Friday, February 23, 2024

Tax Court Denies WB Claim Made Contemporaneously With Target Taxpayer’s Voluntary Disclosure (2/23/24)

In Whistleblower 14376-16W v. Commissioner, T.C. Memo. 2024-22, GS here, the Court held that the Whistleblower (“WB”) was entitled to no relief from the Whistleblower Office’s denial of an award. The opinion establishes no new precedent, which is why it is a Memo opinion. The opinion does offer some interesting aspects, which I will discuss here.

1. The WB claim targeting several taxpayers was made a couple of months before some of the taxpayers made a request to CI to participate in an IRS voluntary disclosure program.  (It is not clear whether the request was under one of the offshore variants or was under the general voluntary disclosure program (see p. 3 n. 6); it makes no difference, however, for the point I discuss here, so I will just call it a VDP request.) The VDP request was made before any submissions (amended returns, etc.) required to complete voluntary disclosure; those submissions were delayed a substantial period. After the voluntary disclosure request, the WBO processed and sent to the field the WB claim after CI received the VDP request. The IRS subsequently undertook the work required to determine and collect substantial tax based on the taxpayers' submissions. The IRS says that, although its examination function received the WB information, it took no action based on the information. The record before the Court (essentially the record related to the WB claim and related items) supported the IRS’s claim that the proceeds generated from its activity did not rely on the WB claim and information in the WB claim.

2. The Court denied the WB’s sweeping and broadly written discovery requests designed to ferret out all documents and information that could test even tangentially the IRS’s narrative that no collected proceeds resulted from the WB information (including whether the record the IRS submitted to the Court was complete). In part, the WB requested documents and information in the voluntary disclosure package that, it claims, was “indirectly considered” in collecting the proceeds. (See pp. 33-37.) In part, the Court reasoned:

          Petitioner contends, however, that the WBO “indirectly considered” the VDP materials. As one court has aptly observed, “it is not entirely clear what it means to indirectly consider documents or materials.” Amgen Inc. v. Hargan, 285 F. Supp. 3d 397, 404 (D.D.C. 2017) (treating the “indirect consideration” concept as “captur[ing] materials that are necessary to understand the documents that the agency directly relied upon” and denying motion to supplement the administrative record with documents intended to test a decision by the Food and Drug Administration for consistency with previous decisions). The caselaw provides no general test.24 But it does suggest some guiding principles. One court has observed that if an agency's final decision was based “on the work and recommendations of subordinates, those materials should be included as well.” Amfac Resorts, L.L.C. v. U.S. Dep't. of Interior, 143 F. Supp. 2d 7, 12 (D.D.C. 2001) (collecting cases), aff'd in part, rev'd in part 282 F.3d 818 (D.C. Cir. 2002), vacated in part sub nom. Nat'l Park Hosp. Ass'n v. Dep't of Interior, 538 U.S. 803 (2003). On the other hand, it is not always necessary to include in the administrative record source information upon which agency staff relied in making their recommendations to the agency decisionmakers if other information in the record obviates the need to consider the source information independently. See, e.g., James Madison Ltd. by Hecht v. Ludwig, 82 F.3d 1085, 1095 (D.C. Cir. 1996) (affirming denial of discovery and record supplementation with respect to source documents that bank examiners had relied upon in making their bank-insolvency reports to the Comptroller of the Currency, where “detailed contemporaneous reports from the examiner-in-charge and members of her examination team explain[ed] how and why they reached their conclusions regarding the banks' reserves”); Cape Hatteras Access Pres. All., 667 F. Supp. 2d at 114 (denying motion to supplement the record with a biological report that the National Park Service had relied upon [*35] in developing an interim strategy that was before the Fish and Wildlife Service when it designated certain critical habitats, even though the biological report was referenced by several other documents in the administrative file).

Wednesday, February 14, 2024

Sixth Circuit Affirms Summary Judgment on FBAR Willful Penalty on Conduct Objectively Reckless (2/14/24)

I report this morning on United States v. Kelly, ___ F.4th ___ (6th Cir. 8/8/24), CA6 here and GS here. Kelly affirms the district court's approval of the FBAR willful penalty on motion for summary judgment.

I first offer the MS CoPilot (MS’s version of AI) explanation of the case:

Case Title: United States v. James J. Kelly, Jr.


• James J. Kelly, Jr., a U.S. citizen, opened an interest-bearing account at Finter Bank in Zurich, Switzerland in 2008.

• He designated the account as “numbered” to keep his name off the statements and requested that Finter retain account-related correspondence instead of mailing it to him.

Legal Context:

• Under the Bank Secrecy Act, individuals with foreign bank accounts containing $10,000 or more must annually file a Report of Foreign Bank and Financial Accounts (FBAR) with the U.S. Department of the Treasury.

• Failure to file an FBAR by the deadline can result in civil penalties. The penalty amount depends on whether the failure was accidental or willful.

Case Details:

• The government sued James Kelly, alleging that he willfully failed to timely file FBARs for the years 2013, 2014, and 2015.

• The district court granted summary judgment in favor of the government.

• Kelly’s failure to file was deemed a willful violation of the Bank Secrecy Act.


• The court affirmed the judgment, emphasizing that Kelly’s actions constituted a willful violation of the law.

• In summary, James Kelly’s failure to file FBARs for his foreign bank account led to civil penalties due to willful non-compliance with the Bank Secrecy Act.

Wednesday, February 7, 2024

Law Firm Tax Partner Sentenced in Germany to 3 1/2 Years for Fraudulent Tax Shelters (2/7/24)

An earlier news item finally reached my consciousness this morning and gave me a déjà vu experience. A Freshfields (prominent law firm) former tax partner who gave legal advice for clients to exploit an abusive tax shelter (aka bullshit tax shelter) was sentenced to 3 ½ years incarceration for his role. The shelter has attracted the name “Cum-Ex.” See e.g., Tom Sims & Kirstin Ridley, Former Freshfields partner sentenced to jail for German tax fraud (Reuters 1/30/24), here; and Olaf Storbeck, Freshfields’ former tax partner sentenced to 3½ years in jail (Financial Times 1/30/24), here.

I don’t know exactly how the scheme worked but the generic description is summarily described in the Reuters article:

Using such dividend stripping schemes, banks and investors would swiftly trade shares of companies around their dividend payout day, blurring stock ownership and allowing multiple parties to falsely reclaim tax rebates on dividends.

The following is from the Financial Times article:

The fraud centred on share deals executed before and after a stock’s dividend payments that duped governments to reimburse taxes that were never paid in the first place.

Maple Bank’s cum-ex transactions were equivalent to “organised [financial] crime”, Gröschel [the judge' said, adding that they were highly organised, took part over several years and led to “ludicrous” financial damage.

The aim of the transactions, said Gröschel, was not just to cut the amount of tax paid but to steal from the government. Johannemann’s legal advice was “a central contribution” to that crime, he added.

“Paying [a tax] once but reclaiming [it] twice just does not work,” he said, and that “a halfway talented elementary school pupil” was able to understand that concept.

* * * *

During the trial, Johannemann acknowledged he had “glossed over the fact that my legal advice was used for illegal means”, and said he had “totally failed” as a lawyer. The judge took issue with that assessment, saying he was certain Johannemann had been aware of all relevant details of the fraudulent transactions when giving his advice.

In his ruling Gröschel also took aim at Freshfields, accusing the tax practice of one of the world’s most prestigious law firms of having developed “its own business model” that specialised in giving affirmative advice on cum-ex transactions. The fees the law firm generated from such business were “almost ridiculously low”, he said.

The latter on fees caught my eye. My experience from the abusive tax shelter era was that the fees were very large compared to the hours expended delivering the opinions when they were "cookie-cutter" opinions marketed to many taxpayers. The excess fees were a form of “get out of jail free’ insurance premium to the taxpayers paying the fees. Viewed alone from a single transaction, the excess fee would be ridiculously low, but when marketed widely among wealthy and high-income earners, the fees really could add up to ridiculous amounts. See e.g., More on the Daugerdas Case - The Role of Nonpromoter Enablers (Federal Tax Crimes Blog 6/5/11), here.

Saturday, February 3, 2024

Tax Lawyer of Some Notoriety Is Again in the News (2/3/24)

 I previously blogged on a tax lawyer, John Anthony Castro, a tax lawyer of some notoriety in the tax community. Repeat Tax Player and Republican Presidential Candidate Loses Unauthorized Return Information Disclosure Suit on Appeal (Federal Tax Procedure Blog 12/24/25), here. I noted in the blog that Castro was a Republican candidate for President; I reported on a Fifth Circuit disposition of a claim he made against the IRS and his candidacy for President.

I have two developments to report:

1. Newsweek recently reported that Castro is suing Clarence Thomas under the Virginia Fraud Against Taxpayers Act, Code of Virginia, Article 19.1 (“VFATA”), here.  I am not familiar with the VFATA, but it appears to be a state parallel to a federal qui tam action, a suit to recover for the government. Excerpts from the article are:

           The complaint, which was shared with Newsweek, alleges that in violation of VFATA, "Clarence Thomas knowingly presented or caused to be presented a false and fraudulent claim (i.e., his 2005 Virginia State Income Tax Return) to the Virginia Department of Taxation on or about April 15, 2016, that failed to report income from discharge of indebtedness."

           Thomas has faced immense scrutiny and calls for his resignation after it was reported that he failed to disclose several transactions, including a $267,230 loan that he received from wealthy friend Anthony Welters. Last year, an investigation from the Senate Finance Committee revealed that Thomas never repaid a "substantial portion" of that loan, raising concerns about whether the justice properly reported it in his tax filings.

          "Under Section 108 of the Internal Revenue Code, he would have had a legal obligation to report [the loan] as taxable income and the tax alone would have been, probably $40,000 or $50,000. That's a third of his annual salary," Castro said on Friday. "And that's when I was like, 'There's no way he reported that because that'd be financially disastrous for him.'"

          Castro is suing Thomas under VFATA, which allows private citizens anywhere in the country to bring a claim against a Virginia resident for making a knowingly false or fraudulent claim to the commonwealth for money or property, essentially empowering regular Americans to take on the role of a de factor agent of the Virginia attorney general.

          "It basically allows you to bring a tax enforcement action against a taxpayer," Castro said of the law.

          Castro said he had planned to file the suit last year but claims that Trump coordinated with the Internal Revenue Service in retaliation against his activities "undermining the political objectives of the Trump Administration."

          "Right when I'm going to level these accusations against Clarence Thomas for filing false and fraudulent returns, what happens to me? I get accused of false and fraudulent returns," Castro said.

          "They intentionally devised this plan of, 'Let's accuse him of what he's about to accuse Clarence Thomas of, it's going to completely discredit him. And if he brings this claim, nobody's going to believe him," he continued. "But, of course, I still want to go forward with it."

          Asked about whether he thinks his lawsuits against Thomas and Trump will fuel speculations about whether or not he was a conservative, Castro insisted he was still a Republican.

          "I'm a very, very stubbornly principled person and if I feel that somebody broke the law, I'm going to hold them accountable," he said. "Just like Trump for January 6 and Clarence Thomas for this sham loan." 

Note that Castro claims that Trump and the IRS coordinated this alleged retaliatory indictment. That is an interesting pairing.

Thursday, January 25, 2024

Tax Court Again Declines to Reconsider Its Holding that the Preparer's Fraud without the Taxpayer's Fraud Invokes Unlimited Statute of Limitations (1/25/24)

 Long-time readers of this blog and the parallel blog Federal Tax Procedure may recall that I have had several postings on the issue of whether § 6501(c) unlimited statute of limitations for fraudulent returns requires (i) the taxpayer's fraud or (ii) may be a third party's fraud that is incorporated in the taxpayer's return without the taxpayer's fraud. The classic case is a preparer's fraud, but could also include fraud on an information return (such as a K-1 for partnership flow-through reporting).

At the end of this blog, I list significant Federal Tax Procedure or Federal Tax Crimes postings on the issue. Basically, the state of play was that the Tax Court held in a precedential decision that the taxpayer's fraud is not required. Allen v. Commissioner, 128 T.C. 37 (2007). The Court of Appeals for the Federal Circuit held that the taxpayer's fraud is required. BASR P'ship v. United States, 795 F.3d 1338 (Fed. Cir. 2015). In Finnegan v. Commissioner, 926 F.3d 1261 (11th Cir. 2019), the Court affirmed the Tax Court's Allen holding that the taxpayer waived the statute of limitations argument in the Tax Court.

In Murrin v. Commissioner, T.C. Memo. 2024-10, TA here, decided yesterday, the Tax Court held that Allen was still the interpretation the Tax Court will apply despite the holding in BASR. The Murrin opinion is 13 pages long and analyzes why BASR was not sufficiently persuasive to justify reconsidering its precedential holding in Allen.

BASR is not binding precedent in Murrin under the Tax Court's Golsen rule because appellate authority is only binding when in the Circuit to which an appeal would be taken in the case (barring stipulation otherwise). Mrs. Murrin lived in New Jersey when she filed the Tax Court petition. Thus, her appeal would be to the Third Circuit which has no authority in point, thus requiring the Tax Court to apply its own authority under Golsen.

Thursday, January 11, 2024

Article Recommendation on Sentencing in Tax Cases-Amendment to Guidelines (1/11/24)

I recommend the following post: Evan Davis, Major Sentencing Guideline Changes for Most Tax Offenders, With More on the Way: ABA Sentencing Panel, here. It is short and, for the subject, feature packed, so I will not summarize it here.

Wednesday, January 10, 2024

DOJ Tax Publicizes Sentencings and Plea Agreements of Syndicated Conservation Easement Enablers; Where Are the Taxpayers (1/10/24)

DOJ Tax issued a press release about sentencing and guilty pleas of enablers in abusive, illegal (maybe redundant) syndication easement tax shelters. Two Tax Shelter Promoters Sentenced to 25 Years and 23 Years in Billion-Dollar Syndicated Conservation Easement Tax Scheme; Two More CPAs Plead Guilty (Press Release # 24-29 1/9/23), here.

The lengths of the sentences are noteworthy.

The two other individuals pled guilty to a single count each of the Klein/defraud conspiracy, thus capping their potential sentences each to 5 years. Of course, they were not the masterminds of the fraudulent tax shelter scheme, but their pleas indicate that they willfully participated.

Of course, it is late in the Syndicated Conservation Easement game, so enablers in the game should be on notice now that they can be caught and punished. How much effect this will have as a future deterrent is unknown because, I suspect, many who know the downside will attempt maneuvers to prevent the IRS or DOJ Tax from discovering their complicity in such conduct. Most economic crime violators (including enablers) do not think they will be caught or their skullduggery will be understood.

My only comment relates to what I call the elephant in the room—the taxpayers willfully participating in such schemes. My experience in these elaborate abusive shelters is that well-heeled taxpayers are also complicit. Those taxpayers who are complicit feel (or at least hope) that the blizzard of paper (including fake opinions and appraisals) and participation of facially expert promoters will protect them from penalties, civil and criminal, thus giving them cost-free access to the audit lottery. But those who consulted independent counsel (and many, probably most, did at least in the Son-of-Boss shelters and, I suspect, in the Syndicated Conservation Easement Shelters) would have known the shelters did not work.

If the IRS and DOJ Tax want to discourage abusive tax shelters, it should prosecute the taxpayers involved (or at least enough of them, the more egregious ones, to send the message to the abusive tax shelter taxpayer community that there is risk of a criminal reckoning). Even where the enablers of the abusive tax shelters put together a package that facially seems to support the tax benefits claimed, most well-heeled tax shelter investors have their own independent legal counsel. Good advice would certainly include enough warning that the gambit is illegal and that their participation is willful. Prosecuting and convicting taxpayers would send the message of risk to all participating in abusive shelters and could substantially reduce the number of players involved by reducing the market for abusive tax shelters.

Sunday, October 1, 2023

Posted to Wrong Blog

This afternon I erroneously posted a blog here that should have been posted to the Federal Tax Procedure Blog. I have deleted the blog on FTCB and posted it to FTPB.  The blog entry may be viewed here:

Update on Supreme Court Deference Case (with Speculation) and New Supreme Court case on General 6-year Statute for Challenging Regulations Interpretations (Without Speculation) (Federal Tax Procedure Blog 10/1/23), here.

Tuesday, May 23, 2023

6th Circuit Holds Excessive Restitution Cannot Be Reduced thus Denying IRS Authority to Reduce Excessive Restitution-Based Assessment (5/23/23)

United States v. Asker (6th Cir. No. 21-1643 5/11/23) (Nonpublished) (CA6 here and GS here), the court held that where the restitution for tax loss ordered by the sentencing court for tax crimes was allegedly higher than the actual tax due, the district court had no authority to reduce the amount. At sentencing, there was confusion among the players as to the actual tax loss for restitution purposes.* In trying to determine the amount in the confusion, the court has this Q&A with counsel:

          During sentencing, however, the court asked what would happen if it were later determined he owed less than $2.5 million in taxes:

Court: You don’t anticipate that what is owed will be more than 2.5?

Government: It is hard to say at this point. It is going to depend—

Court: What if it is? Do you anticipate that 2.5 precludes your client from paying back the rest?

Asker’s Counsel: I wouldn’t think that if it comes out—I would not think that this Court’s restitution award would be conclusive on the IRS. In fact, if there was some civil basis to seek additional penalties or interests, the IRS could do that.

I suppose if it turns out the number is less, we may probably come back and apply to the Court for some relief from the restitution amount.

Government: That is correct, Your Honor.

Court: I just—my concern is that if it turns out to be more, I think that is owed.

Asker’s Counsel: Yes, Ma’am. We don’t disagree with that.

Court: Okay.

The sentencing court assessed $2.5 million in restitution.

In due course, the IRS made a restitution-based assessment ("RBA") for $2.5 million. The IRS has no authority to reduce the RBA.

After Asker's criminal appeal affirmed the judgment, Asker filed amended returns showing a $1.1 million aggregate tax liabilities, which the Government did not contest because it decided not to allocate resources to an audit of the amended returns.  

Asker then moved the district court to reduce the restitution award which would then permit the IRS to reduce the RBA.

The sentencing  court sat on the motion for 3 years and then denied it based on the Government's argument that it had no authority to grant the motion.

The Court of Appeals affirmed.

Wednesday, May 10, 2023

Third Circuit Holds That Tax Loss for Tax Crimes Sentencing Calculations is the Intended Loss Rather than Actual Loss (5/10/23)

In United States v. Upshur, 67 F.4th 178 (3rd Cir. 5/8/23), CA3 here and GS here, the Court held that the loss driving the Tax Table at U.S.S.G. § 2T4.1, here, is the intended loss rather than the actual loss to the Treasury.  The holding is driven by the language in the Guideline itself: “the tax loss is the total amount of loss that was the object of the offense (i.e., the loss that would have resulted had the offense been successfully completed).” § 2T1.1(c), here

That only became an issue because the Third Circuit held in United States v. Banks, 55 F.4th 246 (3d Cir. 2022) that, for larceny and related financial crimes in U.S.S.G. § 2B1.1, the “loss” (meaning actual loss) is the measure. Both results were driven by the plain meaning of the respective terms in the Guidelines.

 The case highlights a possible disconnect between the sentencing for the two types of financial crimes. It is not apparent from the Guidelines why there is a difference, but as the plain text of both Guidelines provisions establishes, there is a difference.

The Court also said (Slip Op. 6 n.1):

   n1 Because we conclude that the text of § 2T1.1(c)(1) is unambiguous, we need not go further and examine its “structure, history, and purpose” or determine if the relevant Guidelines Commentary merits Auer deference. See Kisor, 139 S. Ct. at 2415.

Auer deference in the Guidelines context would be Commentary interpretation of the Guidelines (which for deference is treated like a notice and comment regulations).

Tuesday, May 2, 2023

Tax Crimes Outline for UVA Law Tax Procedure Class (5/2/23)

On March 31, 2023, I taught Tax Crimes session for Jim Malone's Tax Procedure Class at UVA Law School. I prepared an outline that may be useful for others, so I link it here. The outline is from my Federal Tax Procedure Book published annually in early August. The outline is updated with major developments through about March 11, 2023. Keep in mind that the outline is an overview appropriate for one session in a semester class on tax procedure.  It is not definitive on Federal Tax Procedure. For more definitive discussion of tax crimes, I refer readers to Chapter 12: Criminal Penalties and the Investigation Function in Michael Saltzman and Leslie Book, IRS Practice and Procedure (Thomsen Reuters 2015), here, as updated three times a year. I am the principal author of that Chapter and the updates.

Friday, April 14, 2023

Updated DOJ Tax Voluntary Disclosure Policy (4/14/23; 4/30/23)

Caveat on 4/30/23 3:00pm: The Disclosure Policy was updated on 4/25/23. I have not had a chance to determine whether any material changes were made and will do so when I have a chance. The updated web page in HTML is here.

DOJ components, including DOJ Tax, have updated their respective corporate voluntary disclosure policies. While an attorney representing corporations having a potential federal criminal problem should familiarize themselves with appropriate component policies, I focus here on the DOJ Tax updated policy (in HTML here and pdf here). The DOJ Tax update "supplements" the Tax Division's existing policy by providing much more detail as to the requirements for the policy. For background, I include verbatim the DOJ Tax voluntary disclosure policy in CTM 4.01, here:


4.01[1] Policy Respecting Voluntary Disclosure

 Whenever a person voluntarily discloses that he or she committed a crime before any investigation of the person’s conduct begins, that factor is considered by the Tax Division along with all other factors in the case in determining whether to pursue criminal prosecution. See generally USAM, § 9-27.220, et. seq.

If a putative criminal defendant has complied in all respects with all of the requirements of the Internal Revenue Service’s voluntary disclosure  Practice, n1  

   n1 See United States v. Knottnerus, 139 F.3d 558, 559-560 (7th Cir. 1998) (holding that prior visit by special agent disqualified defendant from voluntary disclosure program); United States v. Tenzer, 127 F.3d 222, 226-28 (2d Cir. 1997), vacated in part and remanded on other grounds, 213 F.3d 34, 40-41 (2d Cir. 2000) (taxpayer must pay or make bona fide arrangement to pay taxes and penalties owed to qualify for consideration); and United States v. Hebel, 668 F.2d 995 (8th Cir. 1982).

 A person who makes a “voluntary disclosure” does not have a legal right to avoid criminal prosecution. Whether there is or is not a voluntary disclosure is only one factor in the evaluation of a case. Even if there has been a voluntary disclosure, the Tax Division still may authorize prosecution. See United States v. Hebel, 668 F.2d 995 (8th Cir.), cert. denied, 456 U.S. 946 (1982).

I discuss certain (but not all) aspects of the Update. I provide this discussion in the order of the presentation of the Update (and not necessarily in the order of importance). The alphabetical paragraph references (e.g., ¶ A) are to the paragraphs in the policy; the numbered paragraphs are to my points and are sequential through all paragraphs:

Saturday, April 1, 2023

Update on Wartime Suspension of Limitations Act ("WSLA"), 18 USC 3287, and Tax Crimes (4/1/23; 4/2/23)

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

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

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

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

Wednesday, March 29, 2023

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

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

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

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

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

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

Thursday, March 9, 2023

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

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

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

The IRS Commissioner should:

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

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

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

Monday, March 6, 2023

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

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

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

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

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

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

JAT Comments:

Tuesday, February 28, 2023

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

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

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

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

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

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

Monday, February 6, 2023

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

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

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

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

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

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

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