Credit Suisse Banker Pleads Guilty to Conspiracy (7/20/17)

DOJ Tax announced here the guilty plea by Susanne D. Rüegg Meier, a former Credit Suisse AG banker, for conspiracy.  I link the Plea Agreement here, the Statement of Facts here and the docket entries as of today here.  I previously reported on the indictment here:  Criminal Charges for More Swiss Bank Enablers (Federal Tax Crimes Blog 7/21/11), here.  It is unclear where she has been in the meantime, but my spreadsheet indicates (accurately or not) that she was a fugitive, presumably because a Swiss citizen and resident who chose to stay away from the U.S. after the indictment.  There is no indication as to why she returned now

The key parts of the announcement are:

According to the statement of facts and the plea agreement, Susanne D. Rüegg Meier, admitted that from 2002 through 2011, while working as the team head of the Zurich Team of Credit Suisse’s North American desk in Switzerland, she participated in a wide-ranging conspiracy to aid and assist U.S. taxpayers in evading their income taxes by concealing assets and income in secret Swiss bank accounts. Rüegg Meier was responsible for supervising the servicing of accounts involving over 1,000 to 1,500 client relationships. She was also personally responsible for handling the accounts of approximately 140 to 150 clients, about 95 percent of whom were U.S. persons residing primarily in New York, Chicago and Florida, which held assets under management totaling approximately $400 million. Rüegg Meier admitted that the tax loss associated with her criminal conduct was between $3.5 and $9.5 million. 

Rüegg Meier assisted many U.S. clients in utilizing their Credit Suisse accounts to evade their U.S. income taxes and to facilitate concealment of their undeclared financial accounts from the U.S. Department of the Treasury and the Internal Revenue Service (IRS). She took the following steps to assist clients in hiding their Swiss accounts: retaining in Switzerland all mail related to the account; structuring withdrawals in the forms of multiple checks each payable in amounts less than $10,000 that were sent by courier to clients in the United States and arranging for U.S. customers to withdraw cash from their Credit Suisse accounts at Credit Suisse locations outside Switzerland, such as the Bahamas. Moreover, Rüegg Meier admitted that approximately 20 to 30 of her U.S. clients concealed their ownership and control of foreign financial accounts by holding those accounts in the names of nominee tax haven entities or other structures that were frequently created in the form of foreign partnerships, trusts, corporations or foundations. 

Between 2002 and 2008, Rüegg Meier traveled approximately twice per year to the United States to meet with clients. Among other places, Rüegg Meier met clients in the Credit Suisse New York representative office. To prepare for the trips, Rüegg Meier would obtain “travel” account statements that contained no Credit Suisse logos or customer information, as well as business cards that bore no Credit Suisse logos and had an alternative street address for her office, in order to assist her in concealing the nature and purpose of her business. 

After Credit Suisse began closing U.S. customers’ accounts in 2008, Rüegg Meier assisted the clients in keeping their assets concealed. For example, when one U.S. customer was informed that the bank planned to close his account, Rüegg Meier assisted the customer in closing the account by withdrawing approximately $1 million in cash. Rüegg Meier advised the client to find another bank simply by walking along the street in Zurich and locating a bank that would be willing to open an account for the client. The customer placed the cash into a paper bag and exited the bank. Rüegg Meier also recommended that a few U.S. clients open new accounts at other specific banks, such as Bank Frey and Wegelin & Co., and transfer their assets from their Credit Suisse accounts to the new accounts. 

Credit Suisse pleaded guilty in May 2014 for conspiring to aid and assist taxpayers in filing false returns, and was sentenced in November 2014 to pay more than $2 billion in fines and restitution.

JAT comments:

Second Circuit Decision Applying Fifth Amendment to Foreign Compelled Testimony (7/19/17)

The Second Circuit issued an important decision today dealing with the use -- directly or indirectly -- of testimony compelled by a foreign government in a U.S. criminal case.  United States v. Allen, ___ F.3d ___ (2017), here. This is not a tax prosecution, but the holding could apply in all U.S. prosecutions, tax or otherwise, where foreign compelled testimony is used.

The opinion is very long and very good.  The Court's summary of the opinion is:

 This case—the first criminal appeal related to the London Interbank Offered Rate (“LIBOR”) to reach this (or any) Court of Appeals—presents the question, among others, whether testimony given by an individual involuntarily under the legal compulsion of a foreign power may be used against that individual in a criminal case in an American court. As employees in the London office of Coöperatieve Centrale Raiffeisen‐Boerenleenbank B.A. in the 2000s, defendants‐appellants Anthony Allen and Anthony Conti (“Defendants”) played roles in that bank’s LIBOR submission process  during the now‐well‐documented heyday of the rate’s manipulation. Defendants, each a resident and citizen of the United Kingdom, and both of whom had earlier given compelled testimony in that country, were tried and convicted in the United States before the United States District Court for the Southern District of New York (Jed S. Rakoff, Judge) for wire fraud and conspiracy to commit wire fraud and bank fraud.
While this appeal raises a number of substantial issues, we address only the Fifth Amendment issue, and conclude as follows.   

First, the Fifth Amendment’s prohibition on the use of compelled testimony in American criminal proceedings applies even when a foreign sovereign has compelled the testimony.    

Second, when the government makes use of a witness who had substantial exposure to a defendant’s compelled testimony, it is required under Kastigar v. United States, 406 U.S. 441 (1972), to prove, at a minimum, that the witness’s review of the compelled testimony did not shape, alter, or affect the evidence used by the government.   

Third, a bare, generalized denial of taint from a witness who has materially altered his or her testimony after being substantially exposed to a defendant’s compelled testimony is insufficient as a matter of law to sustain the prosecution’s burden of proof. 

Fourth, in this prosecution, Defendants’ compelled testimony was “used” against them, and this impermissible use before the petit and grand juries was not harmless beyond a resonable doubt. 

Accordingly, we REVERSE the judgments of conviction and hereby DISMISS the indictment

Offshore Account Tax and Bank Fraud Conspiracy Sentencing (7/19/17)

USAO MDFL announced here the sentencing of a Florida businessman, Casey Padula, for conspiring to commit tax and bank fraud.  The sentence is 57 months in prison.  I previously reported on the guilty plea here.  The pattern is a familiar one.  Padula conspired with others to divert money from his U.S. business, thus avoiding tax, into foreign accounts.  The foreign accounts were in Belize and were owned by two nominal foreign corporations.  Padula also conspired with with investment advisors Joshua VanDyk and Eric St-Cyr, who helped them establish a numbered account.  In addition to the tax fraud, Padula committed bank fraud along with another who made a sham purchase of his home secured by a mortgage allegedly under water.  For previous posts mentioning VanDyk and St-Cyr, see here.  The co-conspirator on the bank fraud conspiracy was sentenced to five years probation.

There is no indication in the press release about any potential FBAR penalty.

D.C. Circuit Rejects Injunction End-Run by OVDP Taxpayers Seeking Streamlined Procedures Relief (7/14/17)

The DC Circuit Court of Appeals dismissed an attempt by participants in OVDP before the more robust Streamlined Procedures opportunity was announced in 2014.  Maze v. United States, ___ F.3d ___ (D.C. Cir. 2017), here.  They were relegated to the transition relief which, if nonwillful, would have qualified them for transition treatment reducing the miscellaneous offshore penalty ("MOP"), but would not relieve them from the eight years of income tax, penalty and interest on both required by OVDP.  By contrast, the new Streamlined Procedures would have require only 3 years of income tax and interest, with no accuracy related penalties.

I always thought the transition opportunity was unfair to those who got into OVDP rather than waited.  Taxpayers were rewarded for holding out.  But often life is unfair and taxes are not fair.

The plaintiffs in this action thought this was unfair as well and brought suit to compel the IRS to treat them under the Streamlined Procedures.  They ran squarely into the prohibition against injunctions in § 7421(a), often called the Anti-Injunction Act ("AIA").  Basically, the AIA prevents suits in any form which have the effect of enjoining the IRS in its tax enforcement and collection activities.  This particular suit failed for that reason.

I don't know that there is anything else to really say about this, except, if the taxpayers involved in the suit really were nonwillful, they could opt out of OVDP, take the audit and get an appropriate civil cost (tax, penalty and interest) result that way.  All of their income tax years would be subject to the normal statute of limitations (usually three years, with an exception for substantial omission or fraud (with the fraud unlmited statute not apply if they were nonwillful)).

Indeed, the design of the Streamlined Procedures, as I understand it, was to roughly give nonwillful taxpayers the result they could obtain by joining OVDP and opting out.  True, joining OVDP and opting out of the OVDP penalty structure involves commotion not encountered in Streamlined Procedures but, if taxpayers with a good story to tell (which is a requirement for Streamlined Procedures) can tell the good story in the opt out of OVDP penalty structure and achieve, in broad strokes, a more or  less similar result.  (Note there is some fuzziness there.) And, by staying in OVDP and just opting out of the OVDP penalty structure they get some marginal assurance of no criminal prosecution.

This story reminded me about Jesus' parable of the workers.  The taxpayers in Maze got what they bargained for -- the OVDP and the opportunity to opt out if dissatisfied.  So, too, the workers in Jesus' parable which can be read in Matthew 20:1-16, here.  In the parable, it is an equal reward that causes the problem for the early workers as compared to the late workers, but on an hourly basis, the late workers get paid a lot more for waiting than the early workers.  In the Streamlined Procedures, the late joiners get benefits not allowed the early joiners.  But, in both cases, they get what they bargained for.  (Actually, the early OVDP joiners got the benefit of Streamlined MOP by transitioning.)  What is the complaint?  (Having said that, I have already said that I thought excluding people in OVDP from the Streamlined Procedures benefits -- both income tax and MOP -- is unfair for reasons other than that the OVDP participants shut out of Streamlined Procedures did not get the deal -- even better deal -- they accepted in joining OVDP.)

Klein Conspiracy in the NonTax Crimes News (7/13/17)

I don't see the Klein conspiracy raised often in the popular press.  So, I was surprised to see it here.   Spencer Ackerman and Betsy Woodruff, ‘Dopey’ Donald Trump Jr. Just Might Be Saved by His Own Ignorance (DailyBeast 7/11/17), here.  And, Another article taking off the Daily Beast article is TRUE BLUE REPORT: I learned a new term today—Republicons are the KLEIN CONSPIRACY PARTY, here.

I assume most readers are now aware about the news buzz of an additional Russian off-the-radar screen connection for the Trump Administrations -- Donald Trump Jr.'s emails and meeting with a Russian Lawyer allegedly close to the Putin Kremlin.  So, what does the known information mean in the real world.  Well, on its face, perhaps not much in a traditional crimes sense (for the crimes commonly known).  But that is where the broad sweep of the defraud conspiracy under 18 USC § 371 comes in.  The Klein conspiracy is often a shorthand for the defraud conspiracy, but I use the term in a narrower sense to mean the defraud conspiracy related to impairing or impeding the lawful function of the IRS.  Klein was a tax defraud conspiracy case.  United States v. Klein, 247 F.2d 908 (2d Cir. 1957).  For any readers that my be interested in my views on my concerns with the potential scope of the defraud conspiracy in a tax setting and its companion tax obstruction crime, § 7212(a), much in the tax crimes news lately, see:  John A. Townsend, Tax Obstruction Crimes: Is Making the IRS's Job Harder Enough, 9 Hous. Bus. & Tax. L.J. 255, 334-335 (2009)).

At any rate, back to DJT, Jr.  Here is the relevant portion of the Daily Beast article referring to Barbara McQuade, who, until Trump took office, was the U.S. attorney for Eastern Michigan:

McQuade, however, thinks the emails indicate that the younger Trump could be guilty of a so-called “Klein conspiracy,” which makes it a crime to “defraud the United States.” 

“It doesn’t have to any monetary value,” McQuade said. “It could be defrauding the U.S. government in honest elections.” 

But then comes another twist. The younger Trump would have to “knowingly and wilfully violate” a known legal duty, and “his lawyer will say he had no idea” the intended transaction – which Donald Trump Junior thus far denies actually occurred – was illegal. In this case, Mariotti said, ignorance of the law can be an excuse.

This Klein conspiracy and the tax obstruction counterpart has been much addressed on this blog and in my article linked above.  The Government's imagination -- at least claims -- about the defraud conspiracy is that it is broader than the tax crimes requiring willfulness -- specific intent to violate a known legal duty, the Cheek test of willfulness.  All the defendant has to do, in the Government narrative, is to impair or impede the lawful function of the Government agency.  And the list of things that can do that -- thus criminalized -- is virtually anything the  mind can imagine that would have a likely effect of ever so slightly impairing a Government agency in whatever it is doing within the scope of its responsibility.

Focusing on the DJT, Jr., episode as reported in the credible press I read -- DJT, Sr. would say the fake press -- does not clearly indicate that the emails in question and the meeting in question would rise to the level of a defraud conspiracy.  But we know only part of the story.  And, if there were any agreement among the Trump affiliated persons attending or aware of the meeting to keep it quiet from relevant Government agencies (say FBI and the agencies vetting the security clearances of the attendees), well, there we have the elements of the defraud conspiracy.

But, the saving grace in terms of ultimately knowing what happened and its legality is that we have a cop on the beat -- Mueller who has integrity and determination to get to the bottom and prosecute those who may have violated the law.  Let's trust the integrity of the process.

In the meantime, I do have concerns about the defraud / Klein conspiracy as I note in  my article and its solo companion, tax obstruction under § 7212(a), that the Supreme Court will address in the case it accepted for certiorari in Marinello.  We all just need to stay tuned.

Bench Trial Convictions on Offshore Business Insurance Scams (7/13/17)

Duane Crithfield and Stephen Donaldson, Sr., promoters of a bogus insurance tax evasion scheme commonly referred to as BPP, have been convicted after a bench trial in Florida.  I attach here the order of the judge's Foreword, Findings of Fact and Conclusions of Law.

I have previously written on this prosecution in Two Tax Crimes Cases on Plea Rejections After Previously Accepted (Federal Tax Crimes Blog 6/10/16), here.  That describes a detour in the case as the parties dispute the components of the tax loss based on the guilty plea to one count.  The defendants' lawyers apparently did not understand the notion of relevant conduct, which includes all relevant conduct whether from a convicted count or not.  So the plea was rejected and the parties went to trial.

I will not get into the details of the scam they promoted, because the judge lays all of that out in the order.  I do think it helpful to for flavor to offer the judge's Foreword:

FOREWORD

The United States accuses two men, along with several unindicted conspirators, of hatching and implementing a plot to convert into an intoxicating profit for themselves the aspirations of their high-income customers to protect that high income from federal taxation. So far as the evidence shows, the taxpayers in this venture were mostly honest, educated, and experienced professionals and entrepreneurs, who retained lawyers, accountants, and other skilled advisers to ensure both the effectiveness and the lawfulness of the taxpayers’ management of money. Consistent with the considered judgment of their advisers, these taxpayers purchased at a steep cost a set of fantastical and superfluous “insurance” policies and in return re-captured control of cash equal to about 85% of the premium paid for each policy. In other words, the taxpayers accepted the notion that they could reduce the effective, maximum, marginal-income tax rate from about 40% to about 15% by signing a few papers and moving money from here to there, from there to who knows where, and then back again. 

That these mostly honest, educated, and experienced taxpayers and their savvy advisers believed in, and committed money to, this criminal scam presents an irrefutable and deafening reminder of the extent of the public’s cynicism toward the federal income tax code — a bloated and opaque monstrosity. In other words, as the present episode evidences, almost no financial scheme is so suspicious or so implausible that a good salesman cannot convince an honest and vigilant taxpayer that the Internal Revenue Service is prepared to award tax relief to a participant. But for the adulteration of the public’s regard for the Internal Revenue Code, the charged crime might have been impractical for the compelling reason that no fair-minded and honorable person would have thought for a moment that the scheme would succeed.  

Apparently, when the subject under consideration is the federal income tax code, no enormity is unthinkable and no promise is unutterable.

JAT Comments:

1.  From my prior blog linked above, it appears clear the defendants through their counsel made, in hindsight, a bad call to spat about whether relevant conduct is included in the Guidelines tax loss calculation.  The Guidelines loss for all relevant counts of conviction is not provided, but the maximum sentence for the counts of conviction is 11 years -- 5 years for conspiracy and 6 years for aiding and assisting (two counts for 3 year felonies).  My sense is that the tax loss including relevant conduct may be pretty high and will likely exceed three years, so that the sentencing exposure almost surely will exceed the maximum three years they could have achieved under the negotiated plea.  But, the defendants and their lawyers chose to assert -- inadvisedly, against the clear law -- that relevant conduct could not be included in the Guidelines calculation.  (Students and practitioners should note that this the inclusion of unconvicted relevant conduct is the reason the Government will sometimes agree to drop counts in a plea bargain.)

On Conflicts, Certiorari and Marinello (7/1/17)

I posted a blog entry Tuesday on the Supreme Court’s grant of the petition for writ of certiorari in  United States v. Marinello, 839 F.3d 209, 218 (2d Cir. 2016).  See Supreme Court Grants Certiorari in Marinello Involving Whether § 7212(a)'s Omnibus Clause Requires Knowledge of Pending Investigation (6/27/17), here.

I thought some readers might want some more discussion of intercircuit conflicts as a basis for certiorari.  From my personal observation standpoint (originally with DOJ Tax Appellate Section and then in the Trial Section and thereafter in private practice and as an academic on tax crimes keenly interested in Supreme Court practice), an intercircuit conflict is, as noted in the article below, the "best predictor of Supreme Court review."  The immediate context is, of course, the conflict between the Second Circuit in Marinello and the Sixth Circuit in  United States v. Kassouf, 144 F.3d 952 (1998).  The other Circuits deciding the issue have sided with the reasoning of the Second Circuit in Marinello and rejected the reasoning in Kassouf.  Kassouf is a lone-wolf holding. Since Kassouf was decided in 1998, the Sixth Circuit has narrowed its apparent scope but has not reversed it or cast serious doubt other than what might be inferred from its narrowing of Kassouf, to join with the other Circuits deciding the issue.  So, at this time, on this issue, the law in the Sixth Circuit is different than in the other Circuits that have addressed the issue.

Often, when the consensus of other Circuits moves against a holding in one Circuit, the outlier Circuit will reverse course, thereby assuring uniformity among the Circuits and avoiding the need for the Supreme Court to resolve the conflict.  The process of allowing other Circuits to speak to the issue (referred to in the excerpts below as “percolating”) allows the issue to be fully vetted by the time the Supreme Court does have to resolve by certiorari if the conflict persists.  But the Sixth Circuit has had several opportunities to reverse course or at least indicate disapproval or concern with the Kassouf holding and, while narrowing the potential scope of Kassouf, has declined to reverse course.

Here is what the Government said on that issue in opposing certiorari by holding out the possibility that the Sixth Circuit itself will fix the problem:

The court of appeals’ decision is consistent with the interpretation of Section 7212(a) adopted by most other courts of appeals and does not conflict with any decision of this Court. Although the Sixth Circuit reached a different conclusion in United States v. Kassouf, 144 F.3d 952 (1998), that court has vacillated in its approach to Section 7212(a) over the years and has not yet had an appropriate opportunity to reconsider Kassouf ’s holding in an en banc proceeding. This  Court has repeatedly denied other petitions raising the same issue. Nothing supports a different result in this case. 

Well, nothing except the persistence of the Sixth Circuit decision as an outlier so that the law is different in the Sixth Circuit than in the other Circuits.  (And perhaps a side note, the Government could have forced the issue by bringing an indictment on the same basis it indicts in other Circuits, which the district court would dismiss on the authority of Kassouf, the Government could appeal, the panel on appeal would affirm dismissal on the authority of Kassouf, and the Government could then ask for en banc review, whereupon the Sixth Circuit could resolve the conflict by overturning Kassouf or, if the Sixth Circuit persisted by denying en banc review or, on en banc review, affirming its holding in Kassouf, asking the Supreme Court to resolve the then clearly persistent conflict; there might be some prudential reasons to avoid bringing a single count indictment like that, so perhaps it a really bad-actor case could be chosen with several counts, which would slow down the issue getting to the Sixth Circuit.)

I thought readers who are interested might benefit from this recent scholarly article analyzing a significant original dataset of Circuit Court conflicts and the issue of whether and when Supreme Court review to resolve the conflicts is appropriate.

Deborah Beim and Kelly Rader, Evolution of Conflict in the Federal Circuit Courts (Yale University 3/19/15), here.  Here are some excerpts (footnotes omitted):

Supreme Court Grants Certiorari in Marinello Involving Whether § 7212(a)'s Omnibus Clause Requires Knowledge of Pending Investigation (6/27/17)

By order dated 6/27/17, here, the Supreme Court granted certiorari in Marinello v. United States (Sup. Ct. Dkt. No. 16-1144).   The panel opinion of the Second Circuit is United States v. Marinello, 839 F.3d 209 (2d Cir. 2016), here (official) and here (Casetext).  The denial of petition for rehearing en banc is here.  (Note  that the denial of petition for rehearing en banc has a great dissent by Judge Jacobs (see my blog entry below).)

• The petition is here.  The petition states the issue as:

Section 7212(a) of the Internal Revenue Code includes the following provision:

Whoever corruptly or by force … endeavors to intimidate or impede any officer … of the United States acting in an official capacity under this title, or in any other way corruptly or by force … endeavors to obstruct or impede[] the due administration of this title, shall, upon conviction thereof, be fined not more than $5,000, or imprisoned not more than 3 years, or both . . . . 

26 U.S.C. § 7212(a) (emphasis added). 

The question presented is whether § 7212(a)’s residual clause, italicized above, requires that there was a pending IRS action or proceeding, such as an investigation or audit, of which the defendant was aware when he engaged in the purportedly obstructive conduct

• The Government's Brief in Opposition is here.  The Government states the issue as:

Whether a conviction under 26 U.S.C. 7212(a) for corruptly endeavoring to obstruct or impede the due administration of the tax laws requires proof that the defendant acted with knowledge of a pending Internal Revenue Service action.

• The petitioner's reply is here.

• The Amicus Brief of the American College of Tax Counsel in favor of granting the petition is here.
• The Amicus Brief for the Cause of Action Institute and the NACDL is here.

• The docket entries are here.
• The Scotusblog page for the case (with docket entries) is here.

My previous blogs on Marinello or prominently mentioning Marinello are:

• Second Circuit Rejects Aberrational Sixth Circuit Opinion in Kassouf on Requirements for § 7212(a) Tax Obstruction (Federal Tax Crimes Blog 10/15/16), here.
• Great Second Circuit Dissent on Potential Overreach in Tax Obstruction (Federal Tax Crimes Blog 2/28/17), here.
• Fifth Circuit Joins Majority Decisions that § 7212(a) Requires No Pending Investigation (Federal Tax Crimes Blog 5/28/17), here.

JAT Comments:

1.  Although there is a circuit split, the one case creating the split -- Kassouf in the Sixth Circuit -- has been so narrowed by subsequent cases in the Sixth Circuit that I am a bit surprised the Court would take the case.  Nevertheless, although narrowing Kassouf, the Sixth Circuit has not overturned it, thereby causing the split to linger.

2.  Given the limited number of tax cases accepted for certiorari, this probably does not bode well for Daugerdas' Petition.  See Daugerdas Grasps for the Supreme Court (Federal Tax Crimes Blog 6/26/17), here.

3.  I am not sure that a Government loss would do anything other than encourage it to charge the pattern affected as a defraud / Klein conspiracy.  See Court Rejects Dismissal of Superseding Indictment and Defraud Conspiracy Count As Substitute for Dismissed Tax Obstruction Count (Federal Tax Crimes Blog 4/13/17), here.  The CTM used to say that tax obstruction under § 7212(a) was a one-person defraud / Klein conspiracy.  For most significant tax crimes, there will be at least one person close enough to be a co-conspirator, since only a slight connection is required.  See Ninth Circuit Affirmance in Tax Convictions; Comments on Slight Evidence Formulation (Federal Tax Crimes Blog 6/20/17), here.  This calls to mind Judge Easterbrook's famous lament that "prosecutors seem to have conspiracy on their word processors as Count I; rare is the case omitting such a charge."  United States v . Reynolds, 919 F.2d 435, 439 (7th Cir. 1990).  Another sound-bite from  Judge Learned Hand:  conspiracy is "the darling of the modern prosecutor's nursery."  Harrison v. United States, 7 F.2d 259, 263 (2d Cir. 1925).  And, even where a conspiracy cannot be charged because there really is a lone-wolf actor, almost invariably there will be an investigation of some sort in most of the cases that have been charged as tax obstruction.  So, only a smaller subset of cases will be affected, and undoubtedly some other charge can be made -- for example, evasion with the obstructive acts being treated as affirmative acts of evasion.

Requirements for the Reasonable Cause to Avoid the FBAR Nonwillful Penalty (6/26/17)

The statutory text for the nonwillful penalty says that the penalty does not apply if the violation "was due to reasonable cause" (reasonable cause prong) and "the amount of the transaction or the balance in the account at the time of the transaction was properly reported" (reporting prong)  31 U.S.C. § 5321(a)(5)(B)(ii), here.  In the case of a failure to report (either no FBAR filed or an FBAR filed with the account omitted), the failure to report or report properly is, of course, the act that causes the filer/non-filer to be at risk for the penalty in the first place.  Surely, if that means that proper FBAR reporting in the first instance, the issue of the nonwillful penalty never arises and a supposed reasonable cause escape is meaningless.  What does this mean?

Prior to November 2015, the IRM sensibly provided that meaning with respect to failure to file the FBAR as follows: "This means that the examiner must receive the delinquent FBARs from the non-filer in order to avoid application of the non-willfulness penalty.” IRM 4.26, 16.4.4.2 (07-01-2008), Non-Willfulness Penalty.  Basically, as stated, this permitted a delinquent filing of the FBAR during the audit that might lead to the penalty, then permitting the reasonable cause defense if it applied.

This specific language has been eliminated from the IRM by changes made in November 2015.  The IRM currently says for the reporting component that “The person files any delinquent FBARs and properly reports the previously unreported account.”  IRM 4.26.16.6.4 (11-06-2015), Penalty for Nonwillful FBAR Violations, here.  Like the statute, the description of the reporting prong is not as clear as it should be.  Does it mean that the person must file delinquent FBARs and, on those delinquent FBARs properly report the previously unreported account?  The use of present tense verbs might suggest that.  If that is what it means, the change to the IRM would not appear to be material and the taxpayer perfects his right to claim reasonable cause by filing delinquent FBARs.  However, the statutory text uses past tense for the reporting prong -- that the amount "was properly reported."  The Government now takes the position that the "reporting prong" requires the taxpayer to have made the U.S. aware of the account by proper reporting of the account on Form 1040 (citing legislative history to that effect).  See Jarnagin v. United States (Fed. Cl. No. 15-1534 T).  (The Government does note, in the alternative, that, even if filing a delinquent FBAR reporting the account(s) could alone solve the problem, the Jarnagans have not done so; I will not speculate as to the reason for this failure which would best situate their reasonable cause defense.)  The reply brief in the case was filed June 16, 2017, so presumably when the decision on the parties' cross-motions is rendered, we will have more learning on this issue and perhaps even more questions.

In the meantime, I offer the following:

• U.S. Motion for Summary Judgment, here.
• Jarnagin's Answer and Cross-Motion, here.
• U.S. Reply and Answer to Cross-Motion, here.
• Docket Entries as of today, here.

Daugerdas Grasps for the Supreme Court (6/26/17)

Paul Daugerdas, a prominent topic of this blog since he was the king of bullshit tax shelters, was convicted and his conviction affirmed on appeal.  I reported on the much of his trial and appeal.  The blogs mentioning Daugerdas are here and the blog on the appeal is Daugerdas Conviction and Sentencing Affirmed by Second Circuit Court of Appeals (Federal Tax Crimes Blog 9/21/16), here.

On 3/20/17 Daugerdas filed a petition for writ of certiorari.  The petition for the writ is here.  According to the docket entries, here:

Mar 20 2017 Petition for a writ of certiorari filed. (Response due April 21, 2017)
Mar 31 2017 Waiver of right of respondent United States to respond filed.
Apr 5 2017 DISTRIBUTED for Conference of April 21, 2017.
Apr 17 2017 Response Requested . (Due May 17, 2017)
* * * *
Jun 23 2017 Brief of respondent United States in opposition filed.

The Government's brief in opposition is here.

Now, what to make of all this?  The starting point is the issue presented.

Daugerdas prefaces his statement of the issue with a summary of facts apparently believed necessary to understand the issue.  The Government does not agree with some of the nuances in the facts, so just keep that in mind.  So, I cut and paste the preface and the issue Daugerdas presents:

Petitioner Paul Daugerdas, a tax attorney, was tried by a jury for a “scheme to defraud” and obstruct the Internal Revenue Service (“IRS”) for the design, marketing and implementation of fraudulent financial tax shelters. At trial and during summations, the government presented two separate “schemes”: the first alleged that Daugerdas intentionally orchestrated a massive tax shelter fraud causing losses in excess of $1.6 billion by advising hundreds of clients to report tax losses based on financial transactions that lacked “economic substance”; the second scheme alleged that he conspired with other members of his law firm to intentionally backdate financial transactions on three or four client tax returns to fraudulently reduce their taxes owed, causing losses of approximately $2.2 million. During summations, the government urged the jury to convict Daugerdas of conspiracy, mail fraud, obstruction and relevant tax evasion counts based on the $2.2 million scheme. The jury agreed, acquitting him on six other tax evasion counts unrelated to the $2.2 million scheme. The government then asked the district court to sentence Daugerdas based on the greater $1.6 billion tax shelter scheme. As a result, the district court sentenced him to 180 months, as opposed to the 41–51 month Guidelines range for the backdating scheme, despite the government’s contrary argument to the jury and the jury’s ultimate verdict. 

The question presented is: 

Whether Petitioner’s sentence violated his rights under the Sixth Amendment and the Due Process Clause of the Fifth Amendment when a judge imposed a sentence based on an alleged greater “offense” than the government urged the jury to convict at trial, and after the jury convicted based on the lesser “offense” presented to them during the government’s summation?

In its brief in opposition, the Government goes straight to the issue (without engaging on predicate facts or even believing a statement of facts is necessary to the issue as it presents the issue):

Whether petitioner’s sentence was substantively unreasonable on the ground that the district court imposed a sentence based on judicial fact-finding regarding conduct of which petitioner was acquitted by the jury.

Basically, the issue is whether conduct in counts for which the jury acquitted can be considered in the tax loss calculation (or can be considered at all) in sentencing.  I thought that issue was long since settled and not particularly controversial which, I presume, is why the Government initially waived its right to respond.

Interested readers of this blog can pore over the submissions as their time and interests permit.  I just make the following quick comments about the Government's brief (after far less than a detailed study):

Ninth Circuit Affirmance in Tax Convictions; Comments on Slight Evidence Formulation (6/20/17)

In United States v. Rodrigues, 2017 U.S. App. LEXIS 10556 (9th Cir. 2017) (unpublished), here, the Ninth Circuit affirmed Rodriguez's "convictions for (1) conspiracy to defraud the United States by impairing and impeding the Internal Revenue Service ("IRS"), in violation of 18 U.S.C. § 371; (2) mail fraud, in violation of 18 U.S.C. § 1341; and (3) aiding in the preparation of materially false income tax returns, in violation of 26 U.S.C. § 7206(2)."  Rodrigues' scam was National
Audit Defense Network's sale of Tax Break 2000.  The opinion is short and fairly straight-forward.

I address only one issue.  The Court said:

2. Although Rodrigues does not dispute that NADN's sale of Tax Break constituted a conspiracy to defraud the United States, he argues that the government failed to meet its burden of proving that he became a member of this conspiracy. "Once the existence of a conspiracy is established, evidence establishing beyond a reasonable doubt a connection of a defendant with the conspiracy, even though the connection is slight, is sufficient to convict him with knowing participation." United States v. Lane, 765 F.2d 1376, 1381 (9th Cir. 1985).

The highlighted sentence reminded me of the now discredited formulation of what is known as the "slight evidence" rule.  Here is a problematic example:  "Once a  conspiracy  is established, even slight evidence connecting a defendant to the  conspiracy  may be sufficient to prove the defendant's involvement." United States v. Pullman, 187 F.3d 816, 820 (8th Cir. 1999); see also United States v. Wright, 215 F.3d 1020, 1028 (9th Cir. 2000).  The proper statement of the rule would include the requirement included in the 9th Circuit quote that the defendant's connection be proved beyond a reasonable doubt.   In  other words, the connection may even be marginal or not central, but the connection and the conspiracy still must be proved beyond a reasonable doubt.  See The "Slight Evidence" and Similar Formulations for Connection to a Conspiracy (Federal Tax Crimes Blog 2/19/11), here.

I note that the current version of the DOJ CTM says (23.05[2] Proof of Membership, here):

Although the government must prove that a defendant was a member of a conspiracy, this requirement may be satisfied by a showing of even a "slight connection" to the conspiracy, so long as the connection is proven beyond a reasonable doubt. [citations omitted]

Submissions in Advance of Sentencing for Former Tax Court Judge Kroupa (6/20/17; 6/22/17)

I provide an update that Kroupa received a sentence of 34 months and her husband received a sentence of 24 months.  See here.  I will have more comment in a new blog when I have examined the underlying documents and more reports.  The USAO press release is here; the summary from the press release is:

DIANE L. KROUPA, 61

Minnetonka, Minn.

Convicted:Conspiracy to Defraud the United States, 1 count Sentenced:34 months in prisonThree years of supervised release$457,104 joint restitution

ROBERT E. FACKLER, 63
Minnetonka, Minn.

Convicted:Obstruction of an IRS audit, 1 count Sentenced:24 months in prisonOne year of supervised release$457,104 joint restitution

At the Procedurally Taxing Blog, Keith Fogg has a very good update on the sentencing process for former U.S. Tax Court Judge Diane Kroupa.  Sentencing Fight in Former Judge Kroupa’s Criminal Case (Procedurally Taxing Blog 6/20/17), here.  As I read the docket entries, here, the sentencing is set for June 22, 2017 at 10 am.  Keith provides links to the Government submission, here , and to Kroupa's submission,here.  I will  post again when I get information about the sentencing.

JAT comments:

1.  Kroupa's submission calculates the Guidelines range at 30 to 37 months based on the following:

Ms. Kroupa pled guilty to conspiracy to defraud the United States beginning in or before 2004 and continuing at least through in or about 2012, in violation of 18 U.S.C. § 371. Pursuant to the plea agreement, the base offense level is 18. A 2-level increase applies for abuse of position of public trust. An additional 2-level increase applies for obstruction to justice. The Government recommends a 3-level reduction for acceptance of responsibility. Based on the total offense level of 19 and a criminal history category of I, the guideline range of imprisonment is 30 to 37 months. Ms. Kroupa asks the Court to vary from the Sentencing Guidelines for a sentence of 20 months.

2.  The Government defers recommending a sentence until it has reviewed Kroupa's submissions.  The docket entries do not reflect that the Government has yet made its recommendation.

3.  As one would expect, Kroupa's submission plays up the factors that could cause a sentencing judge to make a variance.  There is considerable discussion of a long history of psychological and emotional issues.  This is, of course, standard fare in appealing to the considerable variance discretion that a sentencing judge has under 18 USC § 3553(a) and United States v. Booker, 543 U.S. 220  (2005).  Some other interesting points in the submission are:

On June 14, 2014, she retired as a Tax Court Judge due to a permanent disability. Attached are her letter and the letter of Dr. Pak supporting her resignation due to a permanent disability. All this took place after the search warrants were executed and it became apparent Ms. Kroupa was a target of the criminal investigation. This understandably caused extreme and additional stress. It exacerbated her long-standing psychological and emotional issues for which she has sought treatment.

* * * *

Tax Court Denies Claim in Offshore Account Case with Very Unusual Facts Because the Information Did Not Produce Collected Proceeds (6/16/17)

In Awad v. Commissioner, T.C. Memo 2017-108, here, a whistleblower case, the following is the key time line:

Date	Event
11/18/2008	Awad files WB claim (Form 211) identifying husband and wife (TH and TW, respectively) and their three adult children as owners of undisclosed foreign bank account.
2/?/2009	WBO assigns to LB&I
	LB&I Agent reviews returns and decides to accept as filed based on insufficient information
8/?/2009	TH dies.
1/?/2010	TW and children file "voluntary disclosures pertaining to a previously undisclosed account at the same foreign bank" Awad had disclosed.to WBO
??/??/2010	SB/SE opens exam incident to voluntary disclosure
7/?/2010	LB&I returns the case to WBO (although a year after LB&I made decision not to pursue)
9/?/2010	WBO discovers SB/SE exam and forwards information to SB/SE for possible use in examination
??/??/2010	SB/SE Agent interviews Awad by telephone; Awad provides additional information
??/??/2010	SB/SE advises WBO that the information did not assist in the audit
8/??/2011	IRS enters closing agreement on the voluntary disclosure requiring tax, penalties (including MOP) in excess of $2M for TW and estate
9/??/2013	WBO learns of estate tax exam for TPH and refers information to SB/SE Estate and Gift Tax
1/28/2014	WBO denies award.

There are some significant, scantily explained, time lapses in the foregoing, but they are not relevant to the outcome because the examining agents involved in LB&I and SB/SE all attested that the Form 211 information did not contribute to the ultimate outcome -- the acceptance of the TH Estate and TW's voluntary disclosure.  After all, for collection, the information does have to contribute to collected proceeds to permit a WB award.

The thing that is curious to me is that there were no procedures to flag the matter when the WBO first assigned it to LB&I so that, after that date, the taxpayers could not qualify for voluntary disclosure.  It is true that the procedure assumes disqualification only after the IRS has flagged the taxpayer for audit.  (I have had one client thus disqualified even though the IRS had never notified him of the audit.)  I understand that LB&I had not yet decided to audit, but it seems to me that there should be some way to disqualify once WBO decides the information has sufficient gravitas to refer to Examination, at least while it is in that status.  Just my view.

Court Dismisses Government Complaint for FBAR Willful Penalty with Leave to Amend for Failure to Allege Facts Supporting Willfulness (6/12/17; 6/26/17)

UPDATE 6/26/17:  On 6/23/17, DOJ Tax filed an amended complaint, here.  I have not studied the complaint in detail, but my quick review suggests that it does address the judge's concerns or confusions.  Note particularly that civil tax cases for the years involved were resolved with the taxpayer agreeing to the civil fraud penalty with the base including, in part, earnings on the offshore accounts.  While this may not be preclusive on the issue of FBAR willfulness, it is certainly not neutral.

We have this unusual order dismissing the Government case seeking to reduce the FBAR assessment to judgment in United States v. Pomerantz (6/8/17 WD WA 2:16cv00689), here.  The Complaint in the case is here; the docket entries as of today are here.  The judge dismissed with leave to amend because the Government failed to plead facts from which a fair inference could be drawn that the defendant acted willfully in failing to file the FBAR.  The Court also denied Pomerantz' motion to dismiss for improper venue and his motion to transfer the case to the District of Columbia.  The latter holdings are unexceptional.  However, under the notice pleading environment, it would be the rare case that would be dismissed for failure to state a claim, so I will just provide excerpts from the opinion on that issue.

The FBAR willful penalty requires, well, willfulness.  If the Government wants a judgment for the willful penalty, the Government must allege and prove that the defendant acted willfully.  The Government did allege willfulness but ---

[I]n order to state a claim to reduce a civil penalty to a judgment, the Government must allege sufficient facts to support a reasonable inference that (1) the government assessed a civil penalty, and (2) the penalty was valid. To adequately allege that the penalty was valid, the Government must allege facts supporting each element of the underlying penalty. 

* * * *  

The Government alleges that Mr. Pomerantz’s failure to timely file FBAR Forms “was willful within the meaning of 31 U.S.C. § 5321(a)(5),” implying that Mr. Pomerantz had either constructive or actual knowledge of the reporting duty. (Id. ¶¶ 23, 37, 45.) However, these allegations are precisely the “threadbare recitals of the elements of a cause of action, supported by mere conclusory statements” that are insufficient to state a claim. Iqbal, 556 U.S. 662, 678, (2009) (citing Twombly, 550 U.S. at 555). They do not plausibly support the inference that Mr. Pomerantz knew of the reporting duty. Instead, the Government must allege sufficient facts to plausibly support the inference that Mr. Pomerantz knew—actually or  constructively—of the reporting requirement. United States v. Williams, 489 F. App’x 655, 659 (4th Cir. 2012). 

i. Actual Knowledge 

Actual knowledge of the duty to report may be inferred from a course of conduct that demonstrates a conscious attempt to conceal the failure to report. See United States v. Sturman, 951 F.2d 1466, 1476 (6th Cir. 1991) (citing Spies v. United States, 317 U.S. 492, 499 (1943)). The Government alleges that the company Mr. Pomerantz used to open the Swiss accounts—Chafford Limited—“conducted no active business, but was a shell entity used to hold and manage [Mr.] Pomerantz’ personal investments.” (Compl. ¶¶ 6-7.) 

Similar allegations, combined with the taxpayer’s failure to pursue knowledge of further reporting requirements, sufficiently supported a finding of “willfulness” in Sturman. See 951 F.2d at 1476-77. The court can plausibly infer an intent to evade the foreign bank account reporting requirement based on the creation of foreign bank accounts in the name of a shell company. See id. Thus, with regard to the Chafford Limited Accounts, the Government has adequately pleaded facts supporting the inference that Mr. Pomerantz knew of his duty to report. 

However, Mr. Pomerantz opened the CIBC Accounts in his own name. (Compl. ¶ 5.) The accounts were opened prior to January 1, 2001, well before the allegedly “duplicitous” actions occurred. (Id.) The Government makes no allegations that Mr. Pomerantz took steps to conceal or mislead sources of income by opening the CIBC Accounts, and since the accounts were created well before the allegedly “duplicitous” actions occurred, the court cannot infer a confiscatory intent with regard to the CIBC Accounts. (See id.) The court declines to infer from Mr. Pomerantz’s creation of the Chafford Limited Accounts knowledge of the duty to file FBAR Forms for the CIBC Accounts. The Government has not provided the court with any authority in which a court inferred from obfuscating conduct with no connection to a particular account an intent to evade a reporting obligation for that account, and the court finds such an inference implausible. (See generally Resp.) Thus, with regard to the CIBC Accounts, the Government makes only speculative and conclusory allegations regarding Mr. Pomerantz’s actual knowledge. 

ii. Constructive Knowledge 

Knowledge of the duty to report may be actual or constructive. Williams, 489 F. App’x at 659. Taxpayers who are willfully ignorant of the reporting requirement are treated as if they knew of the requirement, under the theory of constructive knowledge. Id. The Government alleges that Mr. Pomerantz “failed to report income deposited into, and/or received from, the foreign accounts.” (Compl. ¶¶ 22, 36, 44.) The Government argues that the court can reasonably infer from this allegation that Mr. Pomerantz was willfully ignorant of the FBAR reporting obligation. (Resp. at 4.) 

However, the cases the Government cites in support of this argument have found “willful ignorance” of the FBAR reporting duty because the government showed that the taxpayer was on inquiry notice of the duty due to specific language on a Schedule B tax form, which directs filers to the FBAR filing instructions and requirements. See
Williams, 2010 WL 3473311, at *4 (imputing knowledge of the FBAR reporting requirement to a taxpayer who completed a Schedule B form); McBride, 908 F. Supp. 2d
at 1197-98 (same); Sturman, 951 F.2d at 1476 (imputing knowledge of the FBAR reporting requirement to a taxpayer who was “aware of” the Schedule B form’s contents). 

Here, in contrast, the Government does not allege that Mr. Pomerantz filled out a Schedule B Form or was otherwise aware of its contents and instructions regarding the FBAR reporting requirement. (See generally Compl.) Nor has the Government alleged any other basis to infer willful ignorance. (Id.) Accordingly, the court cannot reasonably infer that Mr. Pomerantz was willfully ignorant of the FBAR duty to report. 

Based on the foregoing analysis, the court concludes that the Government fails to sufficiently plead that any failure of the duty to report with regard to the CIBC Accounts was willful. The court cannot disaggregate the amount of the penalty that resulted from the failure to report the CIBC accounts from the failure to report the Chafford Limited Accounts. Because the CIBC Accounts were part of the basis for levying each of the penalties that the Government seeks to reduce to judgment, the court accordingly dismisses the entire complaint as to all three penalties. (Compl. ¶¶ 24, 46, 48.)

JAT Comments:

Prepared Testimony of Acting Assistant Attorney General to House Judiciary Subcommittee (6/11/17)

I offer the prepared testimony of David A. Hubbert Acting Assistant Attorney General, DOJ Tax, before the House Judiciary Committee Subcommittee on Regulatory Reform, Commercial & Antitrust Law at a Hearing on Oversight of the Tax Division, here.  The video of the hearing is here.  The minute marks for Hubbert's comments are:  1:08:53 - 1:13:21 (reading from opening statement) and 1:27:00 - 1:28:08  (on SIRF), a light day.

EXCERPTS RELATED TO DOJ TAX'S CRIMINAL TAX ENFORCEMENT

To help achieve uniformity in nationwide standards for criminal tax prosecutions, the Division’s criminal prosecutors are broken into three geographic sections and authorize almost all grand jury investigations and prosecutions involving violations of the internal revenue laws nationwide. The Division authorizes between 1,300 and 1,600 criminal tax investigations annually. These crimes are prosecuted by Division attorneys or Assistant U.S. Attorneys, either working alone or in partnership with Division attorneys, after determining that there is a reasonable probability of conviction based on the existence of sufficient admissible evidence to prove all of the elements of the offense charged. Our Criminal Appeals and Tax Enforcement Policy Section handles all appeals from cases assigned to Division prosecutors, as well as selected cases assigned to the Offices of the U.S. Attorneys. 

Criminal Investigation and Prosecution

Criminal Trial. In addition to our extensive civil practice, the Division authorizes all prosecutions arising under the federal tax laws except for excise taxes and criminal disclosure violations. The Division’s criminal enforcement goals are to prosecute criminal tax violations and to promote uniform nationwide criminal tax enforcement. In many cases, the Division receives requests from the IRS to prosecute violations after the IRS has completed an administrative investigation. In other cases, the IRS asks the Division to authorize grand jury investigations to determine whether prosecutable tax crimes have occurred. Division prosecutors review, analyze, and evaluate referrals to ensure that uniform standards of prosecution are applied to taxpayers across the country. In the past few years, the Division has authorized between 1,300 and 1,600 criminal tax investigations and prosecutions each year. After tax charges are authorized, cases are handled by a U.S. Attorney’s Office, by a Division prosecutor, or by a team of prosecutors from both offices. Division prosecutors also conduct training for IRS criminal investigators and Assistant U.S. Attorneys, and provide advice to other federal law enforcement personnel, such as the Drug Enforcement Administration and the FBI. 

The crimes investigated and prosecuted by the Division include attempts to evade tax, willful failure to file returns, and submission of false returns, as well as other conduct designed to violate federal tax laws. The crimes may be committed by individuals, business entities, or tax preparers and professionals. These cases often encompass tax crimes where the source of the individual or business income is earned through legitimate means – as examples, a restaurateur who skims cash receipts; a self-employed individual who hides taxable income or inflates deductions; or a corporation that maintains two sets of books, one reporting its true gross receipts and the other – used for tax purposes – showing lower amounts. Prosecutions in these cases often receive substantial attention in the local and national media, and convictions remind law-abiding citizens who pay their taxes that those who cheat will be punished.
It is also not uncommon for tax crimes to be committed during the course of other criminal conduct, such as securities fraud, bank fraud, identity theft, bankruptcy fraud, heath care fraud, organized crime, public corruption, mortgage fraud, and narcotics trafficking. Division prosecutors work closely with the U.S. Attorneys’ Offices on these issues. 

As tax crimes have become more complex and international in scope, so has the workload of Division prosecutors. Division prosecutors investigate and prosecute domestic tax crimes involving international conduct, such as the illegal use of offshore trusts and foreign bank accounts used to conceal taxable income and evade taxes. In addition to the traditional cases involving unreported legal source income, over the last several years a greater proportion of our cases involve high net-worth taxpayers and tax professionals who sell and implement dubious tax schemes. For FY16, Division prosecutors obtained 131 indictments and 145 convictions (not including the additional criminal tax prosecutions handled exclusively by U.S. Attorneys’ Offices). The conviction rate for cases brought by Division prosecutors generally exceeds 95 percent.
Criminal Appeals. The Division’s Criminal Appeals and Tax Enforcement Policy Section (CATEPS) handles appeals in criminal tax cases prosecuted by Division prosecutors, as well as some appeals from criminal tax cases handled by U.S. Attorneys’ Offices. The appellate-level review provided by CATEPS attorneys plays a vital role in promoting the fair, correct, and uniform enforcement of federal tax law. CATEPS is also charged with developing criminal tax enforcement policy and provides technical guidance on issues, including the sentencing guidelines and restitution in tax cases. CATEPS’s international team serves as a resource to Division attorneys and IRS agents on international matters arising in civil and criminal cases and provides information and technical expertise on matters involving international tax information agreements and treaties. 

It is apparent from this brief overview that Division attorneys are involved in every facet of federal tax enforcement. I would like to take a moment to highlight six areas of enforcement that are among our highest enforcement priorities – abusive tax shelters, abusive promotions, offshore tax evasion, employment tax enforcement, stolen identity refund fraud, and tax defiers. 

Abusive Tax Shelters

On Chevron and Lenity (6/6/17; 6/7/17)

Note:  I made a mistake in the text toward the end of this blog.  The mistake involved Regs. 1.6662-3(b)(2).  On 6/7/17, I corrected the mistake on 6/7/17 by revising the blog below and the the linked full text with footnotes.  Apologies to readers.

I am in the process of revising my Federal Tax Procedure Book in  anticipation of the next edition in August 2017.  I have spent inordinate amounts of time on Chevron and the APA.  In the process, I added one section dealing with lenity and Chevron.  I thought I would post that section here because the text (absent the footnotes) is relatively short and on topic for the Federal Tax Crimes Blog.  For those who can't live without footnotes (or question whether I can support the statements in the text), I offer the text with footnotes here.

By way of introduction, Chevron and its progeny hold that agency regulations adopting a reasonable interpretation of ambiguous statutory text will control, even if the interpretation is not the only reasonable interpretation or even the best reasonable interpretation.  That is a greatly simplified statement of the rule, but it should work for this posting.  The application of Chevron is usually viewed as adopting requiring two steps.  I offer the following from the text of the book (without the footnotes):

• The First Step – often called Step One – inquires whether the meaning of the statute is unambiguous?  (Other synonyms for unambiguous used in this First Step are plain and clear; one does not get past Step One if the text is unambiguous, is plain or is clear; I will generally use the word unambiguous but readers should be alert to the synonyms plain and clear used by other authors, some of whom I quote.)  If so, the regulation is irrelevant because the unambiguous meaning of the statute itself pre-empts the interpretive field.  A regulation inconsistent with the unambiguous meaning is invalid.
• The Second Step – often called Step Two – reached only if the text is determined to be ambiguous in Step One is whether the agency interpretation is unreasonable? Under this Second Step reached if the text is ambiguous, the agency’s interpretation in the regulations is given deference so long as it is not arbitrary, capricious or manifestly contrary to the statute it seeks to interpret (I generally just truncate this litany to “unreasonable”; so that, in Step Two, deference is given if the agency interpretation is reasonable and is not given if the agency interpretation is unreasonable.). In other words, the agency may choose between or among reasonable interpretations within the scope of the statutory ambiguity (sometimes referred to as the Chevron space). Some have argued that, in practice, the Chevron two-step inquiry is often conflated into a single inquiry – deference is given if the regulation is reasonable without first doing the Step One drill; but, at least in my observation, Courts will pay homage to Step One before determining reasonableness which is the Step Two inquiry.  This Step Two reasonableness analysis appears to be the same or at least coextensive with the APA requirement that the agency have engaged in reasoned decision-making so as to avoid being characterized as arbitrary and capricious, an inquiry short-handed to State Farm named for the leading case.

I would appreciate comments from readers, particularly challenging what I say or offering corrections to substance, presentation or syntax.  You can offer such comments either by comment here or by email to me (jack@tjtaxlaw.com).

Here is the text without footnotes:

(8) Chevron, the Rule of Lenity and Criminal and Civil Penalties.

“The rule of lenity requires ambiguous criminal laws to be interpreted in favor of the defendants subjected to them.”  This sounds like a Chevron Step One inquiry for criminal laws, albeit through another interpretive technique.  Lenity requires that the ambiguous statute be interpreted in the defendant’s favor;  Chevron, if applicable, would require that the ambiguous criminal statute must be interpreted as the agency interprets it in regulations unless the interpretation is unreasonable.  Now, I think that everyone would agree that the agency cannot interpret an ambiguous criminal statute in a way adverse to a criminal defendant.  Lenity trumps Chevron.  For example, in the tax area, the IRS could not by a regulation interpret the willfulness element of tax crimes different from the definition developed by the Supreme Court – intent to violate a known legal duty. Thus, it appears that, in tax crimes requiring willfulness or some equivalent of willfulness, the rule of lenity, if it applied, and the willfulness element fully or substantially overlap to assure that a defendant cannot be convicted if the criminal statute is ambiguous.

The finer question is whether an agency could, by regulation interpret a substantive provision that it administers which could then cause a violation of a criminal statute.  Focusing on that crimes with a willfulness element, if the substantive law is not clear (i.e., ambiguous), the taxpayer cannot have intended to violate that law and thus cannot be guilty of a crime requiring willfulness – intent to violate a known and knowable legal duty.  For that reason, the Government only prosecutes where the substantive legal duty allegedly violated is clear (unambiguous).  Here too, the rule of lenity and the criminal tax willfulness element of intent to violate a known and knowable legal duty overlap and assure ambiguous substantive tax provisions are not the basis for criminal prosecution.  The question then is whether facially ambiguous statutory text can be made unambiguous by an agency regulation entitled to Chevron deference and thus form the basis for a criminal tax prosecution which requires intent to violate a known and knowable legal duty.  For example, the IRS can adopt a regulation interpreting a substantive tax provision, such as § 162 for trade or business expenses, and that interpretation will be entitled to Chevron deference within the Chevron space.  If the regulations’ interpretation resolving the statutory ambiguity is entitled to Chevron deference, does that interpretation then set the legal duty that could give rise to a tax willfulness crime if the taxpayer intentionally violates the law as thus interpreted?  I think the answer to that question is yes, but doubt that the interpretive choice even if applicable retroactively for civil tax purposes would be retroactive for criminal tax purposes.  There are many permutations of this issue that I have just not thought through yet, but this should give a sense of the issues involved.

The Whistleblower Behind Caterpillar Tax Commotion (6/2/17)

I wrote before on the execution of a search warrant on Catepillar' Headquarters.  Search Warrant Executed Against Caterpillar HQ, Apparently Related to Tax (Federal Tax Crimes Blog 3/6/17; 3/8/17), here.  I concluded that discussion with the following speculation:

I will raise one possibility, though, and I caution that this is entirely speculation.  I wonder whether her report could have been submitted along with a whistleblower claim?  I have no idea, but given the numbers involved, a whistleblower claim is likely to be very lucrative indeed.  But, I certainly have no idea whether that is the case.

Bloomberg reports that a whistleblower claim is behind the Caterpillar commotion.  Bryan Gurley, David Voraceos and Joe Deaux, The Whistleblower Behind Caterpillar's Massive Tax Headache Could Make $600 Million (BloombergBusinessweek 6/1/17), here.

The article identifies the whistleblower as Daniel Schlicksup, a Caterpillar accountant, and summarizes his saga from company curmudgeon trying to get the attention of superiors on the matter to finally whistleblower.  A very good read.

Schlicksup's journey is consistent with my experience with whistleblowers or persons considering becoming whistleblowers.  All too often the company is just not interested in listening before the problems get out of hand.  The wizards in the company buttressed by their outside professional enablers will not listen to naysayers, and often the internal mechanisms to elevate problems can be thwarted by power structures in the firm.  That is not the way it is supposed to work, particularly for public companies, but unfortunately that is the way it sometimes works.

Now, for a brief review of the tax whistleblower possibilities.  Section 7623(b), here, allows whistleblower awards of from 15% to 30% of collected proceeds from the whistleblower information.  In this case, the collected proceeds would include the tax, the interest on the tax, any penalty (either 20% or 40% accuracy related penalty under § 6662, here, or the 75% civil fraud penalty under § 6663) and interest on the penalty, here).  The article says that the underlying tax bill may be $2 billion and apparently derives a $600 million potential reward based on the maximum award of 30% of that amount.  Of course, the amount of the reward between 15% and 30% is discretionary (although subject to review by the Tax Court), but my experience suggests that an award in this case would probably be at least 22.5% (splitting the difference for a rough and ready solution).  And, of course, if the $2 billion amount does not include interest or penalties, then the reward base would be increased.  In any event, assuming the same $2 billion base, even a 15% reward of $300 million would be sweet.

For more discussion of the whistleblower reward program, see Michael Saltzman and Leslie Book, IRS Practice and Procedure, ¶ 12.05[4][a][iv] Informants (including whistleblowers seeking rewards) (Thomsen Reuters 2015) (online edition).  (Note, I am the principal author of that Chapter of the Saltzman and Book text).

Yet Another Offshore Account Conviction But With DOJ Agreement of No Sophisticated Means (5/29/17; 5/31/17)

DOJ Tax announced Friday here the guilty plea of Joyce Meads of College Station, TX.  Meads was charged in SD FL.  Meads pled to one count of the Klein / defraud conspiracy, a five-year felony.  I link the following document:  docket entries as of today here; the guilty plea here. and the Stipulated Facts here. Notice from the docket sheet that she was charged by information and that she waived indictment, which use indicate a plea agreement in the making.

The key items in the plea agreement are

1. Tax Loss:  Between $250,000 and $550,000.

2.  Sophisticated Means:  "[T]he defendant's efforts to defraud the United States did not involve sophisticated means' within the meaning of the Sentencing Guidelines."  (See my comment below.)

3.  No other factors that would increase the offense level.  Of course, she will get the acceptance of responsibility adjustment (2 or 3 level downward adjustment).

On the basis of the foregoing, my rough and ready calculation of the offense level is 15 with an indicated sentencing range of 18-24 months.  Based on the same calculation, if the sophisticated means adjustment were to apply, the offense level would be 15 with an indicated sentencing range of 24-30 months.

Key items in the stipulated facts, which are pretty much bare bones, are:

1. From 1997 to 2010, Meads "conspired with co-conspirators Marc Harris, Boyce Richard Griffin, and others to defraud the United States."  I will provide some additional information Harris and Griffin at the end of this blog.  One of the others is a person identified as "C.M." with Harris' entity, The Harris Organization in Panama City, Panama.

2. Meads sought to avoid tax on her income from U.S. oil royalties she had recently received from her parents as a gift and would receive as a gift.

3. Harris and the Harris Organization set up entities to implement the offshore structure.  The entities included a Delaware corporation and a Panama corporation.  Meads transferred her royalty interest to the Delaware corporation and he parents transferred to remaining interest to the Delaware corporation.  The royalty income apparently flowed through the Delaware corporation and then out to the Panama corporation.  In 1998, she caused the Panama corporation to distribute $25,000 to her disguised as a scholarship.

4.  In 1999, Meads shifted the operation from the Harris Organization to Griffin's Offshore Management Alliance Ltd., which, like the Harris Organization, assisted U.S. persons seeking to avoid U.S. tax.  Apparently, incident to that shift, Meads caused the royalty payor (Chesapeake Energy) to forward royalty checks to a private post box in Miami.  The royalty checks were forwarded by to Panama where Griffin deposited them in a Panamanian bank account for Meads' benefit.

5.  Meads failed to report the income on her 1997-2009 1040s and, as a result, filed false tax returns.

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