The Interplay of Restitution as Condition of Supervised Release and § 6201(a)(4) Restitution Based Assessment (1/19/20)

For many (perhaps most) federal crimes (certainly those in Title 18), the court "may order, in addition to or, in the case of a misdemeanor, in lieu of any other penalty authorized by law, that the defendant make restitution to any victim of such offense, or if the victim is deceased, to the victim’s estate."  18 USC 3663(a)(1)(A).  Restitution is mandatory in some cases, including tax cases with counts of conviction under Title 18 (such as conspiracy).  § 3663A. In tax crimes cases, the IRS is considered a victim for whom restitution may be imposed.  However, this mandatory or even permissive restitution does not apply to the Title 26 tax crimes.  Accordingly, for tax crimes, restitution may be imposed only if (i) "agreed to by the parties in a plea agreement" (18 USC 3663(a)(3)) or as a condition for supervised release or probation (18 USC. §§ 3563(b), 3583(d)).

DOJ CTM 44.00 Restitution in Criminal Tax Cases (Last Edited August 2018), here, has a good bullet-point summary of key restitution points in tax cases (some redundant from the opening paragraph to this blog):

• Restitution is statutory; district courts have no inherent power to order restitution absent statutory authorization.
• Restitution is limited to the actual loss caused by the count(s) of conviction, unless the defendant agrees to pay more.
• For Title 18 tax offenses, restitution as an independent part of the sentence is mandatory pursuant to 18 U.S.C. § 3663A.
• For Title 26 tax offenses, restitution may be ordered as an independent part of the sentence if the defendant agrees to pay restitution in a plea agreement (18 U.S.C. § 3663(a)(3)).
• For Title 26 cases in which the defendant has not agreed to pay restitution, restitution may be ordered as a condition of supervised release or probation (18 U.S.C. §§ 3563(b), 3583(d)).
• Prosecutors should seek prejudgment Title 26 interest in restitution in order to fully compensate the IRS.
• Use the Tax Division’s form plea language whenever possible (available at § 44.09, infra) 

CTM 44.01 Background provides:

Accordingly, in tax cases, the applicable statutes provide the following: (1) for tax offenses prosecuted under Title 18, restitution is mandatory and is ordered as an independent part of the sentence; and (2) for tax offenses prosecuted under Title 26, restitution is discretionary and is ordered as a condition of supervised release, but the defendant can agree to (and plea agreements should provide for) restitution ordered as an independent part of the sentence.  

Section 209 of the Mandatory Victims Restitution Act mandates that when negotiating plea agreements, prosecutors must give consideration “to  requesting that the defendant provide full restitution to all victims of all charges contained in the indictment or information, without regard to the counts to which the defendant actually plead[s].” Pub. L. No. 104-132 § 209; 18 U.S.C. § 3551 note; see also Attorney General Guidelines for Victim and Witness Assistance, Art. V(D) (May 2012); Principles of Federal Prosecution, USAM §§ 9-16.320. To assist prosecutors with this statutory and Department requirement, standard language for the restitution portion of plea agreements in tax cases is included in § 44.09, infra. 

Readers of this blog know that § 6201(a)(4)(A), here, requires the IRS to assess the amount of resitutition "for failure to pay any tax imposed under this title in the same manner as if such amount were such tax."

I focus this blog on the interplay of restitution as a condition of supervised release in Title 26 criminal cases and § 6201(a)(4)(A)'s mandate for assessment.  The impetus for this blog is PMTA 2018-19 (8/23/18), here.  I find that, although that PMTA was in my research "pile," I had not focused on it before.  The PMTA concludes bottom-line that

Marinello in the Courts – An Update (1/18/20)

Jeremy Temkin, a prominent tax/white collar crime attorney, has published this excellent article:  Two Years Later: Have Defendants Benefited From ‘Marinello’?, 263 NYLJ No. 11 (1/16/20), here.  The law firm posting regarding the article with the link is here.  Temkin’s bio is here.

The article is short, so all interested in the current state of Marinello in the courts should read the article.

JAT Comments:

1.  Temkin reports that results in the cases are mixed.  Marinello has not produced a wave of reversals.  Of course, the Government might have conceded many § 7212(a), tax perjury, convictions that never produced opinions published in the various legal publications.

Some of the cases, like Takesian, which I wrote on recently, did not produce a reversal because ““Takesian could reasonably foresee that an IRS investigation of him was (in Marinello's phrasing) ‘at least . . . in the offing,’” See First Circuit Affirms Tax Obstruction Conviction (Federal Tax Crimes Blog 1/9/20), here.

2.  Marinello-based reversals or Government concessions of the tax obstruction count often would have no bottom-line effect because of other counts of conviction.  In order to test this, the actual sentencing calculations and the Court’s discretionary Booker variances would have to be considered.  I have not done that.  But I did previously note that in Marinello itself, the other counts of conviction likely would permit the same sentencing result.  See Supreme Court Holds that Omnibus Clause of the Tax Obstruction Crime (§ 7212(a)) Requires Awareness of Pending Tax-Related Proceeding (3/21/18; 3/22/18), here, point 4 in JAT comments; see also Dealing with Other Counts of Conviction After Vacating Tax Obstruction Based on Marinello (Federal Tax Crimes Blog 6/26/18), here.

3.  One interesting point that Temkin makes is the issue of whether the Marinello interpretation of tax instruction to require a pending investigation (or expectation of one) is an element of the offense that must be pled in a certain way in the indictment and proved at the trial beyond a reasonable doubt.  Temkin reports that the Government’s position is that the Marinello interpretation is not an element of the crime but rather “establishes an evidentiary and level-of-proof benchmark that the Government must meet at trial.”  I just point readers to Temkin’s discussion. I haven’t fully thought through that issue, so will not comment.

4.  On a related point of the Marinello's effect on Government charging decisions, obviously for tax prosecutions since Marinello, we should expect that the charges made will reflect the decision.  In most cases, the Government has other tax-related crimes it could charge, so that eliminating tax perjury in cases where there is no actual or expected investigation may just mean that the target gets charged anyway with other counts (of a type that might have been charged anyway along with tax perjury) and, given the way the Sentencing Guidelines work, will likely receive the same sentence if convicted.  In other words, the Guidelines are indifferent as to the number of counts, provided that the resulting sentencing range (driven principally by the tax loss for counts of conviction and relevant conduct) is not in excess of the aggregate sentence allowed by the counts of conviction. 

5.  In the latter regard as to charging decisions, keep in mind that the conduct criminalized under § 7212(a), tax perjury, even under the pre-Marinello interpretation substantially overlapped with the Klein / defraud conspiracy, 18 USC 371, as interpreted.  In a prior version of the DOJ Criminal Tax Manual (CTM), DOJ Tax asserted that tax obstruction may be charged where the Klein / defraud conspiracy is “unavailable due to insufficient evidence of conspiracy.”  CTM 17.02 (2001 ed.).  That statement is now omitted in the 2012 edition and, I think, in the 2008 edition.  I don't think that omission is a concession of the point that the conduct criminalized as tax perjury substantially is the same as the conduct criminalized as the Klein / defraud conspiracy, so that if the prosecutor can identify (conjure up) at least two actors in the conduct, it can essentially charged the equivalent of the tax perjury crime without Marinello's limitations to the pending investigation.  I have argued that Marinello's reasoning might apply to the Klein / defraud conspiracy.  What Are the Implications for Marinello on the Defraud / Klein Conspiracy? (3/24/18), here.  The Courts, however, have not (yet) accepted that expansion of Marinello.   See e.g., United States v. Flynn (D. Minn. Decision dated 1/8/19), GS here; United States v. Parlato (W.D. N.Y. Decision dated 2/28/19), GS here; and United States v. Herman (W.D. Tex. opinion dated 4/24/19), GS here.  So, based upon the trajectory to date, my argument is wrong.  But, what that opens up is the possibility that conduct now proscribed by Marinello as tax perjury can be charged as Klein / defraud conspiracy--just find one more actor, called a co-conspirator.

Criminal Tax Evasion and Civil Fraud–If Found by the Trier, Can There be a Reasonable Cause/Good faith Defense (1/16/20; 1/17/20)

I have blogged several times on my Federal Tax Crimes Blog about how the “good faith” defense is subsumed in the definition of willfulness for tax crimes.  Willful is the intentional violation of a known legal duty.  If a trier of fact determines that the defendant intentionally violated a known legal duty, then per se that person did not have a good faith defense.  Accordingly, if the trial court in a criminal case where willfulness is an element of a tax crime properly instructs the jury on the willful element, the fact that the judge did not separately instruct the jury that good faith (such as reliance on tax professional) is a “defense” is not error or, at least not reversible error.  Simply put, proof of willfulness negates the good faith defense.  The defendant cannot have intended to violate a known legal duty and then have reasonable cause/good faith in violating that known legal duty.  Accordingly, for example, consider the following:  "[T]o prove willfulness beyond a reasonable doubt, the Government would have to negate the taxpayer's claim that he relied in good faith on the advice of his accountant.”  United States v. Stadtmauer, 620 F3d 237, 257 n. 22 (3d Cir. 2010).

Now I want to move this concept to the civil arena.  Section 6663, here, imposes a civil fraud penalty.  The conduct penalized under § 6663 is “fraud.”  Basically, the conduct penalized under § 6663 is the same conduct that is tax evasion in the criminal context – intentional violation of a known legal duty.  (There may be different verbal formulations, but that is the essence of it in both the criminal and civil arenas.)  So, if proof of tax evasion negates a reasonable cause defense, one would think that proof of civil fraud negates a reasonable cause defense.

Although I think this logic is irrefutable, some courts nevertheless act like they believe otherwise.  For example, in Purvis v. Commissioner, T.C. Memo. 2020-13, at *33-*48, here, the Tax Court found that the taxpayers committed civil fraud subject to the penalty under § 6663.  The Court concluded after 15 pages analyzing the evidence (*48):   “Accordingly, we hold that petitioners are liable for the section 6663(a) fraud penalties for the years at issue.”

The Court then  (at *49-*50) considered the reasonable cause defense.  But why did the Court do that after the Court found that the taxpayer had intended to violate a known legal duty?

One reason is the way the statutory provisions are written.  Specifically, § 6663 imposes the penalty for fraud but then, § 6664(c)(1), here, states (emphasis supplied): “No penalty shall be imposed under section 6662 or 6663 with respect to any portion of an underpayment if it is shown that there was a reasonable cause for such portion and that the taxpayer acted in good faith with respect to such portion.”  But, as established in the criminal context, the taxpayer (called defendant in a criminal context) cannot have intended to violate a known legal duty if he had a reasonable cause/good faith defense.  That surely must be true in the civil context as well.

I would appreciate readers view on this issue.  Specifically, is it possible for the Government (the IRS in a Tax Court case) to prove civil fraud by clear and convincing evidence and the taxpayer then establish a reasonable cause/good faith defense?

One other thought.  The regulations for the reasonable cause defense under § 6664 on only address the accuracy related penalty under § 6662.  See Regs. § 1.6664-4, titled "Reasonable cause and good faith exception to section 6662 penalties." I suspect that this analysis is the reason.  The reasonable cause defense is an oxymoron if § 6663 civil fraud is proved.  But § 6664(c) is not the only time that Congress has legislated an oxymoron.

Addendum 1/17/20 12:00pm:

Anesthesiologist Sentenced for Tax Perjury (1/16/20)

DOJ Tax announced today the sentencing of a Pennsylvania anesthesiologist, James G. Allen, Jr. To 30 months in prison.  See Pennsylvania Anesthesiologist Sentenced to Prison for Tax Fraud (1/16/20), here.

The key excerpts are:

A Pennsylvania anesthesiologist was sentenced to 30 months in prison today for filing a false income tax return, announced Principal Deputy Assistant Attorney General Richard E. Zuckerman of the Justice Department’s Tax Division. 

From 2010 through 2018, James G. Allen Jr., 54, filed and caused the filing with the Internal Revenue Service (IRS) of sixteen false tax returns for himself and his wife.  On these tax returns, Allen did not report more than $3 million in income that the pair earned as anesthesiologists.  In addition to filing false tax returns, Allen took steps to conceal the couple’s assets and income from the IRS, including depositing money in an offshore bank account held in the Bailiwick of Jersey, wiring money to Columbia to purchase a house, purchasing cryptocurrency and gold, and registering a vehicle in the name of a purported church. In total, Allen caused a tax loss of more than $900,000 to the United States. 

In addition to the term of imprisonment, U.S. District Judge Arthur J. Schwab ordered Allen to serve a one year term of supervised release and pay restitution to the IRS in the amount of $ 1,084,658.52.  

JAT Comments:

Texas Lawyer and Client Convicted for Conspiracy (1/15/20)

DOJ Tax has announced this conviction:  Jury Finds Texas Attorney and Client Guilty of Conspiring to Defraud the Internal Revenue Service (1/15/20), here.  See CourtListener docket entries here.

Key excerpts.

A federal jury convicted a Texas attorney John O. Green and his client Thomas Selgas today for conspiring to defraud the United States, announced Principal Deputy Assistant Attorney General Richard E. Zuckerman of the Justice Department’s Tax Division. The jury also convicted Selgas of tax evasion. Selgas’s wife, Michelle Selgas, was acquitted of conspiring to defraud the United States and tax evasion. 

According to the evidence presented at trial, Selgas conspired with Green, an attorney licensed to practice in Texas, to defraud the United States by obstructing the Internal Revenue Service (IRS) from assessing and collecting Selgas’s taxes. Selgas and his wife owed approximately $1.1 million in outstanding taxes that Selgas refused to pay. When the IRS made efforts to collect the outstanding taxes, Selgas concealed funds by using Green’s Interest on Lawyers Trust Account (IOLTA) rather than using accounts in his own name. An IOLTA is a bank account used by a lawyer to hold money in trust for clients. From 2007 to 2017, Selgas deposited proceeds from the sale of gold coins and other income into Green’s IOLTA and Green would then pay the Selgases personal expenses, including their credit card bills, from that account. Selgas and Green also filed a false tax return on behalf of MyMail, Ltd., an intellectual property development and licensing partnership Selgas co-founded, omitting a substantial portion of the partnership’s income.

JAT Comments:

Eleventh Circuit Affirms Conviction of Another Congressman (1/14/20; 1/16/20)

In United States v. Brown, ___ F.3d ___, 2020 U.S. App. LEXIS 556 (11th Cir. 2020), 11th Cir. here and CL here, Brown, a former congresswoman, was charged with 24 counts for a melange of crimes, including mail and wire fraud and conspiracy to commit, false statements, tax obstruction (§ 7212(a), one count) and tax perjury (§ 7206(1), three counts).  The jury convicted of all except 4 of the fraud counts.  On appeal, Brown argued that the trial judge had improperly dismissed a juror who, another juror reported, stated to the jurors at the beginning of deliberations that (Slip Op. 12-15):

"A Higher Being told me Corrine Brown was Not Guilty on all charges". He later went on to say he "trusted the Holy Ghost". 

The judge then questioned the juror outside the hearing of the other jury members.

Court: Okay. That's fine. So let me get a little more specific with you. Have you expressed to any of your fellow jurors any religious sentiment, to the effect that a higher being is telling you how—is guiding you on these—on these decisions, or that you are trusting in your religion to—to base your decisions on? Have you made any—can you think of any kind of statements that you may have made to any of your fellow jurors along those lines? 

Juror: I did, yes. 

Court: Okay. Can you tell me, as best you can, what you said? 

Juror: Absolutely. I told them that in all of this, in listening to all the information, taking it all down, I listen for the truth, and I know the truth when the truth is spoken. So I expressed that to them, and how I came to that conclusion. 

Court: Okay. And in doing so, have you invoked a higher power or a higher being? I mean, have you used those terms to them in expressing yourself? 

Juror: Absolutely. I told—I told them that—that I prayed about this, I have looked at the information, and that I received information as to what I was told to do in relation to what I heard here today—or this past two weeks. 

Court: Sure. When you say you received information, from what source? I mean, are you saying you received information from— 

Juror: My Father in Heaven.

Fifth Circuit Affirms Republican Congressman Conviction for Crimes Including Tax Perjury (1/14/20)

In United States v. Stockman, ___ F.3d ___, 2020 U.S. App. LEXIS 851 (5th Cir. 2020), here, the Fifth Circuit affirmed Stockman’s convictions of four counts of mail fraud, three counts of wire fraud, two counts of making false statements in FEC filings, eleven counts of money laundering, one count of conspiracy to make conduit campaign contributions and false statements, one count of causing an excessive campaign contribution, and one count of filing a false tax return.  Stockman was a former congressman (Republican).

The only item that I found interesting, more as a reminder rather than as new to readers of this blog, was the rejection of Stockman’s complaint that he should have received a “good faith” instruction for crimes (including the tax crime) with willful conduct as an element of the crime.  Stockman alleged his “good faith” reliance on his tax professional.  The relevant discussion from the Fifth Circuit opinion is (Slip Op. at 17-19 (cleaned up)) :

We next consider Stockman's argument that his tax and campaign finance convictions under Counts 10, 11, 12, and 28 of the indictment were tainted by the district court's refusal to instruct on "good faith." Stockman points to evidence that he relied on an accountant who "wrongly advised him that having aides contribute money to his congressional campaign in the name of their parents was permissible." He also points to evidence that Stockman and Posey intentionally omitted words of express advocacy from The Conservative News in order to comply with FECA. He asserts that in this context and where willfulness is required, a good faith instruction should have been given. 

Again, we disagree. Although the parties dispute the standard of review applicable to the district court's refusal to instruct on good faith, decisions of this court and the Supreme Court show that the refusal was not erroneous, whether reviewed de novo or for plain error. See United States v. Pomponio, 429 U.S. 10, 11-12 (1976); United States v. Simkanin, 420 F.3d 397, 409-11 (5th Cir. 2005). Stockman argues that a good faith instruction should have been issued because the tax and campaign finance offenses [*18]  in question all require a showing of "willfulness." 

But it is precisely that requirement that renders any such instruction unnecessary. The Supreme Court held in Pomponio that an additional good faith instruction is not required when the charge already requires proof of "willfulness," properly cabined to cover only voluntary, intentional violations of known legal duties. In so holding, the Court gave its approval to a charge that did not instruct on good faith but did instruct on the need for proof of a "willful" act, meaning an act done voluntarily and intentionally and with the specific intent to do something which the law forbids, that is to say with the bad purpose either to disobey or disregard the law.  Drawing from Pomponio, we held in Simkanin that a "specific instruction" on good faith is not required when the concept is sufficiently subsumed by a general instruction on "willfulness." Simkanin, like Pomponio, approved of instructions alerting the jury to the fact that a "willful" act is done voluntarily and deliberately, with the intention of violating a known legal duty. 

Here, the district court's instructions [*19]  mirrored those in Pomponio and Simkanin. With respect to Counts 10, 11, and 12, the district court instructed the jury that to act "willfully," the defendant must act "voluntarily and purposely, with the specific intent to do something the law forbids, that is, with the bad purpose either to disobey or disregard the law." With respect to Count 28 [the tax perjury count], the district court instructed the jury that it could not convict unless it found that Stockman acted "with intent to violate a known legal duty." We find no merit in Stockman's "good faith" argument.

JAT Comments:

Court Enters Default Judgment in FBAR Willful Penalty Collection Suit (1/10/20)

In United States v. Lanz, 2019 U.S. Dist. LEXIS 222922 (D. N.J. 2019), CL here, the district court entered default judgment against the defendant, Lanz, in an FBAR willful penalty collection suit.  The judgment is for "$544,731.73 for the penalties assessed against him under 31 U.S.C. § 5321(a)(5), accrued interest on such penalties, late payment penalties, and further statutory additions thereon as allowed by law from August 19, 2015, to the date of payment."

The key excerpts are:

Third, the Court finds that the Complaint states a sufficient cause of action. Plaintiff alleges that Defendant violated the reporting requirements of 31 U.S.C. § 5314, as implemented under 31 C.F.R. § 1010.350 and 31 C.F.R. § 1010.306(c), for calendar years 2006, 2007, and 2008. (Compl. ¶ 20). As Plaintiff explains, "[a]ll citizens and residents of the United States who have a financial interest in, or signatory or other authority over, any foreign financial account that had a maximum value greater than $10,000 during the calendar year are required to file an annual report disclosing the existence of each account." (Compl. ¶ 5 (citing 31 U.S.C. § 5314 & 31 C.F.R. § 1010.350)). That annual report—known as a Report of Foreign Bank and Financial Accounts ("FBAR")—is due no later than June 30th of the year following the calendar year. (Id. ¶ 6 (citing 31 C.F.R. § 1010.306(c)). Plaintiff alleges that Defendant was subject to these reporting requirements because Defendant was a U.S. citizen who held a foreign bank account, and the aggregate amount in that account exceeded $10,000 in U.S. currency during 2006, 2007, and 2008. (Compl. ¶¶ 9-12). Plaintiff further alleges that Plaintiff failed to (i) report the income generated in the Account on his federal income tax returns; (ii) [*7]  file an FBAR as required for 2006, 2007, and 2008; and (iii) report having an interest in a foreign bank account on Schedule B of his income tax returns for at least 2006 and 2008. (Id. ¶¶ 13-15). Based on these allegations, the Court finds that Plaintiff has sufficiently stated a cause of action for failure to comply with the reporting requirements of 31 U.S.C. § 5314. 

Moreover, the Court finds that the Complaint provides sufficient basis for the Court to determine that Defendant's failure to report was willful. Willfulness covers both knowing and reckless violations, and "may be proven through inference from conduct meant to conceal or mislead sources of income or other financial information." United States v. Williams, 489 F. App'x 655, 658 (4th Cir. 2012). Here, Plaintiff alleges several facts suggesting that Defendant acted willfully: (i) Defendant took steps to hide his ownership of the Account by telling UBS AG to hold all correspondence relating to the Account (Compl. ¶ 9); (ii) Defendant falsely told the IRS twice that he did not own a foreign bank account, and signed an affidavit stating that he did not have a foreign bank account during 2008 (id. ¶ 17); and (iii) Defendant eventually transferred the Account that he held in his name to another bank and [*8]  put the Account in the name of another person (id. ¶¶ 10-11). These actions suggest that Defendant acted willfully in failing to report his ownership and interest in the Account. See United States v. Brandt, No. 17-80671, 2018 U.S. Dist. LEXIS 226286, 2018 WL 1121466, at *4 (S.D. Fla. Jan. 24, 2018) (finding a willful reporting violation under similar circumstances).

First Circuit Affirms Tax Obstruction Conviction (1/9/20)

In United States v. Takesian, ___ F.3d ___, 2019 U.S. App. LEXIS 37571 (1st Cir. 2019), here, the Court opens with this:

Greg Takesian is a certified-public-accountant-turned-tax-cheat. Or so a jury essentially concluded in convicting him of four counts of filing false tax returns, see 26 U.S.C. § 7206(1), and one count of attempting to obstruct the internal-revenue laws, see 26 U.S.C. § 7212(a). A district judge at sentencing hit him with concurrent prison terms of 24 months on each count, 12 months of supervised release following the end of his incarceration, a special assessment of $100 on each count, a $10,000 fine, and restitution totaling $286,433. None too happy with these results, Takesian argues here that the judge thrice erred: first, by letting prosecutors impeach him with his 2006 conviction for making a false statement; second, by failing to tell the jury that to convict on the obstruction count, prosecutors had to prove that he obstructed a particular tax-related proceeding that he knew about or could reasonably foresee; and third, by ordering restitution beyond what the jury found the government's tax loss to be. Disagreeing with him, we affirm.

Two of the issues on appeal may be interesting to readers of this blog – first, a Marinello issue and second, a restitution issue.

Marinello

Readers will recall that, in Marinello v. United States,138 S. Ct. 1101 (2018), here, the Court held that the obstructive acts for a conviction of tax perjury under § 7212(a), required that the Government prove that the defendant acted to obstruct a known or foreseeable investigation.  Marinello was decided after the trial in Takesian.  Takesian argued that he was entitled to a Marinello-based instruction which he did not get.  The Court rejected the argument, although agreeing with the parties that the failure to give instruction the Marinello instruction was plain error.  Plain error requires that Takesian must still prove that the error jeopardized his substantial rights–that the defendant show “‘a reasonable probability" that the flawed instruction led to a flawed conviction.”  Basically, the Court found the from the facts showed that “Takesian could reasonably foresee that an IRS investigation of him was (in Marinello's phrasing) ‘at least . . . in the offing,’” For that reason, he cannot show that the jury would have acquitted with a proper instruction.

Restitution

Takesian objected to the restitution award of $286,433.  In an unusual procedure, the trial judge submitted to the jury not only the standard questions for guilty or not guilty but also sentencing factors (including most prominently, the tax loss).  The Court explains:

We should probably say a word about why the judge did what he did here. The government tells us without contradiction that this judge's practice is to "submi[t] . . . sentencing factors to the jury under a beyond-a-reasonable-doubt standard." And the verdict form that he used listed seven tax-loss ranges — each corresponding to an offense level, which helps set a convicted person's advisory prison range under the federal sentencing guidelines. See USSG § 2T4.1. No party complains about this procedure. So we have no occasion to weigh in on it.

Court Affirms Denial of Reliance on Tax Professional Jury Instruction (1/9/20)

In United States v. Wright, 2019 U.S. App. LEXIS 37713 (6th Cir. 2019) (Not Published), here, the Court affirmed the conviction and sentencing of the defendant, Wright.  As suggested by the failure to publish the opinion, there is nothing particularly new or noteworthy in the opinion. I do, however, offer the flavor from the opening paragraph:

This is the second time that James Wright has attempted to conceal income from the United States government. n1 In this instance, Wright underreported his income by claiming improper deductions to a subchapter S-corporation and engaged in self-dealing with a private foundation to pay for his children's tuition. A jury convicted Wright of seven counts of filing, or aiding in the filing of, false tax returns in violation of 26 U.S.C. § 7206. The district court sentenced Wright to 33 months in prison and ordered him to pay $146,404 in restitution. Wright appeals, alleging that the district court abused its discretion by refusing to give a jury instruction on good-faith reliance on accountants and lawyers. Wright also challenges the procedural reasonableness of his sentence, asserting  that the district court improperly calculated the amount of loss stemming from the false tax returns. We AFFIRM.
   n1 In 1998, Wright pleaded guilty to tax evasion for using trusts to conceal insurance-commission income. United States v. Wright, No. 97-cr-64 (S.D. Ohio).

 JAT Comment:

1. Although a defendant would want the reliance on tax professional instruction, it is really baked into the general willfulness instruction.  The willfulness instruction, which the court must give, says that the defendant can be convicted of the tax perjury offense, § 7206(1), only if the taxpayer acted willfully – with intent to violate a known legal duty.  Defenses such as good faith and reliance on tax professional are inherent in the requirement that the Government prove that the defendant did not act in good faith.  Accordingly, although the Sixth Circuit held that Wright did not satisfactorily put reliance on tax professional in issue with evidence sufficient to mandate a specific reliance instruction, the defendant was free to argue that he acted in good faith and had a good faith belief that he was not violating a known legal duty.  See See, e.g., United States v. Montgomery, 747 F.3d 303, 311 (5th Cir. 2014).  He just did not get an instruction that would draw the jury’s particular attention to that defense.

2. My experience is that persons convicted once avoid the conduct in the future.  Even if they continue the conduct, the IRS and DOJ Tax may not learn of the next round(s) and even if they do might not see any value if wasting further criminal investigation or prosecution resources on the same taxpayer.  But, the IRS and DOJ Tax has to bring some of these cases just to remind people that one conviction does not give a free pass for misbehavior.

Union Bancaire Privée, UBP SA ("UBP"), Enters an Addendum to its Swiss Bank Program Category 2 NPA (2/5/20)

I previously reported that Union Bancaire Privée, UBP SA ("UBP"), had entered a NonProsecution Agreement (“NPA”) with DOJ Tax under the DOJ Swiss Bank Program.  One More Swiss Bank Achieves NPA Under Swiss Bank Program (Federal Tax Crimes Blog 1/6/16), here.  Under the original NPA, UBP paid $74,5 million (rounded) in penalties.  DOJ Tax announced here that UBP has entered an addendum to the NPA after disclosing additional, previously undisclosed, accounts and agreeing to pay an additional $14 million, for a combined penalty amount of $201,767 million. 

(Note:  I have added at the end of this blog entry a short discussion of a similar agreement reached with Banque Bonhôte & Cie SA that I missed earlier.)

The key excerpts for the UBP Addendum are (emphasis supplied):

The Department of Justice announced today that it has signed an addendum to a non-prosecution agreement with Union Bancaire Privée, UBP SA (UBP), a private bank headquartered in Geneva, Switzerland. The original non-prosecution agreement was signed on Jan. 6, 2016. At that time, UBP reported that it held and managed 2,919 U.S. Related Accounts, with assets under management of approximately $4.9 billion, and paid a penalty of $187,767,000. In reaching today’s agreement, UBP acknowledges it should have disclosed additional U.S.-related accounts to the department at the time of the signing of the non-prosecution agreement. 

“Foreign banks that participated in the Swiss Bank Program were obligated to identify all accounts in which U.S. taxpayers held an interest, directly or indirectly,” said Richard E. Zuckerman, Principal Deputy Assistant Attorney General for the Tax Division. “Today’s agreement reflects our continued commitment to ensuring that when entities cooperate and make disclosures to the Department, that they do so fully.” 

The Swiss Bank Program provided a path for Swiss banks to resolve potential criminal liabilities in the United States relating to offshore banking services provided to United States taxpayers. Banks eligible to enter the program were required to advise the department that they had reason to believe that they had committed tax-related criminal offenses in connection with undeclared U.S.-related accounts. As participants in the program, they were required to make a complete disclosure of their cross-border activities, provide detailed information on an account-by-account basis for accounts in which U.S. taxpayers had a direct or indirect interest, cooperate in treaty requests for account information, and provide detailed information about the transfer of funds into and out of U.S.-related accounts, including undeclared accounts. 

The department executed non-prosecution agreements with 80 banks between March 2015 and January 2016. The department imposed a total of more than $1.36 billion in Swiss Bank Program penalties. Pursuant to today’s agreement, UBP will pay an additional sum of $14,000,000 and will provide supplemental information regarding its U.S.-related account population, which now includes 97 additional accounts. 

Every bank that signed a non-prosecution agreement in the Swiss Bank Program had represented that it had disclosed all known U.S.-related accounts that were open at each bank between Aug. 1, 2008, and Dec. 31, 2014. Each bank also represented that it would, during the term of the non-prosecution agreement, continue to disclose all material information relating to its U.S.-related accounts. In reaching today’s agreement, UBP acknowledges that there were additional U.S.-related accounts that it knew about, or should have known about, but that were not disclosed to the Department at the time of the signing of the non-prosecution agreement. UBP has fully cooperated with the department with respect to the additional U.S.-related accounts. 

The Addendum to the NPA is linked on the announcement and is bare bones.

JAT Comments:

1. It is not clear to me whether UBP suffered any additional cost for failing to advise DOJ Tax of the previously unreported accounts that it knew or should have known about at the time of the original NPA.  And it is not clear whether UBP eventually self-reported the undisclosed accounts or DOJ Tax and/or the IRS discovered some unreported accounts that led to UBP's cooperation.

2.  In preparing this blog entry, I discovered that I had failed to report one Addendum for Banque Bonhôte & Cie SA.  The DOJ Tax Press Release, dated 7/1/2019 is here.  The same pattern exists - failure to include in initial agreement accounts that the bank knew or should have known abuot..  The initial cost was $624,000, the Addendum added $1,200,00.  The Total is $1,824,000.

Second Circuit Opines that Tax Protestor/Defier Arguments for Lack of Criminal Jurisdiction are Bogus (1/1/20)

In United States v. McLaughlin (2d Cir. Dkt 19-308-cr Opinion 12/30/19), here, McLaughlin was convicted of making false statements to IRS (presumably the charge was tax obstruction, § 7212(a)) by submitting false documents intended to have the IRS audit and assess penalties against a state judge.  McLaughlin appealed, claiming that the district court did not have jurisdiction, a genre of tax protestor/defier argument “consistent with a ‘Sovereign Citizen’ ideology.”

Courts are confronted with this genre of argument often and routinely bat them down.  So, why did the Second Circuit, which often issues summary orders in routine and frivolous cases, decide to issue a full opinion?  The Court says:

McLaughlin’s argument here goes to the very heart of our authority to hear Federal criminal cases. It raises an issue that warrants a clear statement from this Court, to deter future litigants from making similar claims.    

The bottom line, as readers of this blog would expect, that the Second Circuit holds that the district court had jurisdiction.

Short opinion.

JAT Comment:

Maybe the opinion will circulate in the communities of taxpayers to whom it is targeted.  But, I doubt that, if any are deterred by the opinion, it won’t be many and members of these communities will continue to undertake the underlying behavior resulting in their prosecution where their only or, at least, preferred "defense" is this genre of argument.

The opinion will give district court judges additional reason to summarily dispose of similar arguments.

More on Abusive Conservation Easements (12/28/19)

Peter Reilly has a good discussion on an abusive conservation easement.  IRS Grinch Ruining Christmas For Syndicated Conservation Easements (Forbes 12/24/19), here.  The fatal flaw in such easements is the valuations (dare I say bullshit valuations).  These are just variations of many shelters in the 1970s and early 1980s where the fatal flaw was the valuations.  They are therefore just a variation of bullshit tax shelters when the crux of the shelter is major overvaluations.

Peter points to the IRS News Release, IR-2019-213, here, Excerpts from the release:

On Dec. 13, 2019, the U.S. Tax Court entered its first decision on a syndicated conservation easement transaction. In TOT Property Holdings, LLC v. Commissioner, Docket No. 005600-17, the Tax Court sustained in its entirety the IRS's determination that all tax benefits from a syndicated conservation easement transaction should be denied and that the 40% gross valuation misstatement and negligence penalties applied. The Tax Court found that the transaction failed the legal requirements applicable to donations of land easements and, in imposing the gross valuation misstatement penalty, found that the actual value of the easement donation was less than 10 percent of what was originally reported on the tax return. 

"In denying the deductions and upholding the 40% gross valuation misstatement penalty, the Tax Court confirmed that aggressive syndicated easement transactions simply will not survive scrutiny," said IRS Commissioner Chuck Rettig. "We will not stop in our coordinated pursuit of these abusive transactions while seeking the imposition of all available civil penalties and, when appropriate, various criminal options for those involved." 

"If you engaged in any questionable syndicated conservation easement transaction, you should immediately consult an independent, competent tax advisor to consider your best available options," Rettig added.

Peter's posts are usually very good, and this is not exception.

Also, in a related development, in United States v. Zak (N.D. Ga. Dkt. 18-cv-05774-AT Order dated 12/10/19, here), the Court considered a government suit against allegedly abusive shelter promoters.  The Court rejects the defendants' motions, except for one count against Zak which is dismissed without prejudice.

Key excerpts from the Order are (emphases supplied by JAT):

"The Government alleges that defendants ran a “conservation easement syndication scheme.'"

* * * * 

The Government laid out eleven discrete steps that represent the “general pattern” the defendants took in enacting their conservation easement offerings. (Doc. 1 at 18–22.) In brief, according to the Government, the defendants first formed an LLC to take ownership of a piece of land, then hired an appraiser to provide an appraisal of the land, which would be used later in tax filings. (Id. at 18–19.) The defendants then marketed ownership interests in the LLC – whose value is derived only from the possible future tax benefit of converting the land to a conservation easement – to wealthy persons who may seek to maximize their tax benefits. (Id. at 19–20.) The marketing of the LLC clearly explains how the conservation easement might benefit a person in a particular tax bracket by reducing his or her tax burden substantially. (Id.) Once all stakes are sold, the LLC designates the land as a conservation easement, finalizes the appraisal of the land’s value, and prepares its own tax return. (Id. at 20–21.) The LLC is formed as a pass-through entity, so the sizable tax benefit it incurs for designation of the land is then passed through it to the investors themselves. (Id. at 16.) The investors list the conservation easement tax burden on their personal income tax returns, reducing their own tax liability. (Id. at 21–22.)

In Willful FBAR Collection Suit, District Court Rejects Reconsideration of Finding of FBAR Willfulness As Discovery Sanction (12/28/19)

In an earlier Memorandum and Order in United States v. Toth (D. Mass. Dkt. No. 15-cv-13367-ADB 10/15/18), GS here and CL here, the district court imposed sanctions against the defendant in an FBAR collection suit for discovery deficiencies.  The sanctions were (from the Conclusions of the Memorandum and Order (emphasis supplied by JAT):

For the reasons explained above, the Government's amended motion for sanctions is GRANTED and it is hereby ORDERED that the following facts are taken as established for purposes of this litigation:
1. Defendant had legal control over, and the legal authority to direct the disposition of the funds in, the Account (and any sub-accounts), by investing the funds, withdrawing the funds, and/or transferring the funds to third-parties, between the date the Account was opened and at least December 31, 2008.
2. Should the United States establish that Defendant is liable for the penalty alleged in the complaint, for the purposes of calculating the amount of such penalty, the Account (and any sub-accounts) contained $4,347,407 as of the penalty-calculation date.
3. Defendant had a legal obligation to timely file an FBAR regarding the Account in each calendar year that the Account was open, including with regard to calendar year 2007.
4. Defendant willfully failed to file an FBAR regarding the Account with respect to calendar year 2007.
The Government may file an itemized statement of costs and attorney's fees documenting the costs and fees that it incurred in preparing the amended motion for sanctions within 30 days of this order, should it wish to recover fees and costs.
SO ORDERED.

A key fact in this debacle was that the defendant represented herself pro se up to the date of the Memorandum and Order.  After that Memorandum and Order, the defendant engaged counsel, but apparently even then the defendant’s compliance with discovery fell short.

In United States v. Toth (D. Mass. Dkt. No. 15-cv-13367-ADB 12/20/19), GS here and CL here here, the district court rejected the defendant’s motion for reconsideration (erroneously styled a motion to vacate) of the original Memorandum and Order.  What comes through from this Memorandum and Order (as well as the prior one) was that the court was frustrated with the defendant’s continuing obfuscation.

A review of the docket entries at Court Listener (CL), here, should give some sense of the court's frustrations.

Key excerpts from the current Memorandum and Order are:

Tax Perjury, § 7206(1) Is a Different Crime than Perjury, 18 USC § 1621 (12/25/19)

Yesterday, I was updating the working draft of my Federal Tax Procedure Book, here, for the 2020 editions to make a point about § 7206(1) here, which I and others call “tax perjury.”  See e.g., DOJ CTM 12.03 Generally, here (“Section 7206(1) is referred to as the “tax perjury statute,” because it makes the falsehood itself a crime.”) I added the caveat that tax perjury in § 7206(1) is not the crime of perjury, 18 USC § 1621.  The CTM thus cautions that “Although referred to as the ‘tax perjury statute,’ Section 7206(1) prosecutions are not perjury prosecutions.”  CTM 12.09[2] Law Of Perjury Does Not Apply To Section 7206(1) Prosecutions.  Thus features critical to perjury prosecutions (such as the two-witness rule and no corporate criminal liability) do not apply to § 7206(1) prosecutions.

In addressing this point, I discuss in a footnote Siravo v. United States, 377 F.2d 469 (1st Cir. 1967), here.  In Siravo , the defendant argued that § 7206(1) was not a perjury statute, because perjury requires false affirmative statements and the omission of income is not a false affirmative statement.  The Court held that the language of the jurat did cover such omissions because the jurat states that it is signed under penalty of perjury and the taxpayer attests under penalty of perjury that the return is true and correct, so that omitted income was clearly within the scope of the statement made under penalty of perjury covers omissions from the return (the Court treated the word "complete" in the jurat as superfluous to “true and correct”).  “Therefore, the government has made out a violation of the section, whether it be labelled a perjury statute or similar in nature,”  (Pp. 762-473 (cleaned up).  See also United States v. Cohen, 544 F. 2d 781, 783 (5th Cir. 1977) (cleaned up) (“The omission of a material fact [assets from the OIC] renders such a statement just as much not ‘true and correct’ within the meaning of§ 7206(1), as the inclusion of a materially false fact, Siravo v. United States, 377 F.2d 469 (1st Cir. 1967)."

On Informing the Jury of Jury Nullification and Sentencing Consequences (12/21/19; 12/22/19)

In United States v. Manzano, ___ F.3d ___ (2d Cir. 2019), here (2d Cir.) or here (Google Scholar), a nontax case, the Second Circuit addressed issues of jury nullification and instructing the jury as to the sentencing consequences of guilty verdicts.  Those are big issues that surface sometimes in nontax crimes cases but rarely in tax crimes cases.  They could surface in tax crimes cases and tax crimes practitioners should be aware of the issue so that they can “surface” the issues when they need to.

In Manzano, the Court’s unofficial summary is:

On the eve of trial, the United States District Court for the District of Connecticut (Underhill, Chief Judge) ruled that Respondent – who is charged with, [*2] inter alia, production of child pornography, an offense punishable by a mandatory minimum term of fifteen years’ imprisonment – could argue jury nullification at trial.  The district court also reserved decision on whether evidence of sentencing consequences would be admissible.  The government now petitions for a writ of mandamus directing the district court to preclude defense counsel from arguing nullification and to exclude any evidence of sentencing consequences.  We hold that the conditions for mandamus relief are satisfied with respect to the district court’s nullification ruling, but not with respect to the admissibility of evidence of sentencing consequences.  Thus, we grant in part and deny in part the petition. 

So, let’s start with the concept of jury nullification.  As I understand in broad strokes and without nuance, the concept of jury nullification is is that a jury, normally in our system serving solely the role of fact finder (did the defendant factually do the acts that the law describes as a crime), can choose not to return a verdict of guilty because it has concerns about the law or the application of the law to the case at hand.  The jury believes that the prescribed punishment for the crime does not fit the culpability of the defendant.  (Or as the more humane Mikado says (Gilbert & Sullivan, here) the punishment should fit the crime.) More nuanced discussion can be found in Clay S. Conrad, Jury Nullification: The Evolution of a Doctrine (Cato Institute 2014), here.  A reasonable summary can be found in Wikipedia’s entry on Jury Nullification here.

Moving to Manzano, the relevant facts are succinctly stated by the Court (Slip Op. 4):

Coutts & Co. Ltd. Enters an Addendum to its Swiss Bank Program Category 2 NPA (12/20/19)

I previously reported that Coutts & Co. Ltd. (“Coutts”) had entered a NonProsecution Agreement (“NPA”) with DOJ Tax under the DOJ Swiss Bank Program.  Five More Banks Obtain NPAs under DOJ Swiss Bank Program (Federal Tax Crimes Blog 12/23/15), here.  Under the original NPA, Coutts paid $74.5 million (rounded) in penalties.  DOJ Tax announced today here that Coutts has entered an addendum to the NPA after disclosing additional, previously undisclosed, accounts and agreeing to pay an additional $27.9 million, for a combined penalty amount of $102.4 million (rounded).

The key excerpts are (emphasis supplied):

The Department of Justice announced today that it has signed an Addendum to a non-prosecution agreement with Coutts & Co Ltd. (Coutts), a private Swiss bank headquartered in Zurich.  The original non-prosecution agreement was signed on Dec. 23, 2015. At that time, Coutts reported that it held and managed 1,337 U.S. related accounts, with assets under management exceeding $2 billion, and paid a penalty of $78,484,000. In reaching today’s agreement, Coutts acknowledges that it should have disclosed additional U.S.-related accounts to the Department at the time of the signing of the non-prosecution agreement. 

“This agreement reflects our commitment to ensuring that foreign banks that participated in the Swiss Bank Program fully comply with their obligations to disclose accounts in which U.S. taxpayers have direct or indirect interests,” said Principal Deputy Assistant Attorney General Richard E. Zuckerman of the Justice Department’s Tax Division. “When any person or entity makes false, incomplete, or misleading disclosures to the Department, the Department will hold those persons or entities accountable.” 

The Swiss Bank Program, which was announced on Aug. 29, 2013, provided a path for Swiss banks to resolve potential criminal liabilities in the United States relating to offshore banking services provided to United States taxpayers. Swiss banks eligible to enter the program were required to advise the Department by Dec. 31, 2013, that they had reason to believe that they had committed tax-related criminal offenses in connection with undeclared U.S.-related accounts. As participants in the program, they were required to make a complete disclosure of their cross-border activities, provide detailed information on an account-by-account basis for accounts in which U.S. taxpayers had a direct or indirect interest, cooperate in treaty requests for account information, and provide detailed information about the transfer of funds into and out of U.S.-related accounts, including undeclared accounts, that identifies the sending and receiving banks involved in the transactions. 

The Department executed non-prosecution agreements with 80 banks between March 2015 and January 2016. The Department imposed a total of more than $1.36 billion in Swiss Bank Program penalties.  Pursuant to today’s agreement, Coutts will pay an additional sum of $27,900,000 and will provide supplemental information regarding its U.S.-related account population, which now includes 311 additional accounts.  

Every bank that signed a non-prosecution agreement in the Swiss Bank Program had represented that it had disclosed all known U.S.-related accounts that were open at each bank between Aug. 1, 2008, and Dec. 31, 2014.  Each bank also represented that it would, during the term of the non-prosecution agreement, continue to disclose all material information relating to its U.S.-related accounts.  In reaching today’s agreement, Coutts acknowledges that there were additional U.S.-related accounts that it knew about, or should have known about, but that were not disclosed to the Department at the time of the signing of the non-prosecution agreement. Coutts has fully cooperated with the Department with respect to the additional U.S.-related accounts. 

Eleventh Circuit Sustains IRS Summons Issued For French Tax Investigation (12/18/19)

[This is a cut and paste of a posting on my Federal Tax Procedure Blog]

In Redfern v. United States (11th Cir. Dkt. 19-12649 12/17/19) (unpublished), here, the Court affirmed the IRS’s issuance of summonses to various banks “at the request of the French government, pursuant to the United States–France Income Tax Treaty, to aid an ongoing investigation into Redfern’s [French] tax liability.”

For background on the process, I cut and paste this (footnotes omitted) from a version of the working draft of my Federal Tax Procedure Book (basically same as in my Federal Tax Procedure 2019 editions):

In an increasingly globalized economy, records relevant to tax administration in one country may be possessed by someone in another country. Under many U.S. bilateral tax treaties, one treaty partner is obligated to assist the other in gathering information relevant to the latter's tax administration. For example, the Canadian tax authority (referred to as the “competent authority” in treaty parlance) under the U.S./Canada Double Tax Treaty may request the U.S. tax authority (i.e., the U.S. competent authority) to obtain information in the U.S. for Canadian tax administration. (This is commonly referred to as an “exchange of information” provision.) If the request is within the scope of the treaty, the U.S. competent authority will authorize the IRS to issue an administrative summons. The ultimate taxpayer involved may then bring a motion to quash if the summons is to a third party or, if the summons is to the taxpayer, may invoke any basis for noncompliance and await the IRS's pursuit of a summons enforcement proceeding.  

In United States v. Stuart, 109 S. Ct. 1183 (1989), Canada made such a request to the U.S., the U.S. issued summonses to third parties, and the taxpayer brought a motion to quash. The issue presented was whether the Code's limitation on the use of administrative summonses when a DOJ referral is in effect (§ 7602(d)) applies in the case of a summons issued under the Canadian treaty in relation to the Canadian tax. That Code limitation had been enacted after the U.S./Canadian double tax treaty in question had been negotiated and entered into force. Arguably, even if that limitation were not in the treaty, Congress's subsequent legislation may have created a treaty override. The taxpayer argued that the status of the Canadian tax investigation was the equivalent of a DOJ referral and thus the use of an IRS administrative summons was not proper. The Court held that, notwithstanding the subsequent enactment, the treaty itself controlled and had no such limitation, so that it need not inquire into the status of the Canadian investigation.  

In subsequent cases, courts have held that the propriety of the foreign country’s tax investigation is not relevant to whether the IRS can issue and enforce the summons (or avoid a petition to quash the summons); rather, the issue is whether the IRS has met the Powell requirements for the summons focusing on its actions and not that of the foreign treaty partner requesting the IRS to use its processes to obtain the requested information.  

 Similar processes are available under the OECD Convention on Mutual Assistance in Tax Matters, which is a multilateral treaty, and possibly other treaties as well, although most of the litigated cases appear to involve the bilateral double tax treaties.

The process employed in Redfern for the summons as follows (Slip Op. p. 2):

As required by Internal Revenue Code § 7609(a)(1), the IRS provided Redfern, as the holder of the accounts, with notice of the summons and an explanation of the recipient’s right to bring a proceeding to quash the summons. Specifically, it mailed the required notice to Redfern at (1) the address that appeared on his most recently filed and processed federal tax return and (2) the address identified by France as the address he reported to the government, as well as (3) to Leslie R. Kellogg, an attorney at Hodgson Russ LLP, from whom the IRS had received a power of attorney signed by Redfern authorizing her to receive confidential tax information on Redfern’s behalf.