DOJ Tax Finally Decides to Fold 'Em with the Rigas's (1/27/12)

The Wall Street Journal Law Blog reports today that DOJ Tax has given up its prosecution of the John Rigas and Timothy Rigas, father and son ("the Rigas Defendants"), for alleged tax crimes.  Joe Palazzolo, The Daily Writing Sample: Paying Homage to Kenny Rogers (WSJ Law Blog 1/27/12), here.  Readers of this blog will be familiar with the Government's cases against the Rigas Defendants.   For blogs on the saga, see here.  In a nutshell, the Government prosecuted the Rigas Defendants for their alleged skullduggery with the failed Adelphia which they treated as a personal  piggybank (Adelphia being the bank and the Rigas Defendants being the piggies).

The major criminal trial was in New York City, in the Southern District of New York, where many large financial and securities crimes are prosecuted.  The SDNY indictment contained the ubiquitous conspiracy charge as Count One and various other substantive counts.  The conspiracy alleged was a conspiracy related to securities and bank fraud.  The defendants were convicted and sentenced to substantial terms (more on that later).

Following the SDNY convictions, the Government pursued charges against the Rigas Defendants in the Middle District of Pennsylvania for various alleged tax and related crimes related to their alleged looting of Adelphia.  (Note the venue rules for tax charges require or encourage prosecution closer to home.) Again, the ubiquitous conspiracy count appeared as Count One, alleging conspiracy to commit  tax offenses and a Klein (defraud the IRS) conspiracy, presumably both as objects of the single alleged conspiracy relating to tax matters.

In a prior interim appeal in this MDPA case, the Third Circuit held that the Rigas Defendants had made a substantial claim that this tax conspiracy charge was within the scope of the conspiracy alleged and tried in the original SDNY trial.  United States v. Rigas, 605 F.3d 194 (3d Cir. 2010) (en banc), here.  The consequence of that claim, if ultimately accepted, would be that the Rigas Defendants would be subject to double jeopardy in the second criminal case, requiring that the count be dismissed.  The Court remanded for the trial court to reconsider that issue.  For more detail on this holding, see my prior blog.  En Banc Rehearing in Rigas - Scope of Conspiracy, Totality, and Double Jeopardy (5/14/10), here.

HSBC Reportedly Being Investigated for Money Laundering (1/26/12)

The U.S. Senate is reportedly investigating HSBC for money laundering.  See Carrick Mollenkamp, Exclusive: Senate Investigating HSBC for Money Laundering (1/25/12), here.  I don't know precisely what that means in terms of the topic of this blog.  I can say that my impression is that, generally speaking, the U.S. Government would treat money laundering that touches important U.S. interests as more important than promoting U.S. tax evasion.

Keep in mind that the U.S. angst was great over UBS tax evasion actions for U.S. depositors.  HSBC did much of that same thing as UBS, although perhaps not at the same brazen scale as UBS.  But UBS was hammered for its tax evasion conduct without money laundering being in the mix.  My sense would be that, if indeed HSBC facilitated money laundering that affected the U.S., HSBC might be in much deeper doo-doo than was UBS.  (On the other hand, since the Swiss banks tended all to do the same thing, if HSBC did money laundering perhaps UBS did  so also; I doubt that anyone would be surprised that any Swiss bank participated in this type of conduct; but apparently HSBC is the first to be called out -- discovered -- on it.)

I am sure there is more to come.

U.S. HSBC depositors who have not yet resolved their U.S. tax situations should be concerned.  You may quickly be on the chopping block as HSBC tries to mitigate the damage.  While I doubt that the U.S. Government would be assuaged by merely delivering up the U.S. depositors HSBC helped with their U.S. taxes, still such cooperation might buy some time or be seen as a good faith action that will get something somewhere down the road.

However, among those U.S. HSBC depositors there may be some whose goal was not just to cheat on their taxes, but to launder money.  Those persons should be particularly concerned, especially those who may have joined the voluntary disclosure program and submitted either false or misleading information about their offshore banking activity.

Second Circuit Strikes Down Another BS Tax Shelter (1/24/12)

I post another decision in a BS  Tax Shelter, this time involving none other that GE.  Tax Notes has just posted the Second Circuit's slam-down on the shelter.  The opinion is here; the Tax Prof blog is here.  (By the way, the Tax Prof Blog is highly recommended as daily reading.)

The case is TIFD III-E Inc. v. United States, No. 10-70-CV (2d Cir.. Jan. 24, 2012).  The case has some history.  The district court seems to have been smoking from the same exotica plant that the taxpayer was.  The district court sustained the shelter the first time.  The Second Circuit graciously gave the district court another chance at it.  The district court, having not given up its sense of rightness, sustained the shelter again.  In this new opinion, the Second Circuit shuts it down, handily rejecting the shelter and imposing the 20% accuracy related penalty.  (The Second Circuit did throw a words only consolation to the district court by calling his opinion "thorough and thoughtful" albeit wrong.  The Second Circuit offered no consolation to the taxpayer.)

For those who are procedure fans, you will recall that the 20% accuracy related penalty generally has an out if the taxpayer either had substantial authority or disclosed and had at least a reasonable basis.  But there is no such out if the tax in issue relates to a tax shelter (defined very broadly).  The district could held that the transaction was not a tax shelter and that the penalty did not apply because the taxpayer had substantial authority.   The Second Circuit rejected the second basis (finding that substantial authority did not exist) and thus did not have to reverse the district court on its holding that the transaction was not a tax shelter.  The Court said (p. 25 fn 10):

  n10 Our conclusion that a substantial understatement penalty is properly imposed on the taxpayer makes it unnecessary for us to consider whether the district court correctly determined that (1) Castle Harbour was not a tax shelter, see § 6662(d)(2)(C) (1993) (providing that the substantial authority defense is unavailable with respect to items attributable to a tax shelter); and (2) that the taxpayer is not subject to a negligence penalty, see Treas. Reg. § 1.6662-2(c) (barring imposition of a negligence penalty in addition to a substantial understatement penalty for the same understatement of tax)

I speculate that the Second Circuit might have been given the district judge another consolation by not reversing him on everything, although it seems likely that had the court reached this issue, it would have reversed.

Government Appeal of Williams FBAR Case (1/24/12)

Readers will recall that I have posted several blogs on the Williams case where the trial judge refused to find willfulness for purposes of the onerous FBAR penalty.   I post the prior blogs at the end of this blog.  The Government appealed the case.  I now provide links to the Government's briefs.  (Note that these links are to pdf copies that I OCR'd within the pdf file and I provide certain highlights related to the points I discuss in this blog.)

The key points I note are as follows:

1. A lot of the fight is about whether Williams should be bound by -- hanged by, perhaps -- statements he made during a plea allocution in the earlier criminal case.  I am not going to comment on that.

2. A key argument the Government makes if it cannot hang Williams on those statements is that willfulness for purposes of the FBAR penalty is perhaps not the same as Cheek willfulness or even Ratzlaf willfulness (Ratzlaf v. United States, 510 U.S. 135 (1994), the statutory amendment for Ratzlaf did not amend the willfulness civil penalty in question here).  Willfulness is not a term with a single meaning, but certainly in the tax law it has a specific meaning -- intentional violation of a known legal duty.  And, Ratzlaf said it had that meaning the Treasury reporting requirements.  So a good argument, I  think, can be made that the standard is the same as the Cheek standard, but the Government argues otherwise.  Indeed, the Government claims that recklessness will  suffice -- in effect, the Government imports something like a conscious avoidance (aka willful blindness and other terms) into the concept.  I suppose that, if willful should be interpreted by analogy to the criminal provisions requiring willfulness, then perhaps the conscious avoidance concept, if valid for criminal purposes for the high willfulness standard, should also apply for civil FBAR willfulness.  (See my prior blogs on conscious avoidance by clicking the conscious avoidance link below.)  In any event, it seems to me that the standard should not be different, only a less strict standard of proof applies in a civil case.

Evasion of Trust Fund Taxes and Charging Decisions (1/23/2012)

In United States v. Farr, 2012 U.S. LEXIS App. 1032 (10th Cir. 2012), here, in a nonprecedential Order and Judgment, the Tenth Circuit denied Farr's appeal of the district court's denial of bail pending appeal of her conviction for tax evasion of trust fund taxes.  The Court noted the standard as follows (emphasis supplied to highlight the conjunctive requirements for bail):

Under 18 U.S.C. § 3143(b)(1) [here], detention pending appeal is presumed unless a judicial officer finds (A) "by clear and convincing evidence that the person is not likely to flee or pose a danger to the safety of any other person or the community," and (B) "that the appeal is not for purpose of delay and raises a substantial question of law or fact likely to result in" reversal, a new trial, or a lesser sentence. The district court concluded that Ms. Farr had failed to show the required substantial question of law or fact.

The Court concluded, on appeal of the denial, it applies a de novo review to mixed questions of fact and law and a clearly erroneous review to the questions of fact.

Defendant raised several issues alleged to raise a substantial question of law or fact none of which had merit.  The one that interested me is as follows:

Proceeding under incorrect statute. Ms. Farr contends that she should have been charged under 26 U.S.C. § 7202 [here] rather than 26 U.S.C. § 7201 [here]. It appears, however, that § 7201 encompasses her conduct. See Farr I, 536 F.3d at 1186 [here] ("[T]he government has adduced ample evidence from which a jury could find Ms. Farr guilty of evading the trust fund recovery penalty."). "When a defendant's conduct violates more than one criminal statute, the government may prosecute under either (or both, for that matter, subject to limitations on conviction and punishment)." United States v. Bradshaw, 580 F.3d 1129, 1136 (10th Cir. 2009). "Absent certain allegations of impropriety, it is not the role of the jury (or the judge) to decide whether the government has charged the correct crime, but only to decide if the government has proved the crime it charged." Id. Accordingly, this issue does not present a substantial question for appeal.

UBS / Wegelin Client Sentenced (1/22/12)

Taxpayer:  Kenneth Heller
Bank : UBS and Wegelin
Entities: Yes
Guilt: By Plea Agreement - See prior blog entry on guilty plea:  A New UBS Depositor Plea in SDNY (6/27/11), here.
Count(s) of Conviction: 3 - tax evasion
Maximum Possible Sentence:  15 years.
Sentence Imposed: 45 days.
Age at Sentencing:  82 years*
Tax Loss: $400,000 - $1,000,000 (Apparently this number was not more finitely calculated because this is a single Guideline tax loss range and would not change any of the sentencing calculations).
Civil income tax penalty:  Civil Fraud Penalty (75%) agreed to in the plea agreement (see the prior blog), hence, given the tax loss, the civil fraud penalty would be between $300,000 and $750,000.
Restitution:  ?  (May not have been provided because the tax loss was not quantified sufficiently; the IRS will be able to quantify and collected the tax loss through regular tax processes.)
FBAR Penalty: $9.8 MM (FBAR penalty; 50% of highest balance for one year - see prior blog)
Court: SD NY
Judge: Castel, Kevin

 * also with significant, perhaps age related, physical impairments.

Criminal Discovery - A Lighter Blog (1/21/12)

Discovery is a significant part of criminal tax practice and criminal practice in general.  FRCrP 16, here, allows limited discovery, sometimes reciprocal.  In addition, there are certain constitution disclosure requirements, such as Brady, Giglio and Jencks Act.  Brady v. Maryland, 373 U.S. 83 (1963); Giglio v. United States, 405 U.S. 150 (1972); and 18 USC 3500, here.  Some, perhaps most, USAO offices have an open file policy in criminal tax cases -- at least the run of the mill tax cases -- which will disclose everything the Government has in terms of raw data (generally not mental processes related to the investigation and prosecution, but some of that can be reasonable inferred from the data in the files).  Most of the time that works to put the defendant on notice of the Government's case.  And, because of the work performed by the time of indictment, the files will not only put the defendant's counsel on notice, but will paint a sufficiently devastating picture that it will induce a plea in most cases (because most federal tax crimes cases, like most federal crimes cases, result in a plea)..

I don't plan on writing a tome on criminal tax discovery here.  Looking for a lighter nuance on the problem of criminal discovery, I refer to that famous legal movie, My Cousin Vinny (see Wikipedia here), dealing with informal discovery in a state criminal case -- the murder at the Sac O' Suds.  The prosecutor -- Jim Trotter III -- in a small Alabama town had invited his adversary, the defense counsel, the inimitable Vincent Laguardia Gambini, to a hunting jaunt to take his mind off the defense.  Vinny took him up on the offer, hoping to get some informal discovery by schmoozing with the prosecutor.  So here is the dialog with some digression by Mona Lisa Vito:

Reasonableness and Good Faith (1/19/12)

In United States v. Aldridge, 2012 U.S. App. LEXIS 448 (6th Cir. 2010), per curiam unpublished, here, the Sixth Circuit addressed the relationship of reasonableness to the good faith defense as follows:

Reasonableness does play a role in determining whether the defendant acted in good faith. Good faith is a defense to the willfulness element that the government must prove. The court instructed the jury that if it found "that the defendant, subjectively in his own mind, believed that he was not required by the law to file the returns in question or pay the taxes, it will be your duty to find him not guilty." The jury could use the reasonableness of the defendant's explanation for his actions to assess whether the defendant's version was credible. The more unreasonable the jury perceives the defendant's reasons for not paying taxes to be, the more the jury would likely infer that the defendant's proffered reasons were pretextual. Similarly, the more reasonable the defendant's reasons were, the more likely it is that the jury would credit them as being truthful. If the jury believed the testimony of the defendant and that testimony reflected an honest mistake in law, then the jury could find that the defendant acted in good faith. Accordingly, the court properly instructed the jury that the reasonableness of the defendant's actions "is a factor [the jury] can consider in determining whether the defendant acted in good faith."

Further on Conscious Avoidance as a Substitute for -- or Indistinguishable From -- Willfulness (1/12/12)

I have previously written on the logical inconsistency of and dangers of the conscious avoidance concept that juries may be asked to apply in tax crimes requiring willfulness -- defined as the intentional violation of a known legal duty.  The problem is that the jury may believe that it can convict if the defendant knew (the statutory requirement) or should have known but did not because he or she consciously avoided knowledge (not the statutory requirement).  For prior rantings on this subject, click the Conscious Avoidance label below.

I have just had the opportunity to review an article on a related subject.  Francis X. Shen, Morris B. Hoffman, Owen D. Jones, Joshua D. Greene, Rene Marois,  Sorting Guilty Minds, 86 NYU L. Rev.1306 (2011), here.  The synopsis of the article is:

Because punishable guilt requires that bad thoughts accompany bad acts, the Model Penal Code (MPC) typically requires that jurors infer the mental state of a criminal defendant at the time the crime was committed. Specifically, jurors must sort the defendant’s mental state into one of four specific categories—purposeful, knowing, reckless, or negligent—which will in turn define both the nature of the crime and the degree of the punishment. The MPC therefore assumes that ordinary people naturally sort mental states into these four categories with a high degree of accuracy, or at least that they can reliably do so when properly instructed. It also assumes that ordinary people will order these categories of mental state, by increasing amount of punishment, in the same severity hierarchy that the MPC prescribes. 

The MPC, now turning fifty years old, has previously escaped the scrutiny of comprehensive empirical research on these assumptions underlying its culpability architecture. Our new empirical studies, reported here, find that most of the mens rea assumptions embedded in the MPC are reasonably accurate as a behavioral matter. Even without the aid of the MPC definitions, subjects were able to distinguish regularly and accurately among purposeful, negligent, and blameless conduct. However, our subjects failed to distinguish reliably between knowing and reckless.

Another Taxpayer Victory on Required Records Subpoena for Offshore Bank Documents (1/12/12)

In In re Special February 2011-1 Grand Jury Subpoena Dated..., --- F.Supp.2d ----, 2011 WL 6973429  (2011), [will post link when I get one I can post], the Court quashed a grand jury subpoena for foreign bank account records, holding that the Fifth Amendment privilege (the act of production iteration of the privilege) trumps the required records doctrine.

I won't try to analyze the opinion, because I don't think it necessarily adds critical analysis that has not been considered before.  I will say that it strikes me that this is an issue that can go either way, depending upon the predilections of the court considering the matter.  In terms of numbers (judges weighing in on the issue), the Government is ahead.  And, in terms of appellate victories (one with no dissents from the liberal 9th Circuit), the Government is ahead.  I am not so bold as to predict the ultimate resolution after these cases bounce around for a while.  I think it depends upon the guts -- perhaps better, gut reactions -- of as yet unknown judges (including perhaps justices) that will hear the cases.

But, if I were picking Judges taxpayer friendly guts on this issue, Judges Hughes and Holderman would be at the top of the list (even before they decided these cases).

For prior blogs on the topics, click the labels below.

NTA Discussion of the Williams Case (1/12/12)

The National Taxpayer Advocate's report discussed in the preceding blog has a component titled Most Litigated Issues: Case Advocacy, Appendices, here.  In that component, the NTA discussed the Williams case (see report at pp 601 - 603).  The discussion is (footnotes omitted):

The National Taxpayer Advocate's report discussed in the preceding blog has a component titled Most Litigated Issues: Case Advocacy, Appendices.  In that component, the NTA discussed the Williams case (see report at pp 601 - 603).  The discussion is a good review for students and practitioners.  The discussion is (footnotes omitted):

In United States v. Williams, the District Court for the Eastern District of Virginia held that the government did not prove that a taxpayer’s failure to report his foreign accounts on a Report of Foreign Bank and Financial Accounts (FBAR) was willful, even though Schedule B of his income tax return indicated that he had no foreign accounts and he acknowledged willfully failing to report income from the accounts on his return.

Mr. Williams, a U.S. citizen and New York University-trained lawyer, pled guilty to tax evasion and criminal conspiracy to defraud the government with respect to more than $7 million in unreported income that he deposited in foreign accounts and more than $800,000  in earnings on those deposits.  in connection with this plea, Mr. Williams admitted that he intentionally failed to report income in an effort to evade income taxes between 1993 and 2000.  Acting on a request from the U.S., the Swiss government froze his accounts in 2000.

National Taxpayer Advocate Report Critical of IRS Implementation of Offshore Voluntary Disclosure Programs (1/12/12)

The National Taxpayer Advocate who has intervened for participants in OVDP and perhaps OVDI as well has issued her annual report to Congress.   The web page with links to components of the report is here.

Among the items discussed are the problems she and her staff perceive with respect to the IRS's implementation of the voluntary disclosure programs for offshore accounts.  Most of her specific angst appears directed to the IRS's "bait and switch" on OVDP 2009 FAQ 35.  Readers of this blog already know of the bait and switch and the NTA's disapproval.  See particularly Tax Notes Discusses Dispute Between the Taxpayer Advocate and the IRS About OVDP 2011 (1/6/12), here.

The NTA's comments in the report are contained in the International Issues section here.  The key portions of the International Issues section that I picked up on quick search are:

Doctor / Medical Professor / UBS Client Sentenced (1/11/12)

Sentencing on 1/11/12, per USAO SDNY Press Release, here.

Taxpayer: Michael Reiss
Bank : UBS AG; two other unidentified Swiss bank, but one is pseudonymed "Swiss Bank No. 1"
Swiss Enabler: Beda Singenberger (see blogs here)
Entities: Yes (sham foundation and apparently sham corporation)
Guilt: By Plea Agreement - False FBAR (1 count)
Sentence: 1 day incarceration; 8 mos. community confinement; 3 years supervised release
Tax Loss: $400,000 (at least)
Restitution (per Guilty Plea): $458,000 +.
FBAR Penalty: $1,217,316 (FBAR penalty; 50% of highest balance for one year).
Court: SD NY
Judge Accepting Plea: Berman, Richard M. (SDNY)

Prior blog entry on guilty plea:  Yet another plea deal for UBS Depositor (8/6/11), here.

BLIPS Tax Shelter Investor Denied Bankruptcy Discharge for Fraudulent Return and Evasion (1/10/12)

In In re Vaughn, 2011 Bankr. LEXIS 5091 (D. CO 2011), here, the taxpayer was denied discharge in bankruptcy for tax arising from his investment in a tax shelter of the BLIPS variety.  As I have noted before, bankruptcy discharge is denied for certain reasons, including in part here pertinent "with respect to which the debtor made a fraudulent return or willfully attempted in any manner to evade or defeat such tax." "11 USC 532(a)(1)(C).  The Court held that the Government proved that this taxpayer flunked that test.

I will provide a summary below, but note first that the holding is interesting because rarely did the Government put in play the issue of taxpayer fraud with respect to the reporting of the BLIPS and similar Helmer inspired shelters, all of which, the Government claimed, were hokey ("too good to be true") and all of which ultimately failed when tested.  Many of the shelters involved in the current Supreme Court brouhaha over the 6 year statute of limitations were basis boost shelters such as these shelters that positioned the taxpayers to argue that income was not omitted so as to trigger the 6 year statute.  But, if fraud were involved with respect to the reporting, then there is no statute of limitations.  Interestingly, the fraud does not even have to be the taxpayer's fraud to trigger the unlimited statute of limitations; it can be the preparer's fraud (Allen v. Commissioner, 128 T.C. 37 (2007)) or, presumably someone else such as a promoter.  But, certainly the taxpayer's fraud -- the type of fraud  involved alleged and found in In re Vaughn -- suffices to trigger the unlimited statute of limitations.  And, of course, fraud gives rise to a 75% civil fraud penalty.  And, of course, as in In re Vaughn, fraud can preclude bankruptcy discharge for a tax liability.  (Although interestingly, the civil fraud penalty can be discharged in bankruptcy.)  So with all of these incentives to the Government to assert fraud against the taxpayer, why  don't we see the issue arise more often.  I don't know the answer to that question, but the dearth of cases is noteworthy.