Carlos Kepke, Indicted Tax Lawyer Allegedly Enabling Large Tax Evasion Offshore Schemes, Dies Just Before Start of Criminal Trial (11/28/22)

I have blogged on the prosecution of Carlos Kepke, a Houston lawyer, who was prosecuted as an enabler of offshore tax evasion for Robert Brockman and Robert F. Smith.  Kepke was set to go to trial in San Francisco on tax crimes charges.  He died over the weekend.  See  David Voreacos & Neil Weinberg, Lawyer Charged in Billionaire Tax Case Dies on Eve of Trial (2) (BloombergLaw 11/28/22), here.

The earlier blogs on the progress of Kepke’s prosecution may be viewed here.  (Note that this link brings up blogs referring to Kepke in relevance order (with most references first), but a link can be clicked to show the blogs in reverse chronological order.)

Like Brockman, Kepke’s death will avoid a criminal trial and possible conviction.  For Brockman, see Brockman, Defendant in Pending Major Tax Crimes Case, Dies (Federal Tax Crimes Blog 8/6/22), here.

I don't know if there are any ancillary proceedings that were instituted (as the jeopardy assessment and related civil tax proceedings in Brockman's situation).  

One issue left hanging in the Kepke criminal case was who was paying his fees in the criminal case which given the quality of his counsel were very large.  See The Kepke (Brockman and Smith Lawyer Enabler) Prosecution - Developments (Federal Tax Crimes 10/27/22), here. My understanding from inferences in the docket entries is that something happened and was placed under seal with respect to those fees, but it did not prevent the criminal trial from proceeding. There could be some income tax consequences  for his estate from the fee arrangement, but I do not have enough facts to try to anticipate that.

In the Brockman and Kepke prosecutions and the Smith NonProsecution Agreement predicate investigation, the Government put enormous resources to try obtain some criminal vindication.  Of course, Smith had to admit his guilt, and, just by hanging on until death, Brockman and Kepke did not have to admit guilt or be convicted.  In this regard, the Bloomberg Law article reports:

“Carlos always maintained that he was innocent of these charges, and we were prepared to prove that at trial,” said Strassberg, who represented Kepke along with Grant Fondo.

Finally, as noted in the article (JAT added the bracketed description):

The passing of Kepke relieves Smith, 59, of the need to testify as the government’s star witness. Prosecutors accused Kepke of helping Smith evade taxes on $225 million he earned from Vista by setting up a trust structure with entities or accounts in Belize, Switzerland, Nevis and the British Virgin Islands. Under an unusual 2020 agreement [NonProsecution Agreement], Smith avoided prosecution for tax crimes.

Readers interested in viewing the docket entries for the Kepke criminal prosecution may do so free at CourtListener, here. Those who are teaching or are students of tax crimes subjects might want to review some of the pleadings leading up to the now discontinued prosecution. Both sides presented outstanding documents in a well-funded case.  So there are some good examples of what a major criminal trial is like.

Tax Attorneys Indicted for Fraudulent Tax Shelter and Related Conduct (11/18/22)

DOJ announced indictments in a press release, here, titled as follows: Tax Attorneys and Insurance Agent Indicted for Promoting and Selling Fraudulent Tax Shelter. The indictment is here (CL).

The charges are

• defraud conspiracy 18 USC 371 (Count One),
• aiding and assisting 7206(2) (Counts Two through Twelve and Eighteen through Twenty-two),
• tax perjury via false tax return 7206(1) (Counts Thirteen through Seventeen), and
• wire fraud 18 USC 1343 (Count Twenty-Three). 

The indictment also alleges a Notice of Forfeiture and Finding of Probable Cause.

The pattern of conduct alleged in the press release as:

According to the indictment, from 2011 to the present Michael Elliott Kohn and Catherine Elizabeth Chollet, both attorneys and residents of St. Louis, Missouri, and David Shane Simmons, a licensed insurance agent and broker based out of Jefferson, North Carolina, conspired to defraud the United States by promoting, marketing, and selling to clients a fraudulent tax scheme known as the Gain Elimination Plan (“GEP”). The defendants allegedly designed the GEP to conceal clients’ income from the IRS by fraudulently inflating business expenses through fictitious royalties and management fees. These fictitious royalties and management fees allegedly were paid, on paper, to a limited partnership largely owned by a charitable organization. In reality, Kohn and Chollet allegedly fabricated the royalties and management fees. In total, the defendants allegedly caused a tax loss to the IRS of tens of millions of dollars.

 The indictment further alleges that Kohn and Simmons engaged in a scheme to defraud an insurance company by providing false information on insurance applications on behalf of their clients. The false information allegedly included fraudulent representations concerning the clients’ financials and the purpose of the insurance policies. In total, Kohn and Simmons allegedly caused the insurance company to issue more than $200 million in insurance policies based on false application information. Simmons allegedly earned large commissions for selling the insurance policies, many of which he split with Kohn and Chollet. Simmons also allegedly filed false personal tax returns by underreporting his business income and inflating his business expenses.

The press release alleges sentencing matters as follows:

District Court holds in Tax Perjury (§ 7206(1)) Case That Defendant Can Introduce Evidence that IRS Failed to Pursue Civilly (11/12/22)

In United States v. Anderson-Trahan (E.D. La. 22-2 Order and Reasons Dkt. # 94 8/22/22), TN here and CL here, in a tax perjury case under § 7206(1), the Court denied the Government’s motion to prevent Anderson-Trahan from “introducing any evidence or argument concerning the fact that Defendant was prosecuted criminally rather than subjected to civil audit or collection activities by the IRS.”  The reasoning and scope of the holding is (footnotes omitted and bold-face supplied by JAT):

            If the Court allows the government to present evidence that Defendant failed to pay her taxes and/or filed her taxes late from 2012–2017, Defendant argues that she should be able to present evidence regarding the fact that she was not subject to civil collection activities by the [*8] IRS. As discussed in detail in the Order and Reasons granting the government’s Rule 404(b) motion, evidence that Defendant failed to pay her taxes and/or filed her taxes late from 2012–2017 is relevant and admissible. The government intends to argue that Defendant’s tax debt motivated her decision to file allegedly fraudulent tax returns to reduce her tax liability. The defense should be allowed to rebut this argument by pointing out that the IRS did not initiate civil audit or collection proceedings. Evidence of the actions the IRS took (or did not take) to enforce the tax liability, and evidence of whether Defendant was aware of any such actions, is probative of what Defendant knew about the tax liability. If, for example, Defendant was not aware of the extent of her tax liability, this would contradict the government’s argument regarding motive. Allowing the government to present evidence of other “bad acts” without allowing Defendant to respond that the IRS did not seek to enforce these obligations would be prejudicial to the defense. Defendant should be allowed to complete the story by showing that the IRS never instituted civil audit or collection activities.

             The government has not shown that the probative value of the evidence is substantially outweighed by a danger of unfair prejudice, confusing the issues, misleading the jury, undue delay, wasting time, or needlessly presenting cumulative evidence. The government argues that allowing this evidence could encourage jury nullification. “Jury nullification refers to the jury’s power to disregard the rules of law and evidence in order to acquit the defendant based upon the jurors’ sympathies, notions of right and wrong, or a desire to send a message on some social issue.” Defendant may not argue that the jury should acquit her because the government should have [*9] pursued civil civil (sic) audit or collection activities rather than prosecuting her criminally. Nevertheless, evidence that the government did not pursue civil audit or collection activities proceedings is relevant to Defendant’s state of mind.

Supreme Court Oral Argument in Bittner Re FBAR NonWillful Penalty Per Account or Per Form (11/3/22)

Yesterday, the Supreme Court held oral argument in Bittner v. United States (No. 20-40597), SC docket here and SCOTUSblog docket here (I offer SCOTUSblog link because the Supreme Court link does not seem to work.)  The link for the typed transcript is here; the link for the audio is here. 

I listened to the audio and thumbed through the transcript.  The oral arguments were outstanding.  The advocates were

Daniel L. Geyser, for Bittner, here.
Matthew Gaurnieri, Assistant to the Solicitor General, DOJ, for the United States

I have posted earlier on the trajectory of Bittner, but the two postings most relevant to the Supreme Court consideration are:

• Supreme Court Grants Cert in Bittner v U.S. On FBAR Nonwillful Penalty Per Form or Per Account Issue (Federal Tax Crimes Blog 6/21/22; 6/22/22), here.
• Amicus Briefs in Supreme Court Bittner Case on Nonwillful FBAR Penalty Per Form or Per Account (Federal Tax Crimes Blog 10/12/22), here.

I offer some snippets (copy and paste) of portions of the transcript related to criminal conduct I found interesting]

[*20]

MR. GEYSER: Yes, Your Honor, it's -it's the same definition of violation, I think, carries throughout the statute, both in 5321 and in 5322, by the way, which is why, in our case, had Petitioner acted willfully in a criminal sense, under the government's reading, he would be exposed to a prison sentence of 1300 years in jail, which seems pretty egregious for what is really a prophylactic paperwork error.

   * * * *

Is It a Variance for the Indictment to Allege Use of Attorney Client Trust Fund for Evasion When the Proof Showed only Attorney Trust Fund? (10/18/22)

In United States v. Hunter (W.D. Ky No. 3:20-cr-86-BJB Order dated 10/20/22), TN here and CL here, the court rejected Hunter’s claim of variance from the indictment because the indictment alleged use of an attorney client trust account to effect the tax evasion, whereas, Hunter claimed, the evidence (his own testimony) was that the account was the firm’s trust account without proof that it was a client trust account.  The court rejected the argument for several reasons because, in any event, as to the essential allegation and proof, Hunter used the trust account, whether client or not, to effect his evasion.

The court’s discussion is good, so I direct readers to Slip Op. pp. 2-7.  I make some points from the discussion to focus readers’ attention:

1. The testifying Revenue Officer explained why the Government does not levy on client trust accounts to collect the attorney’s tax liability.  The assumption is that the funds in an attorney client trust account are client funds.  See Slip Op. 3.)

2. The evidence that Hunter used the trust account, whether client or otherwise, to store personal assets “was substantial.”  (Slip Op. 4.)

3. Hunter was nitpicking (earlier the court said “persnickety”), noting Slip Op. 4 n. 4):

   n4 Hunter’s reply focuses extensively on the nature of so-called “IOLTA” accounts that many members of the Kentucky Bar must use in a manner that bears interest. Reply at 6–8. But the government’s evidence did not turn on the existence or use of an IOLTA account, or whether Hunter had to use one or not. Given that Hunter maintains he used his attorney escrow account for personal rather than client funds, this distinction appears utterly immaterial to whether his escrow account (however labeled or regulated) was used to shield | money from the IRS in a tax-evasion scheme. Given that Hunter maintains he used his attorney escrow account for personal rather than client funds, this distinction appears utterly immaterial to whether his escrow account (however labeled or regulated) was used to shield | money from the IRS in a tax-evasion scheme.

The Kepke (Brockman and Smith Lawyer Enabler) Prosecution - Developments (10/27/22)

Regular readers know that I have posted several times on the criminal prosecution of Carlos E. Kepke, a Houston attorney who was allegedly the enabler for two alleged massive tax evasion (and related crime) tax schemes involving offshore trusts. Readers will recall that Brockman died before his criminal case went to trial, and Smith achieved an NPA requiring him to testify in the Kepke prosecution. By order dated 10/20/22 (CL here), Judge Donato addressed certain pending motions. The ones that I thought might be interesting to readers are: 

For Dkt. No. 61, defendant’s disclosures for expert witness Rodney Read did not adequately state the bases and reasons for his proposed opinion testimony under Fed. R. Crim. P. 16(b)(1)(C). See Dkt. Nos. 61-1, 61-2, 61-3. In lieu of excluding  Read as a witness, and with the government’s agreement, defendant will have an opportunity to disclose by October 28, 2022, the bases and reasons for each of the following opinions:

 • Foreign asset protection trusts and foreign non-grantor trusts are valid and legal trust entities.

• It is not uncommon to establish a trust in a foreign jurisdiction that has a lower income tax rate than the United States in contemplation of potential United States income tax reduction or deferral.

• There are no legal prohibitions against appointing a beneficiary as the trust protector, which may include the power to remove and replace the trustee of a foreign trust. This arrangement does not necessarily affect the non-grantor status of the foreign trust.

• Foreign and domestic trustees alike owe a fiduciary responsibility to beneficiaries to ensure trust assets are being used exclusively for the benefit of a trust’s beneficiaries and acting within the restrictions and limitations set forth in the trust documents.

Court Rejects No Harm (Tax Loss) No Criminal Foul for Defraud Conspiracy in Backdating to Allocate Partnership Losses to New Partners (10/27/22)

 In an Order in United States v. Fisher (N.D. Ga. No. 1:21-cr-231-TCB dkt entry # 311 10/13/22), TN here, the Court denied motions for bills of particulars and to dismiss.  This is all fairly standard stuff in this area, so I write only to point out the portion I found interesting.

The Court addressed (Slip Op. 30-34) Fisher’s claim that the indictment’s conspiracy charge did not allege criminal conduct.  Specifically, Fisher targeted claim in the indictment that “Fisher (and others) backdated partnership documents in order to receive tax deductions for years in which the clients were not in fact partners.”    What caught my attention was this at the beginning of the discussion:

First, Fisher argues that the backdating led to no harm to the Government because the amount of deduction remained the same. In other words, whether ten or twenty partners split $1,000,000 ends in the same result to the Government; therefore, he contends, there is a lack of harm necessary to prove a Klein conspiracy.

Of course, everyone (at least those everyones practicing tax law or white collar crime law) would recognize as suspect on its face (although Fisher and presumably his lawyer(s) did not recognize it).  More importantly for tax crimes geeks, actual pecuniary loss is not required for the conspiracy alleged–to defraud the IRS.  (See Count One of the Superseding Indictment, here.)  All that is required is a conspiracy to interfere with the lawful functioning of the IRS; allocating losses inappropriately can do that. 

Still the rest of the Court’s discussion on this claim might be useful for  students and even some practitioners:

            But as the Government notes, backdating partnership documents does lead to harm. This is because Fisher’s actions “caused clients to file [*31] false tax returns that claimed fraudulent deductions based upon backdated documents.” [276] at 23. The United States Code explicitly criminalizes this behavior in 26 U.S.C. § 7206, which forms the basis for many counts in the indictment. To argue that causing clients to file false tax returns is not a harm for purposes of the conspiracy charge, when the act itself is criminalized, is simply wrong. Accord, e.g., United States v. Daugerdas, 837 F.3d 212 (2d Cir. 2016) (affirming conviction for conspiracy in tax shelter case involving backdated documents).

Amicus Briefs in Supreme Court Bittner Case on Nonwillful FBAR Penalty Per Form or Per Account (10/12/22)

I previously blogged that the Supreme Court granted Bittner's petition for writ of certiorari. Supreme Court Grants Cert in Bittner v U.S. On FBAR Nonwillful Penalty Per Form or Per Account Issue (Federal Tax Crimes Blog 6/21/22; 6/22/22), here. The Supreme Court docket sheet for the case (No. 20-40597) is here, with links to all filings in the case.  (Because for some reason, the Supreme Court docket sheet link does not work all the time, the parallel SCOTUSblog docket sheet is here with appropriate links.)

I write today on the amicus briefs in the case (also linked on the docket sheet). Both parties in the case gave blanket consent to filing amicus briefs on the merits. Here is the breakdown of the amicus briefs:

Amicus briefs in support of Bittner:  National Federation of Independent Business Small Business Legal Center; American College of Tax Counsel (note that the docket entry for this brief says it is filed in support of neither party, but the actual brief says it is in support of Bittner); Center for Taxpayer Rights; and The Chamber of Commerce of the United States of America,.

Amicus brief in support of the United States (IRS): National Whistleblower Center.

Amicus brief in support of Neither Party:  American College of Trust and Estate Counsel.

JAT Comments:

Tax Court Soundly Rejects Taxpayers' Motion to Compel Immunization of Third Party Witnesses (10/3/22)

In Oconee Landing Property, LLC v. Commissioner (T.C. No. 11814-19 Dkt. #229 Order 9/22/22), here (with Dkt entries here), a short order (3 pages), the Court (Judge Lauber) rejected the petitioner's Motion to Compel Immunization of Third-Party Witnesses. The gravamen of the holding is:

            It is well established that this Court lacks jurisdiction to grant criminal immunity to a witness who may be called to testify before the Tax Court. This power resides solely with the U.S. District Courts and only upon the request of the U.S. Attorney for the applicable district. 18 U.S.C. §§6001-6003; see, e.g., Coulter v. Commissioner, 82 T.C. 580, 583 (1984) (finding that “the Tax Court is not authorized to grant immunity” to a taxpayer); Hartman v. Commissioner, 65 T.C. 542, 547 (1975) (denying a taxpayer’s request for immunity “since jurisdiction to take such action is vested exclusively in the United States District Courts, and then only upon application of a United States Attorney”); Reynolds v. Commissioner, T.C. Memo. 1981-364, 42 T.C.M. (CCH) 395, 397 (holding that a taxpayer’s request that we grant him immunity “is spurious since jurisdiction to take such action is vested exclusively in the U.S. District Courts, and then only upon application of a U.S. Attorney”). It is equally well established that this Court lacks jurisdiction to compel the IRS to seek an order of immunity for a witness. See i, 65 T.C. at 547–48; Hershberger v. Commissioner, T.C. Memo. 1979-522 (finding that a taxpayer’s request that the Tax Court order the IRS to grant him transactional immunity was baseless). This Court has no “inherent authority” to confer immunity on a witness. Such discretionary power is statutorily reserved to the Executive Branch and is available to neither the Tax Court nor U.S. district courts (absent an application from a U.S. Attorney). See 18 U.S.C. §§ 6001-6005.

            In support of its position petitioner cites squibs from various cases taken out of context. Virtually all of these cases involve U.S. District Courts acting on the request of a U.S. Attorney. For example, petitioner errs in relying on United States v. [*3] Bahadar, 954 F.2d 821 (2d Cir. 1992). The question there was whether the U.S. District Court for the Eastern District of New York committed error by failing to order the government to immunize a witness and co-conspirator in a criminal drug trial. See id. at 825. Most cases cited by petitioner rely on Government of Virgin Islands v. Smith, 615 F.2d 964 (3d Cir. 1980). That precedent has been rejected by the Eleventh Circuit, to which this case is appealable. See United States v. DiBernardo, 880 F.2d 1216, 1220 (11th Cir. 1989) (ruling that the grant of immunity is strictly an Executive Branch function). Indeed, Government of the Virgin Islands has since been overturned by the Third Circuit, to the extent that it recognized any inherent authority of courts to confer immunity on a witness. United States v. Quinn, 728 F.3d 243, 252– 61 (3d Cir. 2013).

JAT Comments:

Supreme Court Grants Cert to Determine Whether Dual-Purpose Communications Involving Legal and Non-Legal Advice (in Tax Return Preparation Setting) is Protected by Attorney-Client Privilege (10/3/22)

The Supreme Court accepted certiorari in In Re Grand Jury (Sup Ct. No. 21-1397). See docket entries here. The acceptance does not state or refine the issue presented; presumably, the issue presented that the parties will brief is the one in the petition for cert as follows:

            Whether a communication involving both legal and non-legal advice is protected by attorney-client privilege where obtaining or providing legal advice was one of the significant purposes behind the communication.

The Solicitor General in its brief in opposition states the issue slightly differently (with some spin) as follows:

             Whether the district court permissibly denied petitioner’s general claim of attorney-client privilege over communications, related to the preparation of a tax return, that did not have obtaining legal advice as their primary purpose, while instructing that all legal advice contained in the communications be redacted.

 The amended opinion below is In re Grand Jury, 23 F.4th 1088 (9th Cir. 2022), CA9 here and GS here. The Ninth Circuit’s Summary (not included in GS opinion) is:

SUMMARY*
* This summary constitutes no part of the opinion of the court. It has been prepared by court staff for the convenience of the reader.

Grand Jury Subpoenas

            The panel affirmed the district court’s orders holding appellants, a company and a law firm, in contempt for failure to comply with grand jury subpoenas related to a criminal investigation, in a case in which the district court ruled that certain dual-purpose communications were not privileged because the “primary purpose” of the documents was to obtain tax advice, not legal advice.

Brockman Jeopardy Assessment of $1.4+ Billion Sustained (10/2/22)

 On 9/30/22, the district court sustained the IRS’s $1.4+ Billion jeopardy assessment for taxes, fraud penalties, and interest.  United States v. Brockman (S.D. TX No. 4:22-CV-202 Dkt. # 71 Memo Opinion and Order 9/30/22), here (as retrieved from PACER); see also CL Dkt entries here (the pdf does not yet show up on the CL docket entries but should shortly).  The IRS asserted that the assessment “represents the largest jeopardy assessment/levy case in the history of the United States and features tax fraud on an unprecedented” scale.” (internal quotation marks omitted).

I won’t get into the details since the opinion is short (13 pages) and easily readable (with some nice graphics).  The opinion plows no new ground in jeopardy assessment law.  It is noteworthy (if at all) only because of the size of the assessments and the facts leading to the assessments.

I note that FBAR assessments (which certainly have been made or will be made, depending upon the statute of limitations) are not included.  There is no jeopardy assessment authority for FBARs, but the IRS does not need jeopardy assessment authority for FBARs because it can assess the FBAR penalties without predicate requirements for income tax assessments.  Of course, with FBAR assessments, the IRS will not have the substantial collection tools available for tax assessments and will have to proceed by suit to reduce the FBAR assessments to judgment.

I don’t know what type of estate Brockman had at death and the assets the IRS can get through various third-party liability remedies (such as transferee and similar state law remedies, alter ego, etc.), but I speculate that, with the probable size of the FBAR assessments and third-party liabilities, the IRS will be able ultimately to substantially wipe out his net worth (with third-party liabilities).  Of course, he lived large during his lifetime. And his death permitted him to escape criminal responsibility and liability.

This blog entry is cross-posted to my Federal Tax Procedure Blog, here.  For other postings on Brockman on the Federal Tax Crimes Blog, see here.

Government Moves for FBAR Willful Penalty Judgment in Schwarzbaum (9/15/22)

In United States v. Schwarzbaum (S.D. Fla. No. 9:18–CV–81147–BLOOM–REINHART Motion dated 9/15/22), , here, the Government moved “for entry of a second amended judgment” for the willful FBAR penalty.  Readers of this blog will recall that the Schwarzbaum case created much commotion because the Eleventh Circuit held that the IRS calculation of the FBAR willful penalty.  See United States v. Schwarzbaum, 24 F. 4th 1355 (11th Cir. 1/25/22), CA11 here and GS here.  I discuss the Eleventh Circuit opinion in 11th Cir. Remands For IRS To Re-Determine FBAR Penalties After Affirming Original Calculation Was Arbitrary And Capricious (Federal Tax Crimes Blog 1/26/22), here.  The Circuit Court opinion reversing and remanding for the district court to remand to the IRS to recalculate the penalty led to much thrashing around in the district court as Schwarzbaum’s counsel jockeyed the APA remand into foreclosing the FBAR penalty on statute of limitations grounds.  I won’t get further into that but those wanting to go further on that issue might start with District Court Retains Jurisdiction While Arbitrary and Capricious FBAR Willful Penalty Amount is Remanded to IRS for Recalculation (5/18/22), here.

In the motion, the Government advises that, upon the IRS recalculation of the penalty using the statutory June 30 balances in the account that the Eleventh Circuit said was the proper referent (rather than spreading a maximum amount over willful years based on high amount in the accounts) produced a higher penalty than the Government sought in the complaint.  Therefore, the Government asks for judgment only in the amount sought in the complaint, $4,185,271, plus penalties and interest.

The Government's exercise of judgment to ask for the lower amount sought in the complaint may be a strategy to deflect the statute of limitations issue that Schwarzbaum’s counsel have so much noised about.

As expected, the Government motion advised the Court that Schwarzbaum’s counsel opposes the motion.

Tax Court Sustains Accuracy-Related Penalty for Offshore Accounts, Rejecting Taxpayer's QAR, Statute of Limitations, and § 6751(b) Arguments (9/1/22)

This blog will alert readers of a new Tax Court opinion, Lamprecht v. Commissioner, T.C. Memo. 2022-91, involving the accuracy-related penalty for failure to report income from foreign accounts. (The opinion may be retrieved at docket entry 181 from the docket entries, here.) I will set up my discussion from the syllabus for the key points decided (on the value of the syllabus see point 6 at the end of this blog):

            Ps are citizens of Switzerland who lawfully resided in the United States, where P–H worked as an investment consultant managing investments for himself and his clients. Ps filed U.S. income tax returns for 2006 and 2007 which understated their income in both years by omitting income that Ps treated as foreign sourced.

            In 2008 the IRS issued to Swiss Bank a John Doe summons which sought to discover the identities of U.S. taxpayers using foreign entities and Swiss bank accounts to avoid reporting income on their U.S. tax returns.

            In 2010 Ps filed amended returns for 2006 and 2007 on which they reported the previously omitted income. Upon examination of Ps’ 2006 and 2007 returns, R determined an accuracy-related penalty under I.R.C. § 6662 against Ps for each year on the basis of the tax attributable to the income omitted from the original returns, and issued to Ps a notice of deficiency. Ps timely filed a petition to challenge the penalty determinations in the notice of deficiency, arguing (1) that the IRS failed to comply with I.R.C. § 6751(b)(1) requiring written supervisory approval of penalties, (2) that their amended returns for 2006 and 2007 are “qualified amended returns” within the meaning of Treas. Reg. § 1.6664-2(c)(3), [*2] precluding penalty liability, and (3) that assessment of the accuracy-related penalties for 2006 and 2007 is barred by the statute of limitations under I.R.C. § 6501.

            Held: The amended returns are not “qualified amended returns” under Treas. Reg. § 1.6664-2(c)(3)(i)(D) because they were filed after the service of a John Doe summons.

            Held, further, assessment of the accuracy-related penalties is not barred by the statute of limitations under I.R.C. § 6501 because the limitations period was suspended by the service of the John Doe summons pursuant to I.R.C. § 7609(e)(2).

            Held, further, the IRS complied with the written supervisory approval requirement of I.R.C. § 6751(b)(1).

            Held, further, Ps are liable for the I.R.C. § 6662 accuracy-related penalties as determined by R for the 2006 and 2007 years.

FBAR Willful Penalty (with Collection Suit) after OVDP Drop Opt-Out (9/1/22)

The Government filed an FBAR collection suit in United States v. Leeds (Idaho No. 22-cv-00379-BLW), see TaxNotes copy of complaint here.  The defendant “is the surviving spouse of Richard Leeds, named in her capacity as a potential successor-in-interest to the Estate of Richard Leeds “(Estate”) and/or as a potential personal representative or administrator of the Estate and/or distributee of the Estate.”)

The complaint is about what one would expect in an FBAR collection suit, with slight variances in facts.  However, the following caught my attention:

36. In December of 2014 Mr. Leeds applied to participate in the IRS's Offshore Voluntary Disclosure Program and was initially accepted.

* * * *

39. In April 2018 Mr. Leeds opted out of the OVDP and an IRS examination commenced.

The IRS then proposed a willful FBAR penalty, eventually resulting in this collection suit to collect the penalty.

That is all I know about the facts, but I have these questions, with some speculation as to answers:

1. Since Mr. Leeds knew what the OVDP cost would be going into the program, why would he opt out?  I can only speculate that he wanted to get the benefit of the criminal prosecution protection OVDP offered.  Otherwise, going into OVDP knowing the civil cost would be unacceptable makes no sense.

2. In any event, why would someone with his facts (from the complaint) opt-out of OVDP after he had disclosed his behavior by the OVDP filing?  I can’t even speculate about that other than perhaps he had some vague hope that the IRS would drop the ball in his case.  Remember, that if he had a good nonwillful story, he could have made a Streamlined Filing; I assume he entered OVDP because he (or his counsel) thought he did not have a good nonwillful story.

Sixth Circuit Holds Harmless Error to Not Give Correct Jury Instruction on Evasion Statute of Limitations (8/31/22)

In United States v. Pieron (6th Cir. 8/30/22), Unpublished, CA 6 here and GS here. the Court affirmed Pieron’s tax evasion conviction. Although nonprecedential, I think the opinion offers a lesson for practitioners. I, therefore, report on what the Court described (Slip Op. 4) as “Pieron’s more serious argument” that the trial court failed to give a “correctly stated” jury instruction that the jury was required to find an affirmative act of evasion in the six-year limitations period.

The evidence at trial included some acts that could permit the jury to find an affirmative act of evasion. Some of those acts were outside the six-year period; some were within the six-year period. Pieron argued that the trial judge, through the correctly stated proposed instruction, should have focused the jury on the requirement that the jury find an affirmative act in the limitations period. The trial judge refused the correct instruction. The conviction of evasion means that the jury found at least one affirmative act of evasion, but the absence of the correct instruction means that there is no way to determine if the jury found at least one act of evasion in the limitations period. The Sixth Circuit found the error harmless, citing evidence of acts in the record that could have been persuasive to the jury had the trial court properly instructed the jury.

The Fifth Circuit’s analysis is short, one paragraph spanning parts of two pages (Slip Op. 4-5), so I just quote it in its entirety:

            That same conclusion defeats Pieron’s more serious argument, which is that the district court should have instructed the jury that it could convict Pieron only if it found that he committed an evasive act within the five-year limitations period, meaning after January 9, 2012. Most of the actions alleged in the government’s Bill of Particulars took place before that date; Pieron’s proposed instruction correctly stated that, “[t]o be guilty of the crime alleged, the defendant must have committed an affirmative act of tax evasion after January 9, 2012”; and that instruction likely would have focused both the jury’s attention and the parties’ presentations at trial. But we conclude that any error as to the district court’s failure to give the instruction was harmless. See generally Skilling v. United States, 561 U.S. 358, 414 (2010); Fed. R. Crim. P. 52(a). In closing arguments, the government emphasized the 433-F forms that Pieron filed in 2012 and 2014. Those forms, as discussed above, were patently misleading; and Pieron made little effort to persuade the jury otherwise during trial and particularly during his closing argument. True, in closing arguments, the government also emphasized several instances of evasive conduct before January 9, 2012. But we see no reason to think that the jury might have overlooked his 2012 and 2014 433-F forms or otherwise found them non-evasive. Moreover, in the context of the trial record as a whole, the jury had every reason to think that Pieron’s August 2012 Foreign Bank Account Report (in which he claimed a $250,000 maximum balance for a Swiss account that held $750,000 during the relevant year) was evasive as well. The government has shown by a preponderance of evidence that the district court’s decision not to give Pieron’s proposed instruction neither affected nor “substantially swayed” the verdict. See United States v. Kettles, 970 F.3d 637, 643 (6th Cir. 2020). The omission of that instruction therefore does not entitle Pieron to a new trial.

Senate Press Release and Report on Offshore Evasion Through Shell Banks Skirting FATCA (8/28/22)

Senator Wyden led a major Senate Finance Committee investigation that produced a press release and report about use of “shell bank” to avoid the FATCA reporting requirements.  See the press release titled Wyden Investigation Uncovers Major Loophole In Offshore Account Reporting, here, and the report titled The Shell Bank Loophole, here.  The press release offers a good summary of the report (see particularly the “Key Findings” in the press release).

The following are summaries of the key points that readers of this blog may be interested in:

1. The gambit requires that the shell bank be registered with the IRS.  The press release says that establishing a shell bank with foreign accounts that do not get reported to the IRS is simple:

The key steps:

1. Establish a shell company in a FATCA partner jurisdiction, even those in well-known tax haven jurisdictions like Bermuda or the British Virgin Islands.

2. Submit IRS form 8957 to register the shell company as a foreign financial institution and obtain a Global Intermediary Identification Number (GIIN).

3. Open an account at a bank in Switzerland, or other FATCA partner jurisdiction, in the name of the shell company now registered as a financial institution. Use an attorney or other intermediary as the signatory of the account.

4. Invest in private equity firms or other investment vehicles and direct the fund manager to wire proceeds from investment activities in the United States to the shell company’s account in Switzerland or elsewhere.

The results:

•  The Swiss bank is no longer required to report that the account is held by U.S. persons because the account is held in the name of an entity with a valid GIIN number. The Swiss bank is also no longer required to conduct due diligence to determine whether the account has a U.S. nexus.

•  The shell company is now operating as a “shell bank” and can self-certify reporting offshore accounts to IRS for FATCA purposes.

•  In the absence of an audit or other federal investigation, is it highly unlikely the IRS will detect whether these accounts are concealing or underreporting assets held by U.S. persons.

More on Tax Due and Owing and Tax Deficiency (8/28/22)

In United States v. Green, 47 F. 4th 279, 2022 U.S. App. LEXIS 23750 (5th Cir. 8/24/22), CA5 here and GS here, the Court affirmed convictions of (i) John Green (an attorney) and Thomas Selgas for defraud conspiracy and (ii) Selgas for tax evasion.

I don't think there is anything new in the case or that the opinion presents old law in a way that even justifies making the opinion a published opinion.  Of course, the Fifth Circuit standards for publishing an opinion are not particularly high.  See generally Precedential Effect of Published Plurality Appellate Opinion That Majority of Panel Doesn't Accept (Federal Tax Procedure Blog 8/9/22), here (addressing a published Fifth Circuit opinion that 2 members of the panel disagreed with and thus was not precedent).)

There is one item that I have expressed concern about before – describing the "tax due and owing" element for evasion as "tax deficiency." (See Slip Op. 14-18.)  The Green opinion describes the evasion element as "tax deficiency," although the Court says (Slip Op. 14) that it is "also referred to in the caselaw as a 'tax due and owing.'"

I continue to be concerned about use of the term tax deficiency for the tax due and owing element for tax evasion.  I prefer the term "evaded tax" to describe the element, but the common term is "tax due and owing." Rather than recreate the wheel in describing my concern, I quote from my article, John A. Townsend, Tax Evaded in the Federal Tax Crimes Sentencing Process and Beyond, 59 Vill. L. Rev. 599 (2014), here.  In the article, I have a section discussing Tax Liability Concepts in the Criminal Tax Universe (pp. 602-611).  In that section, I discuss Civil Tax Liability and Tax Deficiency (pp. 603-604), The Tax the Taxpayer Intended to Evade - The Criminal Tax Numbers or Figures (pp. 604-606) and the Sentencing Tax Loss (pp. 606-608).  Here is the most relevant portion of the article (pp. 604-608, some footnotes omitted):

2. The Tax the Taxpayer Intended to Evade - The Criminal Tax Numbers or Figures

            I think it helpful to illustrate the concepts in an example. Assume that, for civil tax purposes, the taxpayer had $ 100,000 of income that the taxpayer failed to report and pay. Assume that the tax liability on that omitted income is $ 35,000; that liability is the deficiency. The $ 100,000 omitted income consists of two items - $ 50,000 of embezzlement income which the taxpayer knew was taxable and chose not to report and $ 50,000 of personal injury income that the taxpayer thought or could have reasonably thought was excludable under section 104 but which, for technical reasons, is not properly excludable under that section. In calculating the tax evaded as an element of tax evasion, the Government will compute the tax only on the $ 50,000 of embezzlement income and will not include the $ 50,000 of personal injury income. So, let's say the tax on $ 50,000 of embezzlement income is $ 17,500. The criminal tax number for establishing the evaded tax element in a tax evasion case is $ 17,500 (even though the deficiency is $ 35,000). The Government must prove the evaded tax beyond a reasonable doubt.

Government Files FBAR Collection Suit for FBAR Willful Penalties Aggregating $23,102,381 (Plus Interest and Costs) (8/17/22; 8/18/22)

In United States v. Nadji (D. Colo. Case No. 1:22-cv-02070), CL dkt entries here, the Government filed an FBAR collection complaint on 8/15/22. The complaint is here. The complaint requests (¶ 55, p. 8) judgment

for $23,102,381 in willful FBAR penalties, $2,631,772.60 in accrued and assessed late payment penalties, and $877,257.53 of interest, plus costs of collection, pursuant to 31 U.S.C. § 3717, as  of  August 11, 2022. The United States is entitled to recover $26,611,411.13, plus interest, penalties, and costs accruing from August 11, 2022.

According to the complaint:

1. The amounts are significant.

2. Nadji was born in Iran in 1944. While educated in part in the U.S., he “moved back to the United States and became a naturalized U.S. citizen in 1992.”

3. Nadji was wealthy, deriving his wealth from an Iranian engineering company he owned 100%. Nadji paid no tax on income from the company, either in the U.S. or Iran.

4. He had interests in four foreign bank accounts from 2009 to 2012.  

5. During those years, his U.S. returns were prepared by a tax preparer in Colorado. However, he did not disclose his foreign accounts to the tax preparer.

6. In 2014, he entered the 2014 OVDI, disclosing the four accounts and filing delinquent FBARS for 2008-2012. The complaint has a table listing the amounts Nadji reported on the FBARS for the high balances in each account for the years and aggregating the high balances for each year. 

7. The IRS removed Nadji from OVDI because he disagreed with the final closing package. I infer that his disagreement was, at least in part, with the OVDI penalty amount (which I think was 27.5% for the high year in the covered period). I presume further that he filed delinquent income tax returns and paid the resulting taxes, penalties and interest.