Tuesday, October 16, 2018

Attorney Fraud Resulting in Tax Court Decision; Can It Be Corrected? How? (10/16/18; 10/17/18)

This article caught my attention today:  Bruce Vielmetti, Former Foley & Lardner partner suspended for falsifying documents in IRS audit of Carmex family (Journal Sentinel 10/16/18), here.  The opening paragraph says:
A former Foley & Lardner partner was suspended two years Tuesday by the state Supreme Court for lying to the IRS during an audit of two wealthy estates connected to a major area business.  
So, I went to the Wisconsin Supreme Court opinion which is here.  I offer the the pertinent portions relevant to the issue I address here as to whether and how the IRS can correct a tax under-assessed because of a Tax Court decision induced by fraud.
¶6 While working at the Foley firm, Attorney Wiensch provided estate planning services to a husband and wife who were owners of a privately owned business corporation. Attorney Wiensch prepared a trust under the terms of which the husband and wife were the trust donors and their children were the trustees and beneficiaries. Attorney Wiensch drafted an  Installment Sale Agreement, pursuant to which the husband sold most of his stock in the company to the trust in exchange for a promissory note in an amount in excess of $50 million based on the appraised value of the stock sold. The purpose of the stock sale was to transfer wealth to the clients' children, via the trust, free of gift and estate taxes and to ensure that any future appreciation of the stock held by the trust would not become part of the husband's estate. 
¶7 Transactions structured like the stock sale are reviewed by the Internal Revenue Service (IRS) to determine if the promissory note is a bona fide debt, or if the transaction should be treated as a taxable gift, or if transferred assets should be included in the seller's gross estate for purposes of determining the estate tax liability. Strategies used by estate planning professionals to minimize the risk of an IRS challenge to transactions such as the stock sale have included the use of personal guarantees by trust beneficiaries of a certain percentage of the sale price, often ten percent, or of a defined value formula clause that automatically adjusts valuation of the transferred assets based on a final determination by the IRS or a court. 
¶8 The husband died first, and pursuant to his estate plan, ownership of his remaining shares in the company passed to his wife as the surviving spouse. Attorney Wiensch was retained to represent the husband's estate. Attorney Wiensch prepared the estate tax return for the husband's estate and filed it with the IRS. The IRS audited the husband's estate tax return, as well as other gift tax returns filed on behalf of the clients for years prior to the husband's death.  
¶9 An IRS estate tax attorney served as the examiner for the IRS in conducting the audit. The IRS attorney corresponded with Attorney Wiensch in an effort to obtain information material to the audit. In September 2012, in response to requests from the IRS attorney, Attorney Wiensch sent the IRS copies of an Installment Sale Agreement, a Collateral Pledge Agreement, and a Guaranty of Specific Transaction. Attorney Wiensch represented to the IRS that the Installment Sale Agreement memorialized the terms of the stock sale and that the Collateral Pledge and Guaranty related to the stock sale. The copy of the Installment Sale Agreement Attorney Wiensch sent to the IRS in September 2012 contained a defined value formula clause. Attorney Wiensch altered and misdated the Installment Sale Agreement he sent to the IRS in September 2012. He did not prepare this document contemporaneously with the stock sale. The Installment Sale Agreement the husband actually executed on an earlier date did not contain the defined value formula clause.

Tuesday, October 9, 2018

On the Klein/Defraud Conspiracy Used by Special Counsel Against Russian Targets; A Tool for Use Against Trump? (10/9/18)

In my federal tax crimes practice and writing I have often lamented the potential sweeping scope of what is called the "Klein conspiracy," which is the defraud conspiracy under 18 USC § 371.  There are two types of conspiracy in the statute -- (i) a conspiracy to commit an offense otherwise prescribed by statute, such as a conspiracy to commit tax evasion as defined in § 7201 (called an offense conspiracy) and (ii) a conspiracy to defraud the U.S., worded variously but generally stated as a conspiracy to impair or impede the lawful functions of a U.S. agency.  The second, the defraud conspiracy, is commonly called a Klein conspiracy named for a leading defraud conspiracy case.  The Klein conspiracy does not require a separate offense as the object of the conspiracy; it simply requires that two or more persons conspire together simply to impair or impede the Government agency.  The Klein conspiracy is frequently used for larger tax crimes where the alleged object is to impair or impede the IRS, but can be used in other agency settings as well.  (Klein itself was a tax case.)

A good general article on the potential dangers of the Klein conspiracy is here:  Eric Felten, A Conspiracy So Vast . . .: But where’s the crime? (The Weekly Standard 10/9/18), here.  I am quoted in the article because I have written, copiously about my concerns about the potential breadth of the Klein conspiracy.  (See links to the principal writings collected at the end of this blog entry.) Felten's article does not get into the twists and turns explored in my thrashings on the issue, but does provide a good summary overview for knowledgeable reader not otherwise steeped in the details of the law of conspiracy theories.  The particular interest of the article is the deployment of the Klein conspiracy by the special counsel in the investigation into Russian meddling in the 2016 election.

Here are some quotes from the article:
Dreeben argued that the United States needs only “to prove a conspiracy to defraud the United States.” But “we do not need to prove a criminal violation of the underlying statute,” he told the judge. In other words, the prosecution is claiming that a conspiracy to do “x” can be criminal even if “x” is not itself a criminal act. This may sound strange, but it’s not a mistake. Pressed by Judge Dabney Friedrich, the deputy solicitor general restated it: “There’s a legion of cases,” Dreeben said, that “have specifically said you don’t need to have an underlying illegality in a conspiracy to defraud.” 
He’s right. Conspiracy law is notoriously elastic. Even so, a prosecutor would rather have conspirators dead to rights on a clear, willful violation of a law than have to establish that colluding to do something not proved to be a crime is nonetheless a crime in and of itself. The latter sort of scenario is why you might need a deputy solicitor general on your team. 
The specific acts Concord is alleged to have engaged in—paying Russians to write social media posts about American politics—aren’t necessarily illegal. Such activities may violate the spirit of U.S. election law and the Foreign Agents Registration Act, but they don’t necessarily fit the elements of any crime on the books. That’s where the conspiracy charge comes in handy. Concord’s lawyers say their client has been charged “for a contrived crime not specifically defined in any statute, without notice and under a standard known only to the special counsel.” 
Yes, and so what? responds the special counsel’s office. Quoting case law, Mueller’s team asserts, “The [conspiracy to] defraud clause does not depend on allegations of other offenses.” And because of that, “even otherwise ‘lawful activity may furnish the basis for a conviction under [Section] 371’ ”—that is, the section of federal law dealing with criminal conspiracies. 
* * * * 
How did we get to a place where agreeing with someone to do something otherwise legal can be prosecuted as a criminal conspiracy? And is Concord Management likely to have any luck challenging the constitutionality of such a law?

Swiss Dispute Sharing Data with U.S. (10/9/18)

Swiss-US tax data transfer method 'violates law' (SWI swissinfo 10/7/18), here.  The article is short.  I nevertheless excerpt the following:
The Swiss Supreme Court has already issued a ruling that bans the indiscriminate disclosure of people’s names without forewarning the individuals involved. This applies even when Switzerland has a treaty to automatically exchange tax information with other countries, as it does with 30 nations including the US. 
* * * * 
These treaties were signed following a US criminal probe into the way Swiss banks helped tax evaders. The investigation and threats of legal sanctions brought about the demise of Swiss banking secrecy.  
Data Protection Commissioner, Adrian Lobsiger, believes the Finance Ministry is failing to observe the court’s ruling on protecting the rights of individuals caught up in the transfer of data. His office told the SonntagsZeitung newspaper that it had issued a complaint to the Federal Administrative Court on Friday. 
* * * * 
The tax administration says it is too costly to black out all the names on thousands of pages of documents being handed to the US, the article states. It also states that Finance Minister Ueli Maurer has the backing of the cabinet on this issue, arguing that failure to comply with US demands for data could result in damaging repercussions. 
A spokesman for the Finance Ministry told the SonntagsZeitung that the department has authority to send data to countries that have a functioning constitutional system. Swiss citizens therefore have the opportunity to dispute proceedings in other countries, which result from their names being handed over, by arguing that the evidence is inadmissible.

France Take UBS to Court on Cross-Border Evasion for French Taxpayers (10/9/18)

The much anticipated French trial of UBS for its cross-border tax evasion scheme for the French has started.  Cross-border evasion is basically the same as U.S. offshore evasion through Swiss banks.  Here are some articles and excerpts:

Inti Landauro and Emmanuel Jarry, Swiss bank UBS on trial in France over alleged tax fraud (Reuters 10/8/18), here.  Excerpts:
Swiss bank UBS Group AG (UBSG.S), its French unit and six executives faced charges of aggravated tax fraud and money laundering on Monday, the first day of a trial into allegations they helped wealthy clients avoid taxes in France. 
After seven years of investigation and aborted settlement negotiations, UBS will also answer allegations that it illegally solicited clients in France. It risks being fined up to 5 billion euros ($5.76 billion) plus potential damages to the French taxman for the missing revenue. 
* * * * 
UBS’s lawyer Jean Veil said the French state was asking for 1.6 billion euros in damages, which he told the court was excessive. 
“They are asking crazy amounts,” he told the court. 
* * * * 
UBS’s trial in France follows a similar judicial process in the United States, where the bank in 2009 accepted to pay $780 million in a settlement. In Germany, UBS agreed to a 300 million euro fine in 2014. 
During the French investigation, UBS turned down a settlement offer of 1.1 billion euros made by the authorities. The amount corresponded to what the Swiss bank had already paid as a court bond, according to judicial sources.
Gaspard Sebag  and Patrick Winters, UBS Accused of Bond Movie Tactics in Paris Tax-Dodging Trial (Bloomberg 10/7/18; 10/8/18), here.  Excerpts:
Eric Dezeuze, a lawyer for UBS France SA, revealed the amount on day one of a trial where the Swiss lender is accused of deploying tactics “worthy of James Bond” to help customers launder money they hadn’t declared to French authorities. He said the French state’s lawyer cited the amount in recent written submissions. 
* * * * 
Zurich-based UBS dispatched bankers across the border to seek out new clients even though they lacked the paperwork -- a banking license or European passport -- to offer such services in France, the lead investigator wrote in the indictment ahead of the trial which got underway on Monday afternoon. 
When they came over from Switzerland to France UBS bankers allegedly took several steps, described in the prosecution’s opinion on the case as akin to 007 techniques and listed in a “security risk governance” manual, to avoid detection by authorities. They used encrypted computers, had business cards without the lender’s logo and were told to switch hotels regularly, according to prosecutors. The bank has consistently denied any wrongdoing. 

Monday, October 8, 2018

All the President's Joint Defense Agreements (10/8/18)

I have previously written on joint defense agreements ("JDAs") (in reverse chronological order):

  • On Trump, Manafort and Joint Defense Agreements (Federal Tax Crimes Blog 9/14/18; 9/15/18), here.
  • More on Joint Defense Agreements (Federal Tax Crimes Blog 5/15/18), here.
  • On Joint Defense Agreements (Federal Tax Crimes Blog 11/23/17), here.

A very good discussion of JDAs in the special counsel's investigation appeared today, addressed to the general public:  Darren Samuelsohn, Trump team’s contact with Mueller targets could taint findings (Politico 10/8/18), here.  The author discusses the Trump legal team's use of JDAs and whether the use may have goals beyond those normally contemplated by JDAs.  I urge readers who are interested in the intersection of politics and the criminal law to read the article because I believe it is quite good.  (Full disclosure, I am quoted in the article.)

JAT Comments:

1.  In my experience, a participant in a JDA withdraws at least by the time the participant agrees to cooperate and tell all.  Of course, that participant will not be able to disclose items that the participant learned earlier from others in the JDA which are within the scope of the JDA.  And, if the participant disclosed information to the other participants that is confidential to himself within the scope of the JDA, the participant can still disclose that information to the prosecutors pursuant to the cooperation agreement.  The only prohibition on the cooperating participant is that he cannot disclose confidential information that the other participants in the JDA disclosed to him within the scope of the JDA.  So, to use the stark example discussed in the article, if Trump or Trump's lawyers disclosed to Manafort or Manfort's lawyers Trump's admission to a crime within the scope of the JDA, Manafort could not disclose that admission to the prosecutors and, if Manafort did disclose the admission in violation of the JDA, the prosecutors would not be able to use the admission, directly or indirectly, in criminally prosecuting Trump.  Other information that Manafort or his lawyers know that was not disclosed by Trump or his lawyers pursuant to the JDA can be disclosed to the prosecutor and can be used to prosecute Trump.

2.  The problem comes in separating what the witness, here Manafort, knows independent of the confidential information he received pursuant to the JDA.  If the prosecutor wants to prosecute Trump for a crime and uses information from a person in a JDA (here that would be Manafort), the prosecutor will have to prove that the prosecution is not based on any Trump confidential information that Manafort learned from Trump or his lawyers under the JDA.  Unless the parties in the criminal action can agree, that would require a Kastigar-like hearing where the prosecutor would have to prove that the case does not rely on that "tainted" information, directly or indirectly.  That can, in many cases, be an impossible burden and would require suppression of any possibly tainted evidence or even, if so intertwined with the prosecution, dismissal of the case.

3.  For this reason, JDAs can sometimes limit the benefit that prosecutors can get from cooperation from participants in a JDA and make prosecutors less willing to strike a deal with the participant if it appears that the evidence the participant has is tainted or potentially tainted.  This requires delicate negotiations in reaching a cooperation agreement (usually by plea).  Accordingly, in complex multi-target investigations, the marginal or less important actors may want to either not join a JDA or limit and carefully document what is received under the JDA so that that participant can maintain maximum flexibility in cooperation/plea negotiations.

Sunday, October 7, 2018

San Diego Law School / Procopio Institute Program Oct 31st-Nov. 2d, 2018 (10/7/18; 10/8/18)

Tax crimes enthusiasts may be interested in this program offering :  14th Annual University Of San Diego School Of Law Procopio International Tax Institute, Oct 31st - Nov 2nd, 2018, here. The location is University of San Diego, Joan B. Kroc Institute for Peace and Justice, Alcalá Park, San Diego, California.

Blog readers qualify for a special $150 discount at the following link with the following Discount Code:  TAXCR18USD.


Select sessions that may of particular interest to tax crimes enthusiasts:

Remaining Offshore Compliance Options and International Tax Topics
Daniel N. Price, Esq., Attorney - Office of Chief Counsel (SB/SE Division - IRS)
Lic. Jacqueline Arellanes, Central Administrator of International Tax - SAT

FATCA Criminal Indictments of Overseas Advisors (Attys/CPAs/FinAd)
Victor So Song, Esq., Founding Partner - Victor Song Consulting (former IRS CI Chief)
Steven Toscher, Esq. Esq., Partner - Hochman Salkin Rettig Toscher & Perez, P.C.
Patrick W. Martin, Esq. - Procopio

United States vs. Colliot: Defending Title 31 FBAR Penalties: Pre and Post Assessments, IRS and DOJ Policies and Strategy Post Colliot
Ms. Caroline D. Ciraolo, Esq. Partner - Kostelanetz & Fink (Former AAG DOJ Tax)
Sandra Brown, Esq., Partner - Hochman Salkin Rettig Toscher & Perez
Patrick W. Martin, Esq. - Procopio

New OECD Guidance to Disclose Information to Tax Authorities - Exchange of Information and Recent cases affecting Professional Duties of Confidentiality
Lic. Juvenal Lobato, Parner - Lobato Diaz Abogados
Lic. Nadja Ruiz Euler, Partner - Ernst & Young

U.S. Passport Revocations for "Seriously Delinquent Taxpayers" - IRS § 7345 & Role of DOJ, IRS, U.S. District Court and U.S. Tax Court.
Ms. Kristen Bailey, Esq., Director of Collection Policy, Small Business Self-Employed Division - IRS
Patrick W. Martin, Esq. - Procopio

I understand that other speakers or participants may be added and will update as I become aware of them.

Saturday, October 6, 2018

On Justice Kavanaugh in my Federal Tax Procedure Book (10/6/18)

We have a new Supreme Court Justice, Brett Kavanaugh.  I thought readers might be interested in this posting to my Federal Tax Procedure Blog.  Justice Kavanaugh in the Federal Tax Procedure Book (10/6/18), here.  Topics are:  justices, statutory interpretation (specifically textualism), originalism, legislative history, footnotes, and notes.

Court Orders Disgorgement of $50 Million Gross Receipts for Bullshit Tax Shelter (10/6/18)

I wrote yesterday on the bullshit tax shelter of the Exelon Corporation, a major corporation.  Today, I write on another, less sophisticated, genre of bullshit tax shelter -- those promoted to the less sophisticated.  I say less sophisticated because it was not wrapped in a smog of paper like Exelon and others of its genre and, at the end of the day, relies on less sophisticated techniques, principally overvaluation, that has been the problem in abusive tax shelters for years.

DOJ announced here that, in United States v. RaPower-3, LLC, et. al. (D. Utah 10/4/18), here, the Court (i) ordered abusive tax shelter promoters "to disgorge over $50 million in gross receipts" from the abusive tax shelter and "barred defendants from promoting and marketing the scheme and ordered them to take steps to ensure that the public is not further harmed by their actions." 

Key excerpts from the announcement:
Based upon evidence the government submitted to the court during a 12-day bench trial, the court found that the defendants engaged in a “massive fraud.” The court stated that the defendants “each knew, or had reason to know, that their statements about the tax benefits purportedly related to buying solar lenses were false or fraudulent.” 
The court stated that “[b]ecause of the manner in which Defendants promoted the scheme, the court concludes that $50,025,480 in gross receipts from the solar energy scheme came from money that rightfully belonged to the U.S. Treasury.” The court found that the defendants “obstructed discovery about their gross receipts and other topics involving their finances.” 
The court stated that the United States showed a “reasonable approximation” of the total gross receipts from lens sales. In addition, the court held that defendants would not be allowed any credit of operating expenses because such credits “are not consistent with principles of equitable disgorgement.” 
According to the opinion, defendant Neldon Johnson claimed to have invented purported solar energy technology involving solar thermal lenses placed in arrays on towers. The court found that to “make money from this purported solar energy technology, Johnson decided to sell a component of the purported technology: the solar lenses.” 
Under the proper circumstances, the Internal Revenue Code allows a taxpayer engaged in a trade or business certain tax deductions for expenses the taxpayer incurs while generating income. Likewise, if all of the requirements are met, the tax law allows an “energy credit” for certain “energy property.” 
However, in this case, the court concluded that the defendants “knew, or had reason to know, that their customers were not in a trade or business of leasing out solar lenses and, therefore, that their customers were not allowed the depreciation deduction or solar energy tax credit.” 
The opinion also concluded that the defendants made “gross valuation overstatements” when they sold lenses to customers. The court found that the defendants sold each lens for a total purported price of $3,500. The court stated that the evidence showed that the raw cost of each supposed “lens” was very low and found that “[d]efendants’ technology does not work, and is not likely to work to produce commercially viable electricity or solar process heat. Therefore, each ‘lens’ is just one component of an inoperable system. It is not a piece of sophisticated technology such that premium pricing is appropriate for it.” 
The court also barred defendants from promoting and marketing the scheme. The court stated that the defendants sold lenses using a multi-level marketing approach, and encouraged distributors to “bring still more people in to the multi-level marketing system and build an extensive ‘downline.’” The court concluded that, in this case, “[t]he toxic combination of multi-level marketing and misleading information creates an urgent need [for] an injunction.”  
The injunction requires, among other things, that the defendants stop making statements that a person who buys a lens is in a trade or business with respect to that lens; may lawfully claim a depreciation deduction or any other business expense deduction related to a solar lens; and may lawfully claim a solar energy credit related to a lens. 
Further, the court ordered that the defendants disclose, in their marketing materials for lenses that the court “has determined that the solar energy technology of RaPower-3 in place from 2005 to 2018 is without scientific validation or substance and ineligible for tax credits or depreciation by individual purchasers of lenses.” 
* * * * 
In the past decade, the Tax Division has obtained injunctions against hundreds of unscrupulous tax preparers and tax scheme promoters. Information about these cases is available on the Justice Department’s website. An alphabetical listing of persons enjoined from preparing returns and promoting tax schemes can be found here. If you believe that one of the enjoined persons or businesses may be violating an injunction, please contact the Tax Division with details (link sends e-mail).
JAT comments:

Friday, October 5, 2018

Reuters Article on End of Swiss Bank Secrecy and the Common Reporting Standard (10/5/18)

Michael Shields, Era of bank secrecy ends as Swiss start sharing account data (Reuters 10/6/18), here.  Excerpts:
The era of mystery-cloaked numbered Swiss bank accounts has officially come to a close as Switzerland, the world’s biggest center for managing offshore wealth, began automatically sharing client data with tax authorities in dozens of other countries. 
The Federal Tax Administration (FTA) said on Friday it had for the first time exchanged financial account data at the end of September under global standards that aim to crack down on tax cheats. 
* * * * 
The initial exchange was supposed to be with European Union countries plus nine other jurisdictions: Australia, Canada, Guernsey, Iceland, Isle of Man, Japan, Jersey, Norway and South Korea. 
* * * * 
About 7,000 banks, trusts, insurers and other financial institutions registered with the FTA collect data on millions of accounts and send them on the Swiss tax agency. The FTA in turn sent information on around two million accounts to partner states. It put no value on the accounts in question. 
The information includes the owner’s name, address, country of residence and tax identification number as well as the reporting institution, account balance and capital income. This lets authorities check whether taxpayers have correctly declared their foreign financial accounts. 
The annual data swap will expand next year to about 80 partner states, provided they meet requirements on confidentiality and data security. The OECD Global Forum on Transparency and Exchange of Information for Tax Purposes reviews states’ implementation of the accord.
JAT Comments:

Another BullShit Tax Shelter Rejected But With Slight Penalty (10/5/18)

In Exelon Corp. v. Commissioner, ___ F.3d ___, 2018 U.S. App. LEXIS 28023 (7th Cir. 2018), here, the Seventh Circuit affirmed the Tax Court's rejection of a bullshit tax shelter and rejection of a reasonable cause defense to the 20% § 6662 penalty.  I wrote earlier on the trial level case: Faulty Tax Shelter Opinions and Appraisals and Resulting Civil Penalties (Federal Tax Crimes Blog 9/24/16), here.

It is clear from the tenor of the decision that the Court of Appeals like the Tax Court (Judge Laro) was not impressed with the taxpayer's arguments.

I think some portion of the penalty discussion is worth excerpting (partially cleaned up):
One common method of demonstrating reasonable cause is to show reliance on the advice of a competent and independent professional advisor. American Boat, 583 F.3d at 481 (citing United States v. Boyle, 469 U.S. 241, 251 (1985) ("When an accountant or attorney advises a taxpayer on a matter of tax law, such as whether a liability exists, it is reasonable for the taxpayer to rely on that advice.")). 
Simply relying on a professional does not necessarily relieve a taxpayer of penalties. To constitute reasonable cause, the reliance must have been reasonable in light of the circumstances. This is a fact-specific determination with many variables, but the question turns on the quality and objectivity of the professional advice obtained." To establish the defense the taxpayer, at a minimum, must show that the advice was (1) based on all relevant facts and circumstances, meaning the taxpayer must not withhold pertinent information[;] and (2) not based on unreasonable factual or legal assumptions, including those the taxpayer knows or has reason to know are untrue. The taxpayer's education, sophistication, business experience, and purpose for entering the questioned transaction are also relevant factors to be considered. 
In the instant case, the tax court sustained the Commissioner's imposition of penalties based on its findings that the underpayments for those years were attributable to Exelon's negligence or disregard of rules or regulations. In doing so, the court necessarily rejected Exelon's "reasonable cause" defense of reliance on its professional advisors. In particular, the court found that Exelon did not rely in good faith on Winston's tax opinions because Exelon "knew or should have known" that Winston's conclusions were flawed in light of the "obvious inconsistency" of the physical return condition specified in the contracts and the capacity factors projected by Deloitte for the plants at the end of the subleases, which made exercise of the purchase options more likely. The tax court found that Exelon must have appreciated that it would be very expensive for the sublessees to sufficiently upgrade the plants to meet the return capacity requirements. Thus, the court concluded that Exelon must have understood that Winston's tax opinions, based on the Deloitte appraisals, were flawed. 
Exelon's attack on this finding mimics its argument that the tax court confused capacity factor with availability factor and thus compared apples to oranges in its determination that the sublessees were reasonably likely to exercise their purchase options. We rejected that argument above and we reject it again here. We agree with the tax court that as a sophisticated plant operator, Exelon knew or should have known that, given the way these transactions were structured and given what the tax court found to be tainted appraisals, it was reasonably likely, or even highly likely, that the sublessees would exercise their options. 
Exelon continues to argue that the Deloitte appraisals were not tainted by Winston's input. More importantly, it argues that even if the appraisals were tainted, Exelon had no way of knowing that and cannot be penalized for its reliance on Winston's opinions. The record is replete, however, with evidence that Exelon knew full well that Winston was supplying Deloitte with the necessary conclusions. Both Walter Hahn and Robert Hanley of Exelon were copied on the emails sent by Winston first to Stone and Webster and then to Deloitte. Indeed, it was Hahn who concluded that most of the requested conclusions were items for Deloitte, and sent the list of Winston's necessary appraisal conclusions to Deloitte multiple times. 
Whether reasonable cause exists, and the finding underlying that determination, are questions of fact which we review for clear error. We find no such error and affirm the tax court's conclusion that penalties are warranted under § 6662.
JAT Comments:  

Tuesday, October 2, 2018

New York Times Special Investigation Report on Trump Family Tax Avoidance/Evasion (10/2/18; 10/3/18)

The NYT has this report:  Trump Engaged in Suspect Tax Schemes as He Reaped Riches From His Father (NYT 10/2/18), here.

Some interesting excerpts without getting too much into the details laid out:
The line between legal tax avoidance and illegal tax evasion is often murky, and it is constantly being stretched by inventive tax lawyers. There is no shortage of clever tax avoidance tricks that have been blessed by either the courts or the I.R.S. itself. The richest Americans almost never pay anything close to full freight. But tax experts briefed on The Times’s findings said the Trumps appeared to have done more than exploit legal loopholes. They said the conduct described here represented a pattern of deception and obfuscation, particularly about the value of Fred Trump’s real estate, that repeatedly prevented the I.R.S. from taxing large transfers of wealth to his children. 
“The theme I see here through all of this is valuations: They play around with valuations in extreme ways,” said Lee-Ford Tritt, a University of Florida law professor and a leading expert in gift and estate tax law. “There are dramatic fluctuations depending on their purpose.” 
The manipulation of values to evade taxes was central to one of the most important financial events in Donald Trump’s life. In an episode never before revealed, Mr. Trump and his siblings gained ownership of most of their father’s empire on Nov. 22, 1997, a year and a half before Fred Trump’s death. Critical to the complex transaction was the value put on the real estate. The lower its value, the lower the gift taxes. The Trumps dodged hundreds of millions in gift taxes by submitting tax returns that grossly undervalued the properties, claiming they were worth just $41.4 million.
JAT Comments:

Court Grants Default Judgment on FBAR Nonwillful Penalty (10/2/18)

In United States v. Marstellar, 2018 U.S. Dist. LEXIS 164706 (W.D. Va. 2018), here, the Court granted default judgment against Marstellar for FBAR nonwillful penalties.  Marsteller failed to appear and respond.  Accordingly, the Court granted default judgment on the Government's complaint and a submission by the IRS FBAR Penalty Coordinator.  The penalty amount was $40,000 ($10,000 per year for four years).  The judgment amount was $44,295.89. including accrued interest and late-payment penalties.

NYT Article on Reduced IRS CI Criminal Tax Enforcement (10/2/18)

The New York Times has this article:   Jesse Eisinger and Paul Kiel, I.R.S. Tax Fraud Cases Plummet After Budget Cuts (NYT 10/1/18), here.  The article is quite good as a general discussion of the tax crimes enforcement problems.

I will first summarize some key points of the article and then include some excerpts related to offshore account enforcement that has been prominent source in postings on this blog.

1.  IRS criminal enforcement is way down.  As a result, "Provided you’re not a close associate of President Trump, there may never be a better time to be a tax cheat."  The statistic given is:  "Last year, the I.R.S.’s criminal division brought 795 cases in which tax fraud was the primary crime, a decline of almost a quarter since 2010."  I have not gotten behind that statistic.  I don't know what 795 cases means.  IRS CI does not bring cases.  DOJ Tax brings the cases (prosecutions).  I infer that the 795 may mean referrals to DOJ Tax.  But, I could not even verify that number.  The IRS does post its CI statistics here which show that the number of Tax Investigations (as opposed to Other Financial Crimes is way down through FY 2016, but the number of prosecution recommendations in tax investigations does not appear to be material down over the time period presented (from FY 2007 to FY 2016).  It is true that the number was higher in the most immediate 5 year period, but was lower most of the years before that.  Although not a direct comparison, I offer a statistics spreadsheet, here, which I maintain based on the IRS data book and the statistics link noted above.  (For those who review this spreadsheet, please review my note at the end of the spreadsheet that I just present the data plus calculated percentages from the data and do not attempt to reconcile the underlying data in the two Tables; also, I would appreciate any thoughts on how these statistics may be reconciled.)

2.  Criminal tax enforcement is central to the IRS's mission and important to encouraging compliance among the whole population of taxpayers.

3.  Criminal tax enforcement has been dramatically reduced by budget cuts and shift in priority of IRS CI.  JAT Note: I thought CI had reduced the shift in priority after the Webster Report in the late 1990s so that IRS could devote more of its limited resources to the type of tax enforcement that would support the general revenue function of the IRS.

4.  The budget constraints have resulted in dramatic reduction of CI special agents and reduction in the pipeline of referrals from civil agents.

5.  The following excerpts relate to offshore accounts:

Saturday, September 29, 2018

TIGTA Report on IRS Compliance Activity Bank Secrecy Act Delegated Authority Other than For FBARs (9/29/18)

TIGTA has issued a report titled "The Internal Revenue Service’s Bank Secrecy Act Program Has Minimal Impact on Compliance (Ref. Num. 2018-30-071 9/24/18), here.  Although included in the report, the highlights page is here.

The report note (p. 2) that the IRS has delegated authority over the following areas (emphasis supplied by JAT):
1) Enforce the criminal provisions of the BSA as provided in 31 C.F.R. § 1010.810(c)(2). 
2) Examine certain nonbank financial institutions to determine compliance as set forth under Title 31 BSA requirements in December 1992; however, the FinCEN retains the final authority to impose civil penalties.n3
   n3 Originally delegated under Department of the Treasury Directive 15-41, December 1, 1992, and as authorized under 31 C.F.R. § 1010.810(b)(8). This regulation authorizes the IRS to conduct most of its Title 31 BSA examinations, such as those with respect to nonbank financial institutions. It does not authorize the IRS to investigate Report of Foreign Bank and Financial Accounts violations; that authority is found in 31 C.F.R. § 1010.810(g). Also, final authority to assess civil penalties is delegated to the FinCEN per 31 C.F.R. § 1010.810. 
3) Examine and impose civil penalties for the Report of Foreign Bank and Financial
Accounts in April 2003.n4 (TIGTA’s review does not include a review of the Report of Foreign Bank and Financial Accounts program).
   n4 Memorandum of Agreement and Delegation of Authority for Enforcement of FBAR Requirements, April 2, 2003; and as authorized under 31 C.F.R. § 1010.810(g)
Accordingly, per 3), the report does not deal with the IRS's FBAR enforcement which has figured so prominently in this blog.  The report does cover other authorities related to tax crimes.

I cut and paste the highlights page:

Final Report issued on September 24, 2018 
Highlights of Reference Number:  2018-30-071 to the Commissioner of Internal Revenue. 
The Currency and Foreign Transactions Reporting Act of 1970 requires U.S. financial institutions to assist U.S. Government agencies in detecting and preventing money laundering and to assist U.S. persons in reporting foreign bank and financial accounts.  The law has been amended several times and is now known as the Bank Secrecy Act (BSA).  The IRS received delegated authority to enforce the BSA’s criminal provisions and examine certain nonbank financial institutions.  The IRS also has authority to examine trades and businesses for compliance with Form 8300, Report of Cash Payments Over $10,000 Received in a Trade or Business, under Internal Revenue Code Title 26 and 31 and authority to assess penalties under Title 26.  However, the Financial Crimes Enforcement Network (FinCEN) retains the final authority to impose Internal Revenue Code Title 31 civil penalties. 
This audit was initiated to evaluate the impact of the IRS’s compliance efforts related to its delegated authority under the BSA. 
The IRS Small Business/Self-Employed Division conducts BSA compliance activities through its Specialty Examination function, which has a dedicated BSA Program.  TIGTA reviewed a statistically valid random sample of 140 compliance cases from a population of 24,212 closed cases worked by the BSA Program for Fiscal Years 2014 through 2016 and found that 105 (75 percent) were closed with 383 Title 31 violations in which the respective business only received a letter citing the violations found.  For the same fiscal year period, TIGTA found that 1) referrals to the FinCEN of Title 31 penalty cases go through lengthy delays and have little impact on BSA compliance; 2) the BSA Program spent about $97 million to assess approximately $39 million in penalties; and 3) while referrals were made to IRS Criminal Investigation, most of the investigations were declined and less than half of the cases were accepted. 
Additionally, a September 2016 TIGTA report addressed the need for the IRS to incorporate BSA Program personnel in developing its virtual currency strategy; however, the IRS has still not effectively used the BSA Program in this area.  TIGTA also found that until June 2017, the BSA Program did not require Publication 1, Your Rights as a Taxpayer, as a required enclosure to notify taxpayers of their rights when initiating a Form 8300, Title 26 examination, and some examiners still are unaware of the change that requires taxpayers to be notified of their rights. 
TIGTA recommended that the IRS: 1) coordinate with the FinCEN on the authority to assert Title 31 penalties or reprioritize resources to more productive work; 2) leverage the BSA Program’s Title 31 authority and annual examination planning in the development of the IRS’s virtual currency strategy; 3) notify examiners of new appointment letter enclosures that includes Publication 1; 4)  evaluate the effectiveness of the newly implemented review procedures for FinCEN referrals; and 5) improve the process for referrals to IRS Criminal Investigation.  The IRS agreed with four of the five recommendations.  The IRS will incorporate its virtual currency strategy into its Title 31 compliance efforts; provide BSA examiners guidance on appointment letter enclosures; review and improve the FinCEN referral process; and review the BSA criminal referral criteria to maximize efficiency and enhance BSA referrals to Criminal Investigation.  However, the IRS disagreed with pursuing Title 31 penalty authority stating it was outside its purview and that the FinCEN intends to retain this authority.

Friday, September 28, 2018

DOJ "Justice Manual" -- the USAM Revised, Updated, Renamed (9/28/18)

The Department of Justice issues this Press Release:  Department of Justice Announces the Rollout of an Updated United States Attorneys’ Manual (9/25/18), here.  I quote it in full because it is short; I bold face things I want to draw attention to:
Department of Justice Announces the Rollout of an Updated United States Attorneys’ Manual
The Department of Justice announced the rollout of an updated United States Attorneys’ Manual, now titled the Justice Manual. It is the first comprehensive review and overhaul of the Manual in more than 20 years. The Department-wide effort involved the dedicated work of over 200 Department of Justice employees. 
“This was truly a Department-wide effort, involving hundreds of employees collaborating from many different Department components,” said Deputy Attorney General Rod Rosenstein. “To mark this significant undertaking, and to emphasize that the Manual applies beyond the United States Attorneys’ Offices, we have renamed it the Justice Manual. Though the name has changed, the Manual will continue as a valuable means of improving efficiency, promoting consistency, and ensuring that applicable Department policies remain readily available to all employees as they carry out the Department’s vital mission.” 
By 2017, many provisions of the Manual no longer reflected current law and Department practice. This diminished the Manual’s effectiveness as an internal Department resource, and reduced its value as a source of transparency and accountability for the public. To bring the Manual up to date, employees from around the country, primarily career attorneys, undertook a yearlong, top-to-bottom review. The Department’s goals were to identify redundancies, clarify ambiguities, eliminate surplus language, and update the Manual to reflect current law and practice. 
Some specific changes include expanding the Principles of Federal Prosecution to incorporate current charging and sentencing policies, and adding new policies on religious liberty litigation, third-party settlement payments, and disclosure of foreign influence operations.
The Justice Manual is here.

The Tax Section is Title 6 and is here with the following sections (cut and paste):
6-1.000 - Policy
6-2.000 - Prior Approvals
6-3.000 - Prior Approvals
6-4.000 - Criminal Tax Case Procedures
6-5.000 - Civil Tax Case Responsibility
6-6.000 - Compromises And Concessions
6-7.000 - Post-Judgment Collection
I think there may be a mistake in the naming of the first three.  I think the Policy is in 6-2.000 and the Prior Approvals are in 6-3.000.  The first section (6-1.000) is just a description of the scope of the Tax Division's work, rather than statements of policy.  So, I think the first three sections should be named as follows:

6-1.000 - The Tax Division's Scope [My description]
6-2.000 - Policy
6-3.000 - Prior Approvals

I have not attempted to read through the provisions and thus cannot speak to how they may have been changed.  I really don't intend to try to compare to the provisions in the now superseded USAM, but I do plan to work my way through them (hopefully sometime in October) to see whether anything catches my attention.

Caterpillar Shareholder Suit For Fraudulent Disclosures from Tax Civil and Criminal Investigation Dismissed (9/28/18)

I have previously written on the Caterpillar kerfuffle.  Search Warrant Executed Against Caterpillar HQ, Apparently Related to Tax (Federal Tax Crimes Blog 3/6/17; 3/8/17), here; and The Whistleblower Behind Caterpillar Tax Commotion (6/2/17), here.  A district court has just dismissed a shareholder claim securities fraud against Caterpillar for inadequate and misleading disclosures about the search warrant and criminal investigation.  Société Générale Securities Services, GbmH v. Caterpillar, Inc. (N.D. Ill. No. 17 cv 1713), order dated 9/26/18, here.

Basically, several agencies of the Government, including the IRS, obtained and executed a search warrant.  The apparent focus was:
Caterpillar’s creation of a Swiss subsidiary, Caterpillar S.A.R.L. (“CSARL”) in 1999, through which Caterpillar paid an effective tax rate of 4-6% to the Swiss government. Société Générale alleges that CSARL lacked a proper business purpose and thus was not a legitimate tax reduction plan. A former employee filed a whistleblower lawsuit  that was resolved through a settlement. After that lawsuit, however, the IRS, Congress, and other government agencies began investigating Caterpillar’s tax position.
Large dollars are potentially involved which could substantially affect Caterpillar's financial position and stock price.  In addition, if indeed Caterpillar participated in illegal tax shenanigans, major fines and other financial consequences could apply and reputational consequences could apply.

When a registered public company has a significant event that could affect its share price, it has to make appropriate public announcements.  Obviously, a previously undisclosed criminal investigation with a search warrant is a major event requiring some disclosures.  Caterpillar made announcements which, according to the opinion, the plaintiff alleged were actionably inadequate by downplaying the potential financial effect of the investigations, particularly the potential for significant tax, penalties and interest.  The Court summarized and categorized the claims as follows:
(1) General statements that Caterpillar’s consolidated financial statements are prepared in accordance with generally accepted accounting principles (“GAAP”). These statements appear in nearly identical form in Caterpillar’s Form 10-K (2013-2017) and Form 10-Q for each quarter of 2013 and 2014. 
(2) Statements disclosing the IRS examination of tax returns from 2007 to 2009 in Form 10-K (2013 and 2014) and Form 10-Q (each quarter of 2014). The forms further state: “In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on our consolidated financial position, liquidity or results of operations.” In 2014, Caterpillar included the additional statement that this opinion included “the impact of a loss carry-back to 2005.”  
(3) Lagacy’s testimony before the Senate Subcommittee and corresponding press release in advance of that testimony in which she referred to Caterpillar’s legal compliance with tax laws, that CSARL is not a shell corporation, and that Caterpillar remains convinced that its restructuring complied with the tax code. 
(4) Caterpillar’s Form 10-K, 2015-2016 (all quarters) and 2017 (first quarter) disclosed the grand jury subpoena from January 8, 2015, stating: “The Company is cooperating with this investigation. The Company is unable to predict the outcome or reasonably estimate any potential loss; however, we currently believe that this matter will not have a material adverse effect on the Company’s consolidated results of operations, financial position or liquidity.” Caterpillar further states: “we believe that taxing authorities could challenge certain positions[,]” and reported that “[o]n January 30, 2015, we received a Revenue Agent’s Report (RAR) from the Internal Revenue Service (IRS) indicating the end of the field examination of our U.S. tax returns for 2007 to 2009 including the impact of a loss carryback to 2005. The RAR proposed tax increases and penalties for these years of approximately $1 billion primarily related to two significant areas that we intend to vigorously contest through the IRS Appeals process…. Based on the information currently available, we do not anticipate a significant increase or decrease to our recognized tax benefits for these matters within the next 12 months. We currently believe the ultimate disposition of these matters will not have a material adverse effect on our consolidated financial position, liquidity or results of operations. We expect the IRS field examination of our U.S. tax returns for 2010 to 2012 to begin in 2015. In our non-U.S. jurisdictions, tax years are typically subject to examination for three to eight
I won't get into the details of the court's treatment of the securities and fraud claims because they relate to law other than the focus of this blog -- federal tax crimes.  But, federal tax crimes enthusiasts might be interest in the following excerpts (which at least I found interesting):

Wednesday, September 26, 2018

Court Holds That Liability for FBAR Civil Willful Penalty Survives Death (9/26/18)

In United States v. Schoenfeld (M.D. Fla. 3:16-cv-1248-J-34PDB), by order dated 9/25/18, here, the Court held (p. 37) that the "the Court finds that the Government's claim did not abate upon Steven Schoenfeld's death."  The reasoning for the holding is found at pp. 24-36.  The first 24 pages include a short one-page introduction and then 23 pages disposing of procedural issues arising from the death of the person putatively liable that the Government sued after he had died but without knowledge of his death.  I do not discuss the procedural issues because they do not appear to be of interest to readers of this blog.

I also do not discuss the key holding of interest -- that the FBAR civil willful penalty survives death.  The Court does a good job of developing and resolving the issue.  Whether its resolution of the issue will ultimately be sustained is an open issue.

I have discussed this issue before, so I refer readers to the blog entry discussion:  Will the FBAR Willful Penalty Survive Death (Federal Tax Crimes Blog 6/6/14), here (which links to Les Book's excellent discussion on the Procedurally Taxing Blog).

Ninth Circuit Affirms Convictions for Klein conspiracy, Tax Evasion and Tax Perjury (9/26/18)

In United States v. Visconti, ______ (9th Cir. 2018) (nonpublished), here, the Ninth Circuit affirmed Visconti's conviction for "conspiracy to defraud the United States, attempted evasion of income tax, and making a false tax return."  Since the decision is nonpublished, the panel apparently felt it somewhat routine.  Nonetheless, I thought readers might find the following helpful:

1.  Corporate Distributions - the Boulware Issue

It is conventional wisdom that the Government bears the burden of proving beyond a reasonable doubt that the criminal defendant is guilty.  Where the criminal count is that the taxpayer failed to report a distribution from a corporation with respect to his stock, the distribution is only income if either (or some combination of both), the corporation has E&P and, to the extent there is no E&P, the distribution exceeds the defendant's basis in the stock with respect to which the distribution was made.  So, does the Government have to prove beyond a reasonable doubt E&P and/or insufficient basis in order to convict the defendant for willfully evadinig tax on the distribution (§ 7201) or willfully misstating the quantum of his income (§ 7206(1))?  The answer is no; the absence of the elements that would make the corporate distribution nontaxable is an affirmative defense that the criminal defendant must establish.  See Boulware v. United States, 552 U.S. 421 (2008); and United States v. Boulware, 558 F.3d 971 (9th Cir. 2009); see also Boulware Wins the Battle Only to Lose the War (Federal Tax Crimes Blog 3/9/09), here (discussing the 9th Circuit decision on remand from the Supreme Court); and for more on affirmative defenses in criminal cases, see Supreme Court Decision on Burden of Proof for Affirmative Defense of Withdrawal from Conspiracy (Federal Tax Crimes Blog 1/10/13), here.

In Visconti, the Court held that "Visconti failed to establish that his stock basis exceeded the value of the distributions."  The facts on that issue appear to me to be somewhat convoluted, but it does appear that Visconti failed to meet that burden.

What about the E&P issue?  The Court did not discuss it, but Visconti would clearly lose unless he established both lack of E&P and sufficient basis to cover the distribution.  By showing that he lacked that basis, the distribution would be taxable whether or not there was E&P.

Question, by holding that the defendant must prove the defense, one issue is what that level of proof is?  Beyond a reasonable doubt?  (Certainly not.)  By a preponderance of the evidence?  (Suspect to me)?  Or, just sufficient to show that the Government has not proved it case beyond a reasonable doubt? (I think this is right.)

2.  Admission of a Witness' Plea Agreement and the Vouching Issue.

It is standard law that the prosecutor should not vouch for the credibility of a witness.  See e.g., United States v. Warshak, 631 F.3d 266 (6th Cir. 2010), reh'g and reh'g en banc denied, 2011 U.S. App. LEXIS 5007 (6th Cir. 2011) (noting that improper prosecutorial vouching "typically occurs occurs when a prosecutor supports the credibility of a witness by indicating a personal belief in the witness's credibility, thereby placing the prestige of the office of the United States Attorney behind that witness." (Cleaned up)).  Visconti claimed that the admission of the witness' plea agreement requiring that he testify truthfully had the effect of the prosecutor vouching for the credibility of the witness.  The court rejected the argument as follows:
Visconti relies on dicta in United States v. Roberts, 618 F.2d 530, 536 (9th Cir. 1980), which raises concerns about admitting a plea agreement. But Roberts did not hold that a plea agreement containing a promise of truthfulness is per se inadmissible. References to a plea agreement “are only mild forms of vouching” and when “the credibility of [a witness] would almost certainly have been challenged during cross-examination, there [is] justification to bolster credibility.” United States v. Brooks, 508 F.3d 1205, 1211 (9th Cir. 2007). The prosecutor did not reference nor elicit testimony regarding the plea agreement’s truthfulness provision, nor did she bolster credibility by expressing personal belief in the witness’s credibility. Visconti challenged the witness’s credibility on crossexamination, and the district court instructed the jury to consider the witness’s testimony with “greater caution.” The district court did not plainly err by admitting the plea agreement. See United States v. Daas, 198 F.3d 1167, 1179 (9th Cir. 1999).
3.  Denial of Advice of Counsel Instruction