantially revised and enhanced on 9/27/26 around 4:15pm because of my obtaining and analyzying the plea agreement, here.  I have therefore eliminated some preliminary discussion, such as preliminary sentencing calculations, in the original draft because the plea agreement provides more detail that I discuss below.

I have blogged previously on the indictment of former U.S. Tax Court Judge Diane Kroupa and her husband.  See Former US Tax Court Judge Kroupa Indicted (Federal Tax Crimes Blog 4/4/16; 4/5/16), here; and Former Tax Court Judge Kroupa Indictment - Part I - Conspiracy (Federal Tax Crimes Blog 4/5/16; 4/6/16), here. The change of plea minutes indicates that the husband has now pled guilty to Count 6 of the indictment which charges tax obstruction, § 7212(a), here.  The plea agreement is here; the indictment is here.

I picked up this news item from the Tax Prof Blog entry, Husband Of Retired Tax Court Judge Pleads Guilty To Taking $1 Million In Fraudulent Deductions (Tax Prof Blog 9/26/16), here, which linked to a newspaper report, Paul Walsh, Twin Cities husband of ex-tax judge admits duping IRS; charges against her pending (Star Tribune 9/26/16), here.

The plea is solely to Count 6 of the indictment, which alleges tax obstruction, I don't have the plea colloquy so don't know what Fackler said other than guilty to the plea of tax obstruction, § 7212(a), here. Count 6.  Often in plea agreements and colloquies, the defendant is required to or does admit his pattern of conduct which would include closely related offenses.  In this case, there is a parallel between tax obstruction in § 7212(a) and the defraud / Klein conspiracy in 18 USC § 371, here.  The defraud / Klein conspiracy is generally formulated as a conspiracy to impair or impede the lawful functions of the IRS, which is basically what tax obstruction is (and, for that reason, tax obstruction has been described as a one person defraud / Klein conspiracy).  The key difference is that tax obstruction can be charged without regard to whether there was a conspiracy and has a 3-year maximum sentence rather than 5-years for the defraud / Klein conspiracy.  As noted below, in the plea agreement, Fackler does admit to conspiratorial conduct with Kroupa.  The conspiracy was charged, but he does not agree to plea to the conspiracy count.

Here are my excerpts from and comments on the plea agreement, here, which I have just obtained from Pacer.

Suffice it to say as the introduction that Fackler does admit facts constituting the crime of conspiracy, although he does not formally plead to the conspiracy count.  What this means is that Fackler is admitting criminal conduct in which former Judge Tax Court Kroupa was a co-conspirator and, in the course of the conspiratorial conduct, committed other crimes (such as evasion, obstruction, etc.)

First, the plea agreement provides the following factual bases supporting the plea to Count 6:

2. Factual Basis. The Defendant admits the following facts and, where the defendant lacks direct knowledge, the defendant acknowledges that the. government has sufficient evidence to establish beyond a reasonable doubt the following facts, all of which constitute the factual basis for this plea. Furthermore, on the basis of the following facts, the defendant stipulates to having committed the additional offense of conspiring with Diane Kroupa to defraud the United States for the purpose of impeding, impairing, obstructing, and defeating the lawful functions of the Intemal Revenue Service of the United States Department of the Treasury in the ascertainment and computation of income taxes in violation of Title 18, United States Code, Sections 371 and 2: 

Conspiracy to Evade the Ascertainmentand Computation of Income Taxes 

Beginning no later. than in or about 2002 and continuing through 2012, the defendant conspired with his wife, Diane Kroupa, to impede, impair, and obstruct the Internal Revenue Service from correctly ascertaining and computing their joint income
taxes. 

* * * * 

FACKLER did not withhold or otherwise save any of the income he earned through Grassroots Consulting in 2002 to make tax payments to the Internal Revenue Service. As a result, in or about early 2003, when FACKLER and Kroupa began to organize their tax information, they did not have sufficient funds to pay their tax obligations for the previous year. When FACKLER and Kroupa discussed this problem, Kroupa told FACKLER that it was "his problem" and that FACKLER needed to fmd as many deductions as possible. FACKLER understood that Kroupa was instructing him to include personal expenses on Grassroots Consulting's Schedule C as business expenses in order to reduce their joint tax burden. FACKLER collected numerous personal expenses paid through his credit cards and Grassroots Consulting's bank account, and included them along with his legitimate business deductions on a spreadsheet that purported to summarize ·his Schedule C business expenses. Kroupa collected additional personal expenses from their joint bank account, and hand wrote them onto the spreadsheet FACKLER prepared. FACKLER and Kroupa then input the total expense figures-which included numerous personal expenses-onto a tax organizer that they provided to their tax preparer. FACKLER and Kroupa thereby significantly and fraudulently increased Grassroots Consulting's business expenses and reduced the amount of taxes they jointly owed to the IRS. 

Thereafter, each year from 2003 through 2011, FACKLER and Kroupa falsely reported a significant amount of personal expenses as Grassroots Consulting business deductions. For example, FACKLER and Kroupa fraudulently claimed the following personal expenses as Schedule C business expenses associated with the operation of Gras~roots Consulting: 

[Various and numbers enumerated personal expenses omitted] 

The method by which FACKLER and Kroupa compiled personal expenses to be inserted into Grassroots Consulting's Schedule C evolved as time went on. However, each year FACKLER generally reviewed business bank records, credit card records, and receipts to compile his business expenses, as well as numerous personal expenses, into a spreadsheet. The spreadsheet listed certain categories of expenses and the total amount of expenses purportedly incurred under each category. Kroupa typically prepared handwritten summaries of additional personal expenses from their joint personal bank account, and categorized them falsely according to Grassroots Consulting Schedule C's business expense categories. FACKLER either added the amoUnts from Kroupa's handwritten summaries to his spreadsheet and provided the totals to their tax preparer, or else provided the spreadsheet to Kroupa, who added personal expenses to the totals listed in FACKLER's spreadsheet and provided the combined amounts to their tax preparer. In some years, FACKLER and/or Kroupa wrote the inflated totals into a tax organizer that they then gave to their tax preparer, and in other years they simply provided the summary spreadsheet to the tax preparer. Neither FACKLER nor Kroupa revealed to the tax preparer that the amounts reflected in the spreadsheet and tax organizer included personal expenses disguised as business expenses. 

In total, from 2004 through 2010, the defendants fraudulently deducted at least $500,000 of personal expenses as purported Schedule C business expenses. As a result, the defendants caused the amount of adjusted gross income, taxable income, and total tax shown on their income tax returns to be falsely and significantly understated. 

Concealment of Reimbursed Expenses for Grassroots Consulting 

As part of the conspiracy, FACKLER also purposely caused the gross receipts attributable to Grassroots Consulting to be falsely understated by fraudulently deducting purported business expenses, such as travel and meals, for which F ACK.LER had previously received reimbursement from his clients. In total, FACKLER understated Grassroots Consulting's gross receipts by approximately $450,000. As a result, the defendants caused the amount of adjusted gross income, taxable income, and total tax shown on their income tax returns to be falsely understated. 

 Deduction of Personal Expenses as Unreimbursed Employee Expenses 

As part of the conspiracy, Kroupa falsely reported certain personal expenses as "Unreimbursed Employee Expenses" incurred in connection with her employment as a United States Tax Court Judge. For example, Kroupa fraudulently claimed the following personal expenses as Unreimbursed Employee Expenses:  

[Various and numbers enumerated personal expenses omitted] 

As a result, the defendants caused and attempted to cause the amount of taxable income and total tax shown on certain of their tax returns to be falsely understated.  

Unreported Income from South Dakota Land Sale 

As part of the conspiracy, Kroupa purposely failed to report approximately $44,520 that she received in 2010 in connection with the sale of a parcel of real estate located in South Dakota. As a result, the defendants caused the amount of adjusted gross income, taxable income, and total tax shown on their income tax returns to be falsely understated. 

Cancellation of Indebtedness Income 

As part of the conspiracy, Kroupa falsely claimed that approximately $33,031 of cancellation of indebtedness income that she and FACKLER received from Bank of America in 2008 was not taxable because the defendants were fmancially insolvent. In fact, they had substantial assets that exceeded their liabilities, including retirement accounts, property, and investment accounts, rendering them solvent within the meaning of the tax code. As a result, the defendants caused the amount of adjusted gross income, taxable income, and total tax shown on their 2008 income tax returns to be falsely understated. 

False and Misleading Representations During 2006 Audit 

In or about 2006, FACKLER and Kroupa caused false and misleading representations to be made to the IRS Tax Compliance Officer who was conducting an audit of FACKLER and Kroupa's tax returns for the calendar years 2004 and 2005. Specifically, in response to inquiries and requests for documentation relating to Grassroots Consulting's business deductions, FACKLER and Kroupa caused their tax preparer to represent to the IRS Tax Compliance Officer that many of the expenses claimed on their tax returns were legitimate business deductions but FACKLER kept poor records. These representations were false-the expenses were personal in nature-although the tax preparer was unaware of this fact. Rather than provide the documents requested by the Tax Compliance Officer, which would have shown that the deductions were fraudulent, FACKLER and Kroupa concealed the records from both the tax preparer and the Tax Compliance Officer, telling both that they had failed to keep records related to the claimed expenses. At the conclusion of the 2006 Audit, FACKLER and Kroupa acknowledged tax deficiencies in the amount of approximately $48,000 (including interest and penalties) and they were issued an "Inadequate Records Notice" by the IRS informing the defendants that they had not been keeping adequate records of their business expenses. 

Obstruction and False Representations During 2012 Audit 

As part of the conspiracy, in or about 2012, FACKLER and Kroupa caused false and misleading representations to be made, and caused false and misleading documents to be delivered, to the IRS Revenue Agent conducting an audit of FACKLER and Kroupa's tax returns for the tax years 2009 and 2010. Specifically, after learning of the audit and the IRS Revenue Agent's requests for documents pertaining to their tax returns, FACKLER and Kroupa together reviewed their tax files, and Kroupa removed certain items requested by the Revenue Agent from the tax files because they could reveal the fact that FACKLER and Kroupa had inappropriately deducted numerous personal expenses. FACKLER and Kroupa then provided to their tax preparer, knowing that he would then provide to the IRS Revenue Agent, typed and handwritten documents purporting to summarize business expenses incurred by Grassroots Consulting that were, in fact and as they knew, personal expenses incurred by FACKLER, Kroupa, and their family members. 

During the audit, FACKLER (with Kroupa's knowledge) prepared cut-and-pasted credit card statements that purported to substantiate certain of the business expense deductions taken by Grassroots Consulting in 2009 and 2010, which as they knew represented personal expenses, knowing and intending that such documents would be provided in whole or in part to the IRS. 

Additionally, in response to a written inquiry from an IRS Revenue Agent regarding the nature of certain purported Grassroots Consulting payments to "service providers," FACKLER and Kroupa together concocted false explanations, and FACKLER wrote those false explanations on an IRS-prepared spreadsheet, justifying each category of payments as legitimate business expenses when, in fact and as they knew, many of the questioned payments were personal in nature. 

During the audit, in response to an inquiry from an IRS Revenue Agent regarding a deposit into her bank account in the amount of approximately $44,520 in July 2010, Kroupa sent an email to their tax preparer falsely and misleadingly informing the tax preparer that the deposit was part of an unrelated inheritance and not income received as part of a land sale by Kroupa in South Dakota.  

When FACKLER and Kroupa learned that the 2012 audit might progress into a criminal investigation, Kroupa instructed FACKLER to lie to the IRS. Believing that the investigation would focus solely on the false business deductions taken by FACKLER's company, Grassroots Consulting, Kroupa told FACKLER to tell the investigating authorities that Kroupa had no role in orgailizing or preparing the Grassroots Consulting portion of their joint tax return. On multiple occasions thereafter, Kroupa continued to insist that FACKLER falsely exculpate Kroupa.

These factual allegations, if true, paint a devastating picture of Kroupa's conduct.

Now for the really fun stuff -- the Sentencing Guidelines Calculations

Total Tax Loss
Each tax year from 2004 through 2010, FACKLER and Kroupa provided false information to their tax preparer and caused false tax returns that significantly understated their adjusted gross income, taxable incom~ and total tax to be filed with the Internal Revenue Service. Through the means described above, from ~004 through 2010,  FACKLER and KROUPA purposely understated their taxable income by approximately $1,000,000 and purposely understated the amount of tax they owed by at least $450,000.

The tax loss then becomes the principal driver of the Sentencing Guidelines calculations.  Paragraph 5 (beginning on p. 15) provides the Guidelines salculations.  I will step through the calculations.

First, the opening step is to determine the version of the Guidelines to apply.  Although not stating expressly, the plea agreement assumes the 2015 Guidelines rather than earlier Guidelines that might have been in effect when the criminal conduct occurred.  Prior to 2015, the Guidelines range breakpoints in the Tax Table, here, were as follows, with the Base Offense Level at the far right:

(G) More than $200,000 18
(H) More than $400,000 20

The 2015 Tax Table, here, provides the Base Offense Level as follows:

(G) More than $250,000 18
(H) More than $550,000 20

Thus, under the 2015 Guidelines version, the Base Offense Level is 18, rather that the 20 it would have been under the 2014 Guidelines version.  The plea agreement thus provides:

a. Base Offense Level. The parties agree and stipulate that appropriate Guidelines section is § 2T 1.1, and the base offense level is 18 because the tax loss resulting from the offense of conviction and stipulated conduct is more than $250,000 but less than $550,000. (U.S.S.G. §§ 2T1.1(a)(l) and 2T4.1(G)).

The express stipulation is as to the tax loss resulting from the "offense of conviction and stipulated conduct."  I presume that "stipulated conduct" is meant to include all of the relevant conduct.  Relevant conduct that is properly included in the tax loss calculation can include conduct in dropped charges and even acquitted or not charged conduct.  There might be some confusion because the conduct alleged in Count 6 only includes 2009 forward, whereas the stipulated conduct includes conduct in years from 2004 forward.

I had expected the sophisticated means 2 level upward adjustment (just on the assumption that some of the conduct would had met the low threshold for sophisticated means), but that adjustment is not included in the plea agreement.

I had not expected the the obstruction adjustment.  It is true that Fackler pled to an obstruction crime -- tax obstruction -- and admitted a Klein conspiracy obstruction.  But, normally, where obstruction is the conduct charged and thus included in the Base Offense Level, an additional enhancement for the same obstruction is not provided.  (See my notes below.)  So, here is what the plea agreement provides:

(1) Obstruction of Justice. The parties agree that the defendant willfully obstructed or impeded the administration of justice with respect to the investigation of the offense of  conviction and relevant conduct, and the offense level should therefore be increased by 2 levels. (U.S.S.G. § 3Cl.l). The parties stipulate and agree that this Guidelines enhancement applies even though the defendant is pleading guilty to Obstruction of a Tax Audit, in violation of Title 26, United States Code, Section 7212( a), in light of the dismissal of the other charges in the indictment. (U.S.S.G. § 1Bl.2(c)).

At least textually, the suggestion may be that this enhancement might not otherwise apply but is a bargained adjustment.  As suggested above, I am not sure it should apply where the conduct is in the conduct counting toward the tax loss from which the Base Offense Level is derived.  Otherwise it might be viewed as double counting.  I have not researched this notion, perhaps just a hunch, here are two related provisions of Guidelines § 3Cl.l:

Application Note 2:
This adjustment also applies to any other obstructive conduct in respect to the official investigation, prosecution, or sentencing of the instant offense where there is a separate count of conviction for such conduct.
Commentary
Application Notes:
1.      Do not apply this enhancement where the offense guideline in Chapter Two, or another adjustment in Chapter Three, results in an equivalent or greater increase in offense level solely on the basis of the same conduct.

In the plea agreement, the parties also agree to the standard acceptance of responsibility level reductions of 2+1 and criminal history of 1, with a resulting Sentencing Table Offense Level of 17 and sentencing range of 24-30 months imprisonment.  This sentencing range is well within the maximum allowed by the single count of conviction, tax obstruction, which is a 3-year felony.

Now, although not expressly addressed in the plea agreement, the usual expectation would be that Fackler agree to cooperate in the further prosecution of any one within the scope of his admitted conduct, specifically here his estranged wife.  Certainly, he has already provided testimony, either by formal testimony or by proffer, against his estranged wife, so I presume that spousal privilege issues have been resolved.  And, his plea agreement resolves the criminal prosecution risk, so that he would not be able to assert a Fifth Amendment privilege.

For related entries:

Faulty Tax Shelter Opinions and Appraisals and Resulting Civil Penalties (9/24/15)

Two recent cases highlight the role of the tax professionals' legal opinions in so-called tax shelters.  During the abusive tax shelter proliferation in the late 1990s and early 2000s, the linchpin to abusive tax shelters was tax professionals' opinion letters pronouncing that the tax benefits were "more likely than not" to be sustained if the IRS contested.  Those opinion letters -- being just tax professionals' opinions -- did not affect how courts would resolve the issue of whether the tax shelters worked.  They served solely to give the tax shelter "player" some basis to claim exemption from the penalties that might otherwise apply to aggressive tax reporting positions.  Relying on tax professionals' opinions might permit the taxpayers to claim § 6664(c)'s "reasonable cause" and "good faith" exception to the penalties in § 6664(c), here, or, possibly, a reduction in the penalty base for the substantial understatement penalty in § 6662(d), here (in an earlier iteration).  Many of the tax shelter players did not in the final analysis actually rely upon the promoted tax shelter professionals' opinions, but rather discretely had their own independent counsel advise them on the shelter.  As I understand it, many of these independent advisers gave roughly the following advice:  "No way the shelter will be sustained if contested, but at least the promoted tax professionals' opinions will give the taxpayers a pretty good shot at avoiding the penalty."  (Of course, for this to work, the taxpayer would have to successfully keep from the IRS or ultimately the courts, the substance of the independent adviser's opinion.)

I discussed United States v. Daugerdas, ___ F.3d ___, 2016 U.S. App. LEXIS 17219 (2d Cir. 2016), here, recently, Daugerdas Conviction and Sentencing Affirmed by Second Circuit Court of Appeals (Federal Tax Crimes Blog 9/21/16), here.  I quoted the part of the opinion relevant to today's discussion, but will present the quote again here:

As an essential part of the marketing of all the tax shelters, Daugerdas and his colleagues issued "more-likely-than-not" opinion letters to clients who purchased the shelters. Such letters state that "under current U.S. federal income tax law it is more likely than not that" the transactions comprising the shelters are legal and will have the effect sought by the clients. They protect clients from the IRS's imposition of a financial penalty in the event that the IRS [6]  does not permit the losses generated by the shelter to reduce the client's tax liability. Paralegals or attorneys who worked for Daugerdas generated these letters and Daugerdas often reviewed and signed them himself. The letters stated that the clients had knowledge of the particular transactions underlying the shelter and that the clients were entering into the shelter for non-tax business reasons. Multiple clients testified that they never made representations of knowledge to Daugerdas or his associates and that, in any event, these representations were false because the clients knew little or nothing about the underlying transactions and entered into the shelters only to reduce their tax liability.

Daugerdas' shelters were clearly of the abusive -- aka bullshit -- variety.  In essence, for the tax shelters Daugerdaus and his partners in crime hawked, the play in the shelter gave the taxpayer a shot at the audit lottery and some way potentially to mitigate the penalty damage if he did not win the audit lottery.  But, as it turns out, these shelters were so bad, that they did not really offer much in the way of penalty mitigation except, sometimes, through IRS amnesty programs.  In essence, most of the taxpayers -- certainly the more sophisticated taxpayers who had millions and millions of income to shelter -- got into the shelter on a wink and a nod, hoping for the best with some downside protection.

In Exelon Corp. v. Commissioner, 147 T.C. ___, No. 9 (2016), here, the taxpayer had $1.6 billion in gain that it perceived a need to shelter -- i.e., avoid paying tax on.  The transactions are convoluted (as in the case of many tax shelters where the convolutions masks lack of substance).  (The complexity of the opinion is suggested by the fact that the substantive discussion concludes on p. 161 of the slip opinion.)  The details of the transactions are not important for purposes of this blog, but they are variations on leveraged leases with their own acronym that is familiar to affionados of bullshit tax shelters -- SILOs (to be contrasted from related tax shelters called LILOs).  In the opinion, Judge Laro offers the following "Primer on Leveraged Leases, LILOs, and SILOs:"

Daugerdas Conviction and Sentencing Affirmed by Second Circuit Court of Appeals (9/21/16)

The Second Circuit affirmed today the conviction and sentencing of Paul M. Daugerdas, promoter en mass of bullshit tax shelters.  United States v. Daugerdas, ___ F.3d ___, 2016 U.S. App. LEXIS 17219 (2d Cir. 2016). The opinion is here.

The opinion, by Judge John M. Walker, starts with a summary of the convictions:

(1) one count of conspiracy to defraud the Internal Revenue Service (“IRS”) in violation of 18 U.S.C. § 371; see 26 U.S.C. § 7201 and 18 U.S.C. § 1343; (2) four counts of client tax evasion in violation of 26 U.S.C. § 7201 and 18 U.S.C. § 2; (3) one count of IRS obstruction in violation of 26 U.S.C. § 7212(a); and (4) one count of mail fraud in violation of 18 U.S.C. §§ 1341 and 1342.  

He was then "sentenced principally to 180 months’ imprisonment, three years’ supervised release, $164,737,500 in forfeiture, and $371,006,397 in restitution."

Then, he argued on appeal that

(I) the evidence was insufficient to support his convictions; (II) the indictment was constructively amended; (III) the indictment was duplicitous; (IV) the accumulation of errors at trial violated his due process right to a fair trial; (V) the district court’s supplemental instruction on the Annual Accounting Rule misled the jury; (VI) his sentence was procedurally and substantively unreasonable; and (VII) the government failed to establish the requisite nexus between his crimes and the property sought in forfeiture. 

The Court of Appeals rejects all arguments and affirms.

The opinion is 37 pages long and is fairly straight-forward.

Basically, Daugerdas designed and participated, directly and through others, in the implementation the some variation of the bullshit shelters based on an aggressiv, too aggressive, interpretation of various strategies promoted by prominent law and accounting firms in the late 1990s and early 2000s.   He did this for his or his firm's clients and also did some of them for himself to shelter the large amount of income that he was earning.  As the Court notes,

As an essential part of the marketing of all the tax shelters, Daugerdas and his colleagues issued “more‐likely‐than‐not” opinion letters to clients who purchased the shelters.  Such letters state that “under current U.S. federal income tax law it is more likely than not that” the transactions comprising the shelters are legal and will have the effect sought by the clients.  They protect clients from the IRS’s imposition of a financial penalty in the event that the IRS does not permit the losses generated by the shelter to reduce the client’s tax liability.    Paralegals or attorneys who worked for Daugerdas generated these letters and Daugerdas often reviewed and signed them himself.  The letters stated that the clients had knowledge of the particular transactions underlying the shelter and that the clients were entering into the shelter for non‐tax business reasons.  Multiple clients testified that they never made representations of knowledge to Daugerdas or his associates and that, in any event, these representations were false because the clients knew little or nothing about the underlying transactions and entered into the shelters only to reduce their tax liability.   

Because Daugerdas and his colleagues designed the transactions with a focus on their tax consequences rather than their profitability, they generally did not generate meaningful returns.  [Examples omitted]  Nevertheless, Daugerdas chose to proceed and even issued “more‐likely‐than‐not” opinion letters falsely stating that some of the transactions had a 15 reasonable possibility of producing a profit.  Moreover, the already‐ 16 low profit potential of all the shelters disappeared entirely when the 17 fees charged by J&G, BDO, and DB for the shelters were taken into account.  

Then, there was some backdating of transactions and documents to correct errors in the implementation.

Another Plea to Offshore Account Tax Crimes (9/21/16)

DOJ Tax announced here another conviction related to an offshore account.  The title of the press release is:  "DOJ Tax Press Release, Connecticut Man Pleads Guilty to Concealing Income from Undeclared Panamanian Bank Account."

Key Excerpts from the press release:

A Weston, Connecticut man, who used a Panamanian bank account to conceal over $1.5 million in income from the sale of duty-free alcohol and tobacco products pleaded guilty today to one count of conspiring to conceal assets and income from the Internal Revenue Service (IRS) * * * * 

Saul Hyatt, 53, pleaded guilty today before U.S. District Judge Freda L. Wolfson of the District of New Jersey to an Information charging him with conspiracy to conceal assets in an undeclared bank account held in Panama for his benefit.  According to documents filed with the court, Hyatt conspired with another individual in the United States and others to conceal his assets and income derived from the sale of duty-free alcohol and tobacco products.  To execute the scheme, Hyatt used a registered Panamanian corporation, Centennial Group, to buy and sell the duty-free products.  The alcohol shipped through a customs-bonded warehouse in the Foreign Trade Zone in Fort Lauderdale, Florida.  The tobacco products, Chinese-brand cigarettes sold under the names “Chung Hwa” and “Double Happiness,” passed through a customs-bonded warehouse in North Bergen, New Jersey.  From 2006 to 2012, Hyatt directed that $1,627,832 in profits from the sale of duty-free alcohol and tobacco products be wired to his undeclared bank account in Panama.  Hyatt repatriated money from the Panamanian bank account to buy a Mercedes Benz SL 550R automobile and to pay for $19,000 in interior design goods and services.  

* * * * 

Hyatt failed to report income earned on his Panamanian account, and failed to file an FBAR for the years at issue.  Hyatt admitted that this scheme resulted in a tax loss of $521,986. 

* * * * 

Hyatt faces a statutory maximum sentence of five years in prison, as well as a term of supervised release and monetary penalties. Hyatt has agreed to file true and accurate tax returns and to pay the IRS all taxes and penalties owed, in addition to paying an $854,465.50 penalty for failure to disclose his foreign accounts.

JAT Comments:

1. The Panamanian bank is not named.
2. The bank account appears to represent untaxed income that, in the resolution, will be fully taxed.  Often in these resolutions to the extent that proceeds were deposited many years ago, they may not be taxed.  The statute would still be open if fraud were involved.  See § 6501(c)(1), here.  But developing the information to assert the tax on the original deposits may be difficult.  Hence, the resolution oft the tax in many cases relates only to later years where the income involved is the income on the earlier deposits without regard to whether the original earlier deposits were of untaxed income.

 Here are some of my compiled statistics.  I have not recently reviewed the spreadsheet in detail to make sure that all formulas work as they should.  I will try to do that soon.  But, with that caveat, here are some of them now.

	All	Taxpayers	Enablers	# Uncertain
Charges (Indictments, Information, Complaint)	171	122	49
Charges with Taxpayer Entities Involved	102	102	N/A	5
Guilty Pleas	108	91	17
Guilty Verdicts	19	17	2
Acquittals	3	1	2
Dismissals	2	1	1
Cases Sentenced (Total)	87	73	14
Cases Pending (All Prior to Sentencing, incl. Fugitives)	77	47	30
Cases Pending (without Fugitives)	53	45	8
Cases Pending (Fugitives Only)	24	2	22

Fourth Circuit Affirms Conviction for Tax Evasion In Questionable Circumstances (9/16/16)

In United States v. Davey, 2016 U.S. App. LEXIS 16519 (4th Cir. 2016) (unpublished), here, Davey was convicted of "for conspiracy to commit wire fraud, conspiracy to commit money laundering, and tax evasion."  The gravamen of the case was the nontax charges, with the tax charge in the indictment, proper, but added on for good measure.  (I am not sure that it would have stood as a separately prosecuted tax crime, but what do I know about that?)  I separate out the tax crime to discuss here, but in the ambiance of the trial the tax crime conviction may have been influenced by the other convictions.

There were two issues raised regarding the tax conviction.  Davey argued that (i) the judge had erred in excluding evidence (specifically his 2009 tax return); and (ii) evidence was insufficient to establish guilt of the crime alleged.  I will address this after first stating the facts as I understand them from the discussion.

In his larger scheme to defraud investors, Davey caused certain entities to use $810,000 for his personal uses, in this case to construct a home.  The Court said:

One of the most significant personal expenses Defendant funded with DCS investor money was the construction of a $2 million, 10,000-square-foot personal home. To channel money from DCS towards the construction of his home, Defendant created two additional entities: "Sovereign Grace" and "Shiloh Estates." Essentially, Defendant transferred funds, in the form of purported "loans," from DCS to Sovereign Grace, and then from Sovereign Grace to Shiloh Estates, the legal owner of the home and direct funder of its construction. J.A. 291-98, 513. 

Those "loans" had no recognized interest rates, no payment schedules, no associated liens, and no loan documentation. In late 2008, Defendant informed Barry McFerren, his brother-in-law and business associate, that he intended to default on the loans, and Defendant did so in 2009. Defendant identified $810,000 as a "loan" on his 2008 tax return, an amount corresponding to purported loan payments to Shiloh Estates in that year. J.A. 516-17.

The key additional fact, related to his reporting the arrangement as a loan on his 2008 return, is that he had reported a default on the loan on his 2009 return, with resulting COD income.

So, under Davey's reporting methodology, at least between the two years, the right amount of income was reported.  As tax lawyers and tax accountants say, it was just a timing issue.  Of course, timing issues are important.  (It may well be that Davey had no "shelter" for the $810,000 in 2008 and expected that he would in 2009, so he reported it in 2009.)

Now, here is the Court's discussion of the two issues (bold face supplied by JAT):

Exclusion of Evidence

Defendant's final argument contesting an evidentiary ruling relates to his conviction for tax evasion. At trial, the government sought to show that Defendant evaded taxes by falsely characterizing $810,000 in payments from Sovereign Grace to Shiloh Estates-the entity that funded the construction of his home-as a "loan" on his 2008 tax return. Defendant contends the district court erred by excluding his 2009 tax return, which reported the defaulted "loan" as taxable income in 2009. He argues that this evidence tends to disprove his intent to evade taxes in 2008. 

The government's theory of the case, however, was that Defendant mischaracterized the payment as a loan in 2008, and that this mischaracterization was itself a willful attempt to evade income taxes. Consequently, the relevant intent was Defendant's intent to repay-or not repay-the loan amount at the time he received it. See United States v. Pomponio, 563 F.2d 659, 662-63 (4th Cir. 1977) (explaining that the "principal question" relevant to a tax evasion prosecution based on mischaracterized loan payments is whether those payments "were not [actually] loans, that is, that no intent to repay them existed, and that the defendants knew they were not loans"). That one year later Defendant defaulted on the loan, recognized it as income, and paid taxes on it tends to reinforce, rather than undermine, the government's argument that Defendant did not intend to repay the "loan" when he received it. 

In short, the district court did not abuse its discretion in excluding the 2009 tax return for lack of relevance.

JAT Comment:  The issue was whether the arrangement was a loan in the first instance.  If the arrangement was not a loan, it could not be defaulted in 2009.  Yet, the Court says this (perhaps not paying attention to what it was saying):  "That one year later Defendant defaulted on the loan, recognized it as income, and paid taxes on it tends to reinforce, rather than undermine, the government's argument that Defendant did not intend to repay the 'loan' when he received it."  Maybe that is just a semantical miscue, but in criminal cases, semantics are important.  The Court does in the sufficiency discussion below refer to it as a "purported loan."  But, certainly, at least in my mind, Davey's actual reporting of the arrangement as a loan and default in 2009 is relevant to the issue of whether he intended it as a loan in 2008.  It may be self-serving but that does not make it irrelevant.  I can't imagine why the district court excluded the return or why the Court of Appeals affirmed the exclusion on the basis of irrelevance.  It seems to me that, particularly based on the sufficiency of the evidence discussion (below), the better ground for affirmance was that, in the context of all the evidence, even if not excluded, it would not have affected the jury verdict.

Sufficiency of the Evidence

Tax Preparer Receives the Vulnerable Victim Sentencing Enhancement for Falsely Claiming Minor Dependents (9/16/16)

In United States v. Adeolu, ___ F.3d ___, 2016 U.S. App. LEXIS 16655 (3rd Cir. 2016), here, the Third Circuit held the key facts where (footnote omitted):

Adeolu's tax preparation company employed approximately fifteen people and prepared fraudulent tax returns in two ways: by selling the taxpayer an individual's personal information to fraudulently claim as the taxpayer's dependent; or, by suggesting that the taxpayer fraudulently claim a dependent that the taxpayer personally knew. According to the District Court, the individuals who were fraudulently claimed as dependents ranged in age from one to eighteen years old, including a thirteen-year-old, nine-year-old, six-year-old, and five-year-old child. (App. 1111.) 

The issue was whether that conduct justified the 2-level vulnerable victim enhancement under Sentencing Guideline § 3A1.1(b)(1), here.

At first blush, it might appear that the only victim in the case was the IRS.  Merely using these minor persons' information to claim tax benefit affecting the IRS does not seem to rob those minor of anything and the perpetrator does not seem to intend any harm to the minors.

That is exactly what the defendant argued on appeal.  "On appeal, Adeolu argues that the vulnerable victim enhancement should not apply because the 'minors did not suffer actual harm, such as loss of tax refund proceeds, a fine, or a negative mark on their credit score.'" (Footnote omitted.)  To which the Court replies in summary (footnote omitted):

Our Court, however, has never held that the vulnerable victim enhancement requires a showing of actual harm, whether financial or otherwise. Rather, our three-part test under United States v. Iannone, 184 F.3d 214, 220 (3d Cir. 1999), properly analyzes the "nexus" between a victim's vulnerability and the success of the defendant's criminal scheme, thereby encompassing any resulting harm to the victim and rendering an analysis of "actual" harm inconsequential.

That makes no sense to me.  In effect, the Court holds that the vulnerable victim can apply where the only victim in sight is the IRS which is not a vulnerable victim.  The Court simply disregards the required "vulnerable" victim status and looks solely for some nexus between someone who is vulnerable and the scheme, whether or not the vulnerable person is a victim.

My reaction above is not based upon detailed research on the issue but only in response to the words of the opinion.  So, I would appreciate the ideas, learning and experience (includiing research) of others on this issue.

But, for take-aways, sophisticated preparers (perhaps those who read cases such as this and blogs such as this) should avoid using such vulnerable persons to implement stealing from the IRS via false returns.  There are other ways to steal from the IRS via false returns. At least, if caught, they can avoid this enhancement.

One other itrm that caught my eye.  The defendant was "convicted of conspiracy to defraud the United States and of aiding and abetting the preparation of materially false tax returns, in violation of 18 U.S.C. § 371 and 26 U.S.C. § 7206(2)."  I have previously noted that the conviction under § 7206(2), here, is for aiding and assisting, not aiding and abetting.  See e.g., Fifth Circuit Opinion on Aiding and Asisting and Trial Management (Federal Tax Crimes Blog 8/27/16), here.

French Prosecutor Requests 3-year Prison Sentence for French Officials' Offshore Accounts (9/16/16)

This report on the prosecution of a former French official.  Chine Labbe and Michel Rose, French prosecutor seeks 3 years' jail for ex-minister over foreign bank account (Reuters 9/14/16), here.  Excerpts:

France's financial prosecutor on Wednesday sought a three-year jail term for former budget minister Jerome Cahuzac, who was forced to quit government three years ago over the discovery that he owned a secret bank account abroad. 

Cahuzac, 64, a plastic surgeon by profession who was appointed budget minister when Socialist President Francois Hollande took power in 2012, stands accused of tax fraud and money laundering. 

"You have tarnished this country's honor," Prosecutor Eliane Houlette said. "What has not been repaired, and will never be, is the harm done to our country, which became a laughing stock." 

* * * * 

The ex-minister, who had presented government proposals to clamp down on tax evasion in December 2013, quit three months later and admitted that he had indeed placed 600,000 euros ($667,000) abroad. 

Judicial investigators later unearthed an account opened at Swiss bank UBS in the early 1990s that was later transferred to Singapore under the codename "Birdie". 

* * * * 

The prosecutor also sought a 1.875 million euro ($2.10 million) fine from the Reyl bank of Geneva, which in 2009 allegedly helped Cahuzac transfer funds to Singapore to avoid detection by French tax authorities, and an 18-month suspended jail term for its director, Francois Reyl. 

The bank denies any wrongdoing. Francois Reyl told the court he had only played a technical role in the confidential request from the former minister, which appeared to have no tax evasion motive to him at the time.

And from Philippe Sotto, French Tax Fraud Trial Portrays Example of 'World Plague' (ABC News 9/15/16), here.  Excerpts:

Their hidden wealth in foreign bank accounts in Switzerland, Singapore and the British tax haven of the Isle of Man was estimated at 3.5 million euros ($3.9 million) in 2013, assistant prosecutor Jean-Marc Toublanc said. 

The value of their concealed assets likely was much higher because the money helped the couple finance a lavish lifestyle over the years, Toublanc said. 

Branding tax evasion as a "world plague" and citing the Panama Papers scandal as a recent example, Toublanc called the Cahuzac spouses "among the biggest fraudsters" of whom French tax authorities are aware. 

On trial in Paris alongside Cahuzac and his ex-wife were a banker, a legal adviser, and bank Reyl, a respectable but little-known Swiss establishment, all charged with money laundering. 

During the trial, the former budget minister argued for the first time that he originally opened his Swiss account in 1992 to collect funds from drug companies. He said the money was to be used for illegal financing of a branch of the Socialist Party led by Michel Rocard, the former French prime minister who died in July. 

However, Cahuzac did not provide any evidence for those claims. 

After the first press reports that Cahuzac had a hidden foreign bank account surfaced in late 2012, Cahuzac publicly denied the allegations for months. He eventually admitted to the fraud in April 2013, saying he had been "trapped in a lying spiral." French law does not sanction perjury.

JAT Comment: The sentence imposed should be interesting.  Just the request  for the length of the sentence suggests that the French may be more serious about offshore accounts than the U.S. is.  Even in  large cases, such as the Ty Warner case, U.S. prosecutors asked for far less a sentence and the court then  imposed only probation.

Swiss Supreme Court Approves Netherland Group Requests Under Double Tax Treaty (9/16/18)

Although other countries' tax initiatives involving secret accounts is not the main focus of this blog, I thought readers might be interested in this article because it illustrates the continuing and expanded interest in an area where the trail was blazed by the U.S. starting with the UBS initiative in 2008.  In addition, the decision reported here plus related initiatives reported will have wide impact.

The Swiss Federal Tax Administration has decided that it will respond to so-called group requests may be made under the Switzerland-Netherlands double tax treaty (sometimes referred to as "DTT NL"), just as it is now responding to such requests under the Switzerland-U.S. double tax treaty.  (I sometimes refer to such group requests as John Doe treaty requests because they function like John Doe Summonses in the U.S. system in terms of identifying unknown taxpayers by identifiable characteristics.) That decision has been sustained by the Swiss Federal Supreme Court.  For a good write up, see Jueng Birn, Swiss Federal Supreme Court considers Dutch Group Request as permissible (KPMG Switzerland Expert Blog 9/14/16), here.

The Netherlands group request had the following characteristics to identify the account information requested:

• UBS clients domiciled in the Netherlands who had held an account with UBS in Switzerland between 1 February 2013 and 31 December 2014.
• UBS had sent the client in question a letter in which they were informed that their account would be canceled unless the client could prove his or her tax conformity.
• The client did not prove his or her tax conformity to UBS.

And, a practically identical request was made to Credit Suisse.

JAT Note:  the characteristics of such requests made by the U.S. are more detailed.  See Swiss FTA to Pass HSBC U.S. Depositor Information to IRS Under Treaty (Federal Tax Crimes Blog 7/27/16; 7/28/16), here.

The KPMG report indicates that, after the FTA approved the request, an affected client successfully appealed to the FTA Court on the ground that requests without names were not authorized under the DTT NL.  The Swiss Supreme Court then on further appeal allowed the request.  The KPMG report discussion of the Swiss Supreme Court decision is:

According to the Swiss Federal Supreme Court’s interpretation of the DTT NL, it is sufficient if the group request contains sufficient information that will allow an identification of the person in question to be able to provide administrative assistance. That specifically naming a client is not mandatory is due to the purpose of the DTT NL, which according to the relevant protocol consists of, “an exchange of tax information to the maximum extent without allowing the states partial to the agreement to go on “fishing expeditions”. 

Finally, the Swiss Federal Supreme Court also checked whether this could be considered a legitimate group request or indeed a fishing expedition, which would not have been permitted. Despite the fact that the definition of group in the present request for administrative assistance goes quite far, the Swiss Federal Supreme Court judged that it is not an inadmissible fishing expedition.

The KPMG report indicates the impact is:

Impact of this decision 

Switzerland has already concluded more than 60 double taxation treaties and tax information agreements, which permit administrative assistance based on group requests. Moreover, under the OECD administrative assistance convention concerning Switzerland, group requests will be possible in any case as of 2017. The administrative assistance convention foresees retroactive effect to 1 January 2014. 

We expect a number of other states to follow the example set by the Netherlands and to address Switzerland with similar group requests. At this time, it remains to be seen which countries will place a similar request.

For related coverage, see

• Swiss Court Sets Precedent With Release of UBS Client Data (Fiunews.com 9/12/16), here.  
• Joshua Franklin and Angelika Gruber, Swiss Supreme Court rules bank data can be sent to Dutch (Reuters 9/13/16), here.  
• Swiss noose tightens around suspected Dutch tax evaders (Swissinfo.ch 9/12/16), here.

Gary Stern Plea Agreement (9/15/16)

I have previously reported on the indictment of Gary Stern, a lawyer, for various tax counts.  See Gary Stern Indictment (Federal Tax Crimes Blog 10/15/14), here (with a link to the indictment).  I said in that posting that I  would add more on the indictment later, but never got back to it.  Today, I report on Stern's plea agreement, here.  (For a related posting, see Chicago Lawyer Enjoined From Promoting Fraudulent Tax Schemes (Federal Tax Crimes Blog 11/7/13), here.)

In the plea agreement, Stern agrees to plead to Counts Five and Seven, two counts of aiding and assisting, § 7206(2), here.  Aiding and assisting is a three-year maximum felony, so the maximum incarceration period permitted under the plea agreement is six-years.

I won't get into the details of how Stern committed the crime, but it appears that he and an associate in his firm took the key steps necessary to create a structure purporting to transfer energy tax credits otherwise unusuable by one corporation through a series of transactions to two trusts which claimed the credits on their tax return and allocated $5,337,103 in improper credits to persons investing in the scheme.  Through those actions, defendant aided and assisted in the preparation and presentation of the trust tax returns that resulting in the claiming of credits by perhaps 55 taxpayers.

As to the two specific counts involved in the plea, only two taxpayers' false returns are involved -- Taxpayer RL whose return reportedly falsely claimed $150,718 in credits and Tapxayer JK whose return falsely reported $154,534 in credits.  The aggregate falsely claimed credits for the two is thus $305,252.

As is often the case, the plea agreement addresses the Sentencing Guidelines calculations.  (See ¶¶ 8 ff, pp. 10 ff.)

i. The base offense level 1s 24 pursuant to Guidelines §§2T1.4(a)(1) and 2T4.1(J), because the intended tax loss, $5,337,103, was more than $3,500,000 and not more than $9,500,000.  

ii. Pursuant to Guideline §2T1.4(b)(2), the offense level is increased two levels because the offense involved sophisticated means.  

iii. Pursuant to Guideline §3Bl.l(c), the offense level is increased two levels because the defendant was a supervisor of a participant in the criminal activity.  

iv. Defendant has clearly demonstrated a recognition and affirmative acceptance of  personal responsibility for his criminal conduct. If the government does not receive additional evidence in conflict with this provision, and if defendant continues to accept responsibility for his actions within the meaning of Guideline §3El.1(a), including by furnishing the United States Attorney's Office and the Probation Office with all requested  financial information relevant to his ability to satisfy any fine that may be imposed in this case, a two-level reduction in the offense level is appropriate. 

v. In accord with Guideline §3El.1(b), defendant has timely notified the government of his intention to enter a plea of guilty, thereby permitting the government to avoid preparing for trial and permitting the Court to allocate its resources efficiently. Therefore, as provided by Guideline §3E1.1(b), if the Court determines the offense level to be 16 or greater prior to determining that defendant is entitled to a two-level reduction for acceptance of responsibility, the government will move for an additional one-level reduction in the offense level. 

c. Criminal History Category. With regard to determining defendant's criminal history points and criminal history category, based on the facts now known to the government, defendant's criminal history points equal zero and defendant's criminal history category is I.  

d. Anticipated Advisory Sentencing Guidelines Range. Therefore, based on the facts now known to the government, the anticipated offense level is 25, which, when combined with the anticipated criminal history category of I, results in an anticipated advisory sentencing guidelines range of 57 to 71 months' imprisonment, in addition to any supervised release and fine the Court may impose.

Court Rejects Attempt to Attack Guilty Plea Over Claim that Prosecutor Threatened to Prosecute Wife (9/13/16)

It is not uncommon in situations where two related parties are implicated in a common potential crime for the federal prosecutor to offer and accept a plea by one of the parties with the inducement that indictment or prosecution of another will not occur or will be more lenient.  This sometimes happens in the context of husband and wife who filed a joint return and are both potentially culpable for some crime with respect to the return, such as tax evasion or tax perjury.  If the husband is more culpable, the prosecutor may offer to accept a plea from the husband and not charge or drop the charges for the wife.

Obviously, the power to indict and prosecute both spouses creates powerful incentives/coercion on the spouse or related party being offered the guilty plea.  Is that coercion fair?  Would it allow a defendant accepting the plea to avoid the plea agreement, perhaps at a time when the Government will be unable to prosecute the other spouse?

In Peters v. United States, 2016 U.S. Dist. LEXIS 106962 (ED TX 2016), here, adopted by the district court, 2016 U.S. Dist. LEXIS 106654 (ED TX 2016), the husband defendant accepted a plea to one count of tax evasion and one count of bankruptcy fraud.  After the district court accepted the plea and sentenced the defendant, he was incarcerated.  He then brought a federal habeas corpus petition under 18 USC § 2255, here.  The petitioner made several claims for habeas relief, but the only one I address here is that he was subject to under coercion because of the prosecutor's threat to indict his wife.  I quote from the magistrate's opinion which was affirmed by the district court on the grounds stated in the magistrate's opinion:

b. Peters' claim that the plea was coerced by the threat of prosecution of his wife lacks merit 

The Fifth Circuit has explained: 

[G]uilty pleas made in consideration of lenient treatment as against third parties pose a greater danger of coercion than purely bilateral plea bargaining." United States v. Nuckols, 569 (5th Cir.1979). Even so, there is no "intrinsic constitutional infirmity" in promising leniency to a third party in exchange for a guilty plea. Id. A prosecutor has discretion to "inform an accused that an implicated third person will be brought to book if he does not plead guilty." Id. The prosecutor has a duty of good faith in making such a representation, which duty is satisfied where he has probable cause to believe the third person has committed a crime. Id.; United States v. Diaz, 733 F.2d 371, 375 (5th Cir. 1984). 

McElhaney, 469 F.3d at 385 [McElhaney v. United States, 469 F.3d 382 (5th Cir. 2006)]. Thus, so long as the Government has probable cause to bring charges against a defendant's relative, the "defendant's plea 'would not be involuntary by reason of a desire to extricate his relatives from such a possible good faith prosecution.'" Id. (quoting Diaz, 733 F.2d at 375). 

Peters does not allege that the Government lacked probable cause to bring charges against his wife in the underlying criminal case or otherwise acted in bad faith during the plea bargaining process. Rather, he asserts that defense counsel threatened that his wife would be subject to indictment should Peters proceed to trial. See Brief in Support of Motion, Exhibit B. However, it is evident from the record that defense counsel reasonably concluded the Government had probable cause to bring an indictment against Peters' wife, since she was a signatory on the tax and bankruptcy filings at issue in the case. See Arrambide Affidavit at 1-6. Under the circumstances, the Court cannot find fault with counsel's advice regarding the potential exposure of his clients' spouse. Moreover, Peters' decision to enter a guilty plea in order to prevent such a good faith prosecution cannot be deemed involuntary.

This is a pretty fair statement of the law.  The issue of undue coercion is whether the prosecutor made an unreasonable threat to prosecute the third party to induce the plea.  Reasonableness is determined by whether the prosecutor had probable cause to assert the potential prosecution of the third party.  If so, then most courts would not entertain the attack on the plea.

In United States v. Marquez, 909 F.2d 738 (2d Cir. 1990), although an older case, the Second Circuit provides a good discussion of the then state of the law, which appears to be also the current state of the law.  In Marquez, the defendant sought to withdraw his guilty plea.  He claimed that the prosecutor had improperly threatened less leniency against his wife if he did not accept the offered plea.  (Or, I could have said that the prosecutor offered more leniency to the wife if he accepted the offered plea.)  He accepted the plea and sought to withdraw the plea.  The district court denied the request.  The defendant appealed on several grounds.  The Court of Appeals affirmed, reasoning