Saturday, April 1, 2023

Update on Wartime Suspension of Limitations Act ("WSLA"), 18 USC 3287, and Tax Crimes (4/1/23)

Caveat: Although authored and published on 4/1/23, this blog is not an April Fool's Joke.

I have written before about the Wartime Suspension of Limitations Act (“WSLA”), 18 USC 3287, here, that suspends certain criminal statutes of limitations while “the United States is at war or Congress has enacted a specific authorization for the use of the Armed Forces, as described in section 5(b) of the War Powers Resolution (50 U.S.C. 1544(b)).” The statutes of limitations are suspended in relevant part for crimes “(1) involving fraud or attempted fraud against the United States or any agency thereof in any manner, whether by conspiracy or not.” My blogs on this subject discussing the potential application of this WSLA suspension for tax crimes are collected by relevance here and reverse chronological order here. In those blogs, I have noted that the WSLA’s literal application to certain tax crimes involving “fraud” would mean that the WSLA could have a pervasive effect permitting the charging of tax crimes far before the normal suspensions often encountered for tax crimes. See also, Michael Saltzman & Leslie Book, IRS Practice and Procedure, ¶ 12.05[9][a][iii] Suspension and tolling (discussing normal suspensions and discussing § 3287 at n. 933); and John A. Townsend, Federal Tax Procedure (2022 Practitioner Ed.) 317-387 (August 3, 2022). Available at SSRN:

1. The purpose of this blog supplement those discussions until the next revisions of those respective books (note that I am the principal author of the Saltzman and Book chapter). Since I have already brought the discussion up to date in the 2023 working draft for the Federal Tax Procedure Book (2023 Practitioner Ed.), I will just offer the following from the 2023 draft (which should be finalized by early August 2023).The last sentence in the carryover paragraph will be changed to and a footnote added as follows (note that I link the blog entries and key case entries in this blog but will not link them in the book):

This provision [WSLA] might apply to the Iraqi and Afghanistan engagements, but its application to tax crimes with elements of fraud or attempted fraud is notable only because of the many cases in which it could have been applied but is rarely, very rarely, asserted where statute of limitations defenses are asserted. fn

Wednesday, March 29, 2023

Houston Lawyer Closes the Criminal Case by One Count Plea (3/29/23)

I have written before on the prosecution, conviction, appeal and remand in United States v. Pursley (S.D. Tx – No. 18-cr-00575). See blogs here sorted by relevance and here sorted by date. Pursley, a Houston lawyer, was originally convicted of one count of conspiracy and three counts of tax evasion. The Fifth Circuit remanded for retrial on the original counts based on errors not related to guilt or innocence of the original counts. Yesterday, Pursley pled guilty to one count of conspiracy. The DOJ Tax press release is here. The plea agreement is here; the docket entries are here. (Note, according to the Texas State Bar site, here, as of today, Pursley has an “interlocutory suspension entered 11/16/20.)

The plea agreement is pursuant to FRCrP 11(c)(1)(A) and (C), here. The key feature of that type plea is described in the Plea at p.5 ¶ 8:

If the Court accepts this Plea Agreement, this sentencing provision is binding on the Court. Pursuant to Federal Rule of Criminal Procedure 11(c)(5), if the Court rejects this Plea Agreement, Defendant will be allowed to withdraw his guilty plea. If Defendant declines to withdraw his guilty plea, the disposition of the case may be less favorable than that contemplated by the Plea Agreement.

 I will discuss this type of plea at the end of this blog, but I first discuss some terms of this plea that I feel are a bit unusual.

1. Many plea agreements have a more or less standard paragraph saying that the IRS can assess more tax liability (including penalties and interest) beyond restitution. So, for example, in a tax evasion case related to willful understatements of tax liability on a return, restitution normally covers the tax loss (also sometimes called the criminal number) related to the evasion. Sometimes the civil number is larger (never less than the criminal number but sometimes more). Moreover, and more importantly, restitution can only cover the criminal tax number related to the Count of Conviction and sometimes interest on the criminal number. Restitution usually does not include the civil tax number if larger or, more importantly, the civil fraud penalty under § 6663. The reason is that the taxpayer attempts to evade the underreported tax, and not the civil fraud penalty, which would not be in the criminal number/tax loss determined by what he should have reported on the returns. And that is why plea agreements involving return tax evasion (as here, although presented in a conspiracy conviction) normally have a paragraph permitting additional assessments through the IRS normal assessment procedures (notice of deficiency, et al.). The most obvious additional assessment would be the civil fraud penalty, § 6663. There could conceivably also be some civil tax liability that was not included in the criminal number and thus not included in restitution, but the civil fraud penalty potential would remain after sentencing, at least normally. Two provisions of the CTM suggest that plea agreements should, if anything related to the civil fraud penalty, include agreement to the penalty but certainly should not  foreclose IRS post-sentencing assertion of the civil fraud penalty. DOJ CTM 6-4.360 - Compromise of Criminal Liability/Civil Settlement, here; and DOJ CTM 5.01[7] Compromise of Criminal Liability/Civil Settlement, here.

Thursday, March 9, 2023

TIGTA Recommendation for Legislation Consideration to Make Failure to File a 2-Year Felony (3/9/23)

TIGTA released a report titled The IRS Has Not Adequately Prioritized Federal Civilian Employee Nonfilers (TIGTA Rept No. 2023-30-011 3/6/23), here. The report discusses that category of nonfilers and the Federal Employee/Retiree Delinquency Initiative (FERDI) started in 1993. The report criticizes the IRS for its low compliance enforcement. Of course, most IRS compliance initiatives are weaker than they could be because of resource constraints. But TIGTA urges the IRS to focus more on that program.

TIGTA makes a number of recommendations based on its findings. One of the recommendations, a recommendation to consider legislation, sweeps broader than Federal Employee noncompliance and would have a major effect on tax crimes generally (particularly IRS charging recommendations and DOJ Tax charging decisions). The recommendation is (Recommendation 5, p. 14):

The IRS Commissioner should:

Recommendation 5: Share this report and recommendation with the Treasury Department Office of Tax Policy to consider a legislative proposal to amend IRC § 7203 by replacing “misdemeanor” with “felony,” and additionally, by replacing the time for potential imprisonment from “one year” to “two years,” thereby making willful nonfiling a felony. Management’s Response: IRS management agreed with this recommendation. The IRS will share TIGTA’s report and this specific recommendation with the Treasury Department Office of Tax Policy. The IRS does not formally propose legislation.

As I understand the proposal, it would not change the current elements of the failure to file crime, which already requires willfulness. It would change only the maximum incarceration period to make the crime a two-year felony.

I have no idea how much traction that recommendation will get within the IRS and the Office of Tax Policy and ultimately in Congress. But if it were to gain traction, I think it will materially affect the criminal tax arena from both the charging side (DOJ Tax and IRS) and the defense side.

Monday, March 6, 2023

Paul Manafort "Settles" His FBAR Civil Willful Penalty Case in Full (3/6/23)

I report today on Paul Manafort’s “settlement” of his FBAR civil willful liability. I had earlier decided not to report on the “settlement” because the only noteworthiness was that the penalty was imposed on Paul Manafort, a person of some public notoriety resulting in the FBAR “settlement” achieving some public press. E.g., Azi Paybarah and  Devlin Barrett , Paul Manafort agrees to pay $3.15 million to settle with Justice Dept. (WAPO 3/5/23), here.

 The number is large, but there have been large FBAR civil willful penalties that were more or less routine, which I have not deemed worthy of posting to the blog. Why do I post now?

I do so because of the press about the "settlement." As I read the motion to enter this “settlement,” it was not a settlement in the way I think of settlements with mutual concessions. The Joint Motion for Entry of Consent Judgment and Notice of Settlement, here, says “As part of the settlement, Mr. Manafort has consented to an entry of judgment in full in this case, with interest accruing.”

Note, for some reason, the link to the Joint Motion seemed to be spotty in working. Readers can retrieve the document from Court Listener service for the docket entries at docket number 29 here,

I suppose that there may have been some costs that the Government gave up. And, I suppose, that it Manafort committed misconduct to hide assets or some other form of obstruction, the “settlement” might include the Government foregoing any further investigation or prosecution of that.  

JAT Comments:

Tuesday, February 28, 2023

Supreme Court Holds in Bittner that FBAR Nonwillful Penalties are Per Form Rather Than Per Account (2/28/23; 3/5/23)

In Bittner v. United States, 598 U. S. ____ (2/28/2023), here, the Court held that the best interpretation of the nonwillful FBAR penalty is that it applies per form rather than per unreported account. The nonwillful penalty is in 31 U. S. C. §§5321(a)(5)(A) and (B)(i). Five Justices (Gorsuch, the author of the Court opinion, joined by Justices Jackson, Roberts, Alito, and Kavanaugh, so held. Justice Gorsuch included in the opinion a section on the application of lenity (referred to as II-C), in which only Justice Jackson, joined. The opinion of the Court joined by 4 Justices addresses only the interpretation of the nonwillful penalty provision and not Justice Gorsuch’s lenity discussion.

Four Justices dissented—Justices Barret (writing the dissenting opinion) joined by Justices Thomas, Sotomayor, and Kagan and would have held that the best interpretation of the nonwillful penalty was per account rather than per form.

The holding that the nonwillful penalty is per form rather than per account is a significant holding for all with multiple foreign reporting accounts potentially subject to nonwillful penalties. Beyond deciding that issue—per form vs. per account—the opinions merely interpret the statute. I see nothing of systemic value beyond the resolution of the bare issue of per form or per account that is of ongoing importance.  (It is interesting to note that avowed textualists came down on both sides of the issue.)

This is the type of case where it is important to deal with conflicts among the Circuits and, like the doctrine of stare decisis, "because in most matters it is more important that the applicable rule of law be settled than that it be settled right." Burnet v. Coronado Oil & Gas Co., 285 US 393, 406 (1932) (Brandeis dissenting in a tax case). I am mostly agnostic as to the "right" answer to the question of per form or per account. I think I could have credibly argued it both ways. Still, if I were the decider, I think I would have gone with per form rather than per account. My point here, though, is that it is good to have a settled answer.

As a bit of an aside, I note the part of Justice Gorsuch’s opinion—II-C—relating to lenity that attracted only one other Justice and hence is not part of the opinion of the Court. I am reminded of Justice Gorsuch's famous rant in his concurring opinion describing Chevron “elephant in the room” diatribe while on the Tenth Circuit in Gutierrez-Brizuela v. Lynch, 834 F.3d 1142, 1149 (10th Cir. 2016), here. Then Judge Gorsuch wrote the opinion of the panel but then authored a separate concurring opinion with which the other Judges did not agree.

Monday, February 6, 2023

Interesting Motion to Dismiss Government FBAR Willful Penalty Collection Suit (2/6/23)

In United States v. Lisenby (N.D. Ga. Case number 1:22-cv-04579), CL docket entries here, on November 17, 2021, the Government sued Lisenby for recovery of FBAR willful penalties for multiple years. (Dkt entry 1.) On January 31, 2023, Lisenby responded with a motion to dismiss. (Dkt entry 9, here.)  I write here about the memorandum in support of the motion to dismiss.

The memorandum seems to provide a well-written summary of the Government’s claims. The motion to dismiss makes the following claims:

1. The original FBAR assessments were based on the method of calculation that the 11th Circuit rejected in United States v.  Schwarzbaum, 24 F.4th 1355 (11th Cir. 2022). As explained in the motion (p. 6):

The Government alleges that at some unspecified time following the Eleventh Circuit’s decision in United States v. Schwarzbaum, 24 F.4th 1355 (11th Cir. 2022), the IRS determined it would sua sponte recalculate the penalties assessed against Mr. Lisenby based upon that decision. (Compl. ¶ 61). Despite determining that the Government’s initial assessment was not in compliance with the law (Compl. ¶¶ 61-62), the Government has not alleged that it ever reassessed Mr. Lisenby or gave him an opportunity to pay based upon what it now asserts is the correct assessment.

The motion makes further arguments based on that claim (pp. 7-8). My sense is that the best that can come from this claim is to put Lisenby in the position of Schwarzbaum that, once having made an invalid assessment, the statute has expired on making a recalculated assessment. I think that, while that may be a good argument in Schwarzbaum on its current appeal, the 11th Circuit is unlikely to accept it because it will certainly know that it screwed up the original Schwarzbaum opinion that they did not realize would give Schwarzbaum an opportunity to escape the penalty. Two mistakes may do rough justice. I have no idea what the court will do in the Lisenby case.

2. The motion claims (pp. 9-11) that, in any event, the assessments (original or recalculated) are out of time. Lisenby’s argument is that the Government's reliance on consents/waivers to extend the time for assessment are invalid because key consents/waivers were signed at some point after the statute of limitations had expired. Lisenby seeks to morph the clear statutory text of § 6501(c)(4) requiring that consents for tax purposes be signed while the statute is still open. The problem Lisenby must overcome is that there is no such statute applicable to the FBAR penalties, so the general rule applies that waivers to statute of limitations defenses can be made at any time. See Court Rejects Government Summary Judgment Motion in FBAR Willful Penalty Collection Suit (Federal 8/28/19), here, on a rejection of a similar defense in the district court Schwarzbaum.

Saturday, January 28, 2023

Does Tax Perjury, § 7206(1), Require Some Act of "Filing" Beyond Receipt By The IRS? (1/28/23)

In United States v. Abramson, (N.D. Ill Case: 1:18-cr-00681 Doc 119 Memo Opinion and Order 1/20/23), TN here and CL here, Abramson was indicted for various counts of tax perjury, § 7206(1), for original personal income tax returns and original and amended corporate tax returns. Abramson moved to dismiss the counts related to amended corporate tax returns received by the IRS but, he alleges, not "filed" because not accepted by the IRS.

The key facts alleged by Abramson for purposes of the motion are:

Abramson states that in August 2014 he sent the Forms 1120X along with a letter on behalf of LES "requesting a determination that LES and its subsidiaries be allowed an extension of time to file an election under § 1.1502-75 of the Income Tax Regulations which would allow the affiliated group to file amended consolidated returns for the years 2006-2012." (Dkt. 80 at 3). He later received a letter dated March 16, 2015, from the IRS's Office of Associate Chief Counsel (Corporate) that, in Abramson's words, indicated the IRS had "expressly rejected the request to file them." (Id. at 1).

The Court denied the motion on the following bases:

1. the indictment counts alleging that Abramson had filed the amended corporate income tax returns were legally sufficient on their face to state a violation of § 7206(1).

2. Abramson's defense requires consideration of facts outside the indictment, which the Court held was legally sufficient (see par. 1). Accordingly, on the motion as framed, the Court could not consider the evidence outside the indictment. The evidence Abramson submitted had markings that might indicate that, although the IRS received the amended corporate income tax returns, it had not "filed" the amended corporate income tax returns. The Court said (Slip Op. 7):

            Abramson's defense requires considering and weighing evidence to make factual determinations regarding these documents' meanings. It is not self-evident that the March 2015 letter "rejected" Abramson's returns; there are other possible interpretations of this letter, including that the IRS simply decided not to issue a private letter ruling based on inadequate information. It is even less clear what "D" means on the proffered forms. The government offers an alternative explanation. (Dkt. 91 at 4 n.2). The Court cannot resolve factual disputes about such evidentiary issues on a Rule 12(b) motion. Sampson, 898 F.3d at 281; United States v. Schafer, 625 F.3d 629, 635 (9th Cir. 2010) ("[I]f the pretrial motion raises factual questions associated with the validity of the defense, the district court cannot make those determinations.").

3. Even if Abramson's evidence were considered, the Court held that (Slip Op. 12):

Monday, January 23, 2023

Supreme Court Denies Cert in FBAR Willful Penalty Case With Justice Gorsuch Dissenting on Excessive Fines Issue (1/23/23)

I previously blogged about United States v. Toth, 33 F.4th 1 (1st Cir. 4/29./22), CA1 here and GS here, the Court affirmed the district court’s grant of summary judgment which had imposed a willful determination as a discovery sanction. See First Circuit Sustains Willful Penalty Where Willfulness Found as Discovery Sanction (Federal Tax Crimes Blog 5/2/22), here. Toth petitioned for writ of certiorari. Toth v. United States (Dkt No. 22-177), docket entries here.

The question presented in the petition was:

The question presented is whether civil penalties imposed under 31 U.S.C. § 5321(a)(5)(C)-(D)—penalties that are avowedly deterrent and noncompensatory—are subject to the Eighth Amendment’s Excessive Fines Clause.

Today, the Supreme Court denied a petition for writ of certiorari, with Justice Gorsuch issuing a three-page dissenting opinion, here. Justice Gorsuch sets up his argument with the 1st Circuit’s holding:

It [the 1st Circuit] held that the Constitution’s protection against excessive fines did not apply to Ms. Toth’s case because the IRS’s assessment against her was “not tied to any criminal sanction” and served a “remedial” purpose. 33 F. 4th 1, 16, 17–19 (2022).

Justice Gorsuch then states his case in three paragraphs spanning two pages. It is short, so I recommend readers read his version rather than an inadequate summary I might make.

JAT Comments:

Supreme Court Dismisses Attorney-Client Privilege Case as Improvidently Granted (1/23/2023; 1/25/23)

I recently reported on the Supreme Court  Oral Arguments in In Re Grand Jury (Sup Ct. No. 21-1397), docket entries here.  See On Supreme Court Oral Argument in In Re Grand Jury On Issue of Principal or Significant Purpose for Attorney-Client Privilege (1/10/23; 1/11/23), here.

Today, the Supreme Court entered the following order “Writ of certiorari DISMISSED as improvidently granted. Opinion per curiam.”  See the docket entries linked above and the opinion here.

The Supreme Court does not explain why it dismissed, but I anticipated that dismissal as a possibility based on the comments at oral argument. See the blog above at paragraph 2 as follows:

Justice Jackson’s point is that, if the parties wanting the test to be “significant” rather than “primary” and the courts are already doing "significant" (or less than primary) in practice even when articulating a primary purpose test, shouldn’t the Supreme Court just let the issue alone because there has been no upswell of complaint from the district courts applying the test. Mr. Levin expressed concern that a Supreme Court statement that the test is “primary” (which the courts already stated they were applying even which in actuality applying a significant-type test) will add gravitas to the primary test and cause courts to change their practice to strictly limit the privilege. Does that mean that Mr. Levin’s client was imprudent in asking for cert in the first place? Perhaps, the Court could do a win-win for both parties simply by ducking the issue by saying that cert was improperly granted. As Justice Kagan said (Tr. 33): “I -- I'm wondering if  you would just comment on, you know, the ancient legal principle, if it ain't broke, don't fix it.”

Note, I said improperly granted rather than improvidently granted, but it was the same point.  Technically, the writ was not improperly granted but was improvidently granted. So my choice of words was poor.

Thursday, January 19, 2023

Update on Use of Acquitted Conduct to Enhance Guidelines Calculations (1/19/23)

Today, I alert readers of potential action on the Sentencing Guidelines' use of acquitted conduct as "relevant conduct" to increase the sentencing offense level and incarceration range. Technically, all the acquittal meant was that the Government had not proved guilt beyond a reasonable doubt. However, the Government could theoretically still prove, either on the trial record or perhaps with new evidence at the sentencing hearing, that the guilty conduct was proved by a preponderance of the evidence (the standard at sentencing) and could even use otherwise inadmissible evidence (e.g., hearsay) in determining preponderance.

1. The Supreme Court may consider the issue of whether use of acquitted conduct in sentencing is constitutional. See John Elwood, Acquitted-conduct sentencing and "offended observer" standing (SCOTUSblog Relist Watch 1/19/23), here. In this article, the author advises

a. The Supreme Court has relisted five cases involving “the controversial practice of sentencing criminal defendants based on offenses that juries acquitted them of.” (For links discussing the Supreme Court practice of relisting and inferences/speculations from relisting, see citations and links in paragraph 4 of my comments below.)

b. A divided Supreme Court had approved the use of acquitted conduct in United States v. Watts, 519 U.S. 148 (1997). Based on Watts, “essentially every federal court of appeals and many state courts have read the opinion to have conclusively resolved the constitutionality of acquitted-conduct sentencing.”

c. The relisted petitions “argue that Watts should be overruled or limited and that the due process clause of the Fifth Amendment and the jury-trial guarantee of the Sixth Amendment prohibit imposing sentencing enhancements on criminal defendants based on conduct of which the jury acquitted them.”

2. On January 12. 2023, the US Sentencing Commission released proposed amendment limiting the use of acquitted conduct to enhance sentences. See USSC, Proposed Amendments to the Sentencing Guidelines (Preliminary) (1/12/23), here

Tuesday, January 10, 2023

On Supreme Court Oral Argument in In Re Grand Jury On Issue of Principal or Significant Purpose for Attorney-Client Privilege (1/10/23; 1/11/23)

Yesterday, the Supreme Court held the much anticipated oral arguments in In Re Grand Jury (Sup Ct. No. 21-1397). See docket entries here. The oral argument audio is here, and the transcript is here

I discuss the acceptance of cert from the Ninth Circuit case In re Grand Jury, 23 F.4th 1088 (9th Cir. 2022), CA9 here and GS here, in the following blog:  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), here, where I addressed the question presented. The question is whether the attorney-client privilege, permitting the client to withhold evidence about an attorney-client privilege, requires that the "principal purpose" of the client communication be to seek legal advice or, instead, only a "significant purpose" of the communication to seek legal advice. For more on the issue, see the Federal Tax Crimes Blog linked above, but for even more ad nauseam on the issue, see the briefs on the merits at the Supreme Court docket entries linked above, both the parties' merits briefs and the many amicus curiae merits briefs. (In fairness, from my perspective, an experienced attorney can understand the arguments from the parties' merits briefs; the amicus briefs, in my opinion, add nothing of material value; I will say more about the amicus merits briefs at the end of the blog.)  For a general discussion of the attorney-client privilege, see my text, Federal Tax Procedure 860-873 (2022 Practitioner Ed.), SSRN here.

 I now offer some comments on the oral arguments. 

 CAVEAT: My high overview comment is that the arguments were packed mostly with glittering generalities rather than struggling with specific context in the case presented. The context arose in a grand jury investigation which requires secrecy of the events in the grand jury. Thus, we are not offered specifics of how the general issue of principal rather than significant arose. There are some more or less relevant examples from other cases used by the parties' counsel to frame the issue, but we don't know the specific context in the case before the court. Hence, much of the back and forth between the Justices and the parties' respective counsel is very general. That, in my mind, may be required by the grand jury context, but it does not offer the best context for fleshing out strengths and weaknesses in the parties' arguments. With that caveat, I offer the following:

1. The parties were represented at oral argument as follows:

Thursday, December 15, 2022

Good Article On Open Pleas vs. Negotiated Plea Agreements (12/15/22)

Since charging in federal tax crimes, like other federal crimes, usually results in a plea agreement, I thought readers of this blog might be interested in Alan Ellis and Mark H. Allenbaugh, Plea Bargained vs. Open Pleas: What the Data Reveal (31 Westlaw Journal White-Collar Crime March 2017), here. Ellis and Allenbaugh are recognized experts in sentencing and have collected and analyzed sentencing data presented in the article. The authors say that 97% of all federal defendants plead guilty. Statistics are wobbly things but I am sure the real statistics as most of us would understand them indicate over 90% for federal crimes generally and for tax crimes. So, the question of whether to plea bargain or do an open plea is something lawyers should discuss with the clients.

The authors open with (footnote omitted):

Federal Rule of Criminal Procedure 11 governs guilty pleas for federal criminal defendants. This expert analysis examines the raw sentencing data published by the U.S. Sentencing Commission  regarding the types of pleas defendants enter and the sentences they receive. In particular, we examine the number and rate of pleas under agreements (whether written or oral, conditional or not) versus open pleas. The results are rather surprising, and we suggest there are increasing strategic reasons for defendants to consider pleading open, that is, pleading guilty without benefit of a plea agreement with the government.

JAT Comment:

1. As practitioners and other observers of sentencing know, a plea bargain to reduce the counts of conviction often does not affect the sentence, particularly in tax crimes cases because of the expansive use of “relevant conduct” in calculating the Guidelines sentencing range. The Probation Office PSR often will state that expressly. In most plea agreements, the parties will stipulate the relevant conduct. As the authors note, “Defendants who plead guilty without benefit of a plea agreement by pleading ‘open’ or ‘straight up,’ are not required to admit any relevant conduct.”  Those Defendants “preserved their right to challenge all relevant conduct in terms of sentencing factors.” As a result, the authors conclude that they “have received lower sentences on average,” at least “statistically speaking.”

Monday, November 28, 2022

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.

Friday, November 18, 2022

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:

Saturday, November 12, 2022

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.

Thursday, November 3, 2022

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]


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.

   * * * *

Friday, October 28, 2022

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.

Thursday, October 27, 2022

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.