Government Moves for FBAR Willful Penalty Judgment in Schwarzbaum (9/15/22)

In United States v. Schwarzbaum (S.D. Fla. No. 9:18–CV–81147–BLOOM–REINHART Motion dated 9/15/22), , here, the Government moved “for entry of a second amended judgment” for the willful FBAR penalty.  Readers of this blog will recall that the Schwarzbaum case created much commotion because the Eleventh Circuit held that the IRS calculation of the FBAR willful penalty.  See United States v. Schwarzbaum, 24 F. 4th 1355 (11th Cir. 1/25/22), CA11 here and GS here.  I discuss the Eleventh Circuit opinion in 11th Cir. Remands For IRS To Re-Determine FBAR Penalties After Affirming Original Calculation Was Arbitrary And Capricious (Federal Tax Crimes Blog 1/26/22), here.  The Circuit Court opinion reversing and remanding for the district court to remand to the IRS to recalculate the penalty led to much thrashing around in the district court as Schwarzbaum’s counsel jockeyed the APA remand into foreclosing the FBAR penalty on statute of limitations grounds.  I won’t get further into that but those wanting to go further on that issue might start with District Court Retains Jurisdiction While Arbitrary and Capricious FBAR Willful Penalty Amount is Remanded to IRS for Recalculation (5/18/22), here.

In the motion, the Government advises that, upon the IRS recalculation of the penalty using the statutory June 30 balances in the account that the Eleventh Circuit said was the proper referent (rather than spreading a maximum amount over willful years based on high amount in the accounts) produced a higher penalty than the Government sought in the complaint.  Therefore, the Government asks for judgment only in the amount sought in the complaint, $4,185,271, plus penalties and interest.

The Government's exercise of judgment to ask for the lower amount sought in the complaint may be a strategy to deflect the statute of limitations issue that Schwarzbaum’s counsel have so much noised about.

As expected, the Government motion advised the Court that Schwarzbaum’s counsel opposes the motion.

Tax Court Sustains Accuracy-Related Penalty for Offshore Accounts, Rejecting Taxpayer's QAR, Statute of Limitations, and § 6751(b) Arguments (9/1/22)

This blog will alert readers of a new Tax Court opinion, Lamprecht v. Commissioner, T.C. Memo. 2022-91, involving the accuracy-related penalty for failure to report income from foreign accounts. (The opinion may be retrieved at docket entry 181 from the docket entries, here.) I will set up my discussion from the syllabus for the key points decided (on the value of the syllabus see point 6 at the end of this blog):

            Ps are citizens of Switzerland who lawfully resided in the United States, where P–H worked as an investment consultant managing investments for himself and his clients. Ps filed U.S. income tax returns for 2006 and 2007 which understated their income in both years by omitting income that Ps treated as foreign sourced.

            In 2008 the IRS issued to Swiss Bank a John Doe summons which sought to discover the identities of U.S. taxpayers using foreign entities and Swiss bank accounts to avoid reporting income on their U.S. tax returns.

            In 2010 Ps filed amended returns for 2006 and 2007 on which they reported the previously omitted income. Upon examination of Ps’ 2006 and 2007 returns, R determined an accuracy-related penalty under I.R.C. § 6662 against Ps for each year on the basis of the tax attributable to the income omitted from the original returns, and issued to Ps a notice of deficiency. Ps timely filed a petition to challenge the penalty determinations in the notice of deficiency, arguing (1) that the IRS failed to comply with I.R.C. § 6751(b)(1) requiring written supervisory approval of penalties, (2) that their amended returns for 2006 and 2007 are “qualified amended returns” within the meaning of Treas. Reg. § 1.6664-2(c)(3), [*2] precluding penalty liability, and (3) that assessment of the accuracy-related penalties for 2006 and 2007 is barred by the statute of limitations under I.R.C. § 6501.

            Held: The amended returns are not “qualified amended returns” under Treas. Reg. § 1.6664-2(c)(3)(i)(D) because they were filed after the service of a John Doe summons.

            Held, further, assessment of the accuracy-related penalties is not barred by the statute of limitations under I.R.C. § 6501 because the limitations period was suspended by the service of the John Doe summons pursuant to I.R.C. § 7609(e)(2).

            Held, further, the IRS complied with the written supervisory approval requirement of I.R.C. § 6751(b)(1).

            Held, further, Ps are liable for the I.R.C. § 6662 accuracy-related penalties as determined by R for the 2006 and 2007 years.

FBAR Willful Penalty (with Collection Suit) after OVDP Drop Opt-Out (9/1/22)

The Government filed an FBAR collection suit in United States v. Leeds (Idaho No. 22-cv-00379-BLW), see TaxNotes copy of complaint here.  The defendant “is the surviving spouse of Richard Leeds, named in her capacity as a potential successor-in-interest to the Estate of Richard Leeds “(Estate”) and/or as a potential personal representative or administrator of the Estate and/or distributee of the Estate.”)

The complaint is about what one would expect in an FBAR collection suit, with slight variances in facts.  However, the following caught my attention:

36. In December of 2014 Mr. Leeds applied to participate in the IRS's Offshore Voluntary Disclosure Program and was initially accepted.

* * * *

39. In April 2018 Mr. Leeds opted out of the OVDP and an IRS examination commenced.

The IRS then proposed a willful FBAR penalty, eventually resulting in this collection suit to collect the penalty.

That is all I know about the facts, but I have these questions, with some speculation as to answers:

1. Since Mr. Leeds knew what the OVDP cost would be going into the program, why would he opt out?  I can only speculate that he wanted to get the benefit of the criminal prosecution protection OVDP offered.  Otherwise, going into OVDP knowing the civil cost would be unacceptable makes no sense.

2. In any event, why would someone with his facts (from the complaint) opt-out of OVDP after he had disclosed his behavior by the OVDP filing?  I can’t even speculate about that other than perhaps he had some vague hope that the IRS would drop the ball in his case.  Remember, that if he had a good nonwillful story, he could have made a Streamlined Filing; I assume he entered OVDP because he (or his counsel) thought he did not have a good nonwillful story.

Sixth Circuit Holds Harmless Error to Not Give Correct Jury Instruction on Evasion Statute of Limitations (8/31/22)

In United States v. Pieron (6th Cir. 8/30/22), Unpublished, CA 6 here and GS here [to come]. the Court affirmed Pieron’s tax evasion conviction. Although nonprecedential, I think the opinion offers a lesson for practitioners. I, therefore, report on what the Court described (Slip Op. 4) as “Pieron’s more serious argument” that the trial court failed to give a “correctly stated” jury instruction that the jury was required to find an affirmative act of evasion in the six-year limitations period.

The evidence at trial included some acts that could permit the jury to find an affirmative act of evasion. Some of those acts were outside the six-year period; some were within the six-year period. Pieron argued that the trial judge, through the correctly stated proposed instruction, should have focused the jury on the requirement that the jury find an affirmative act in the limitations period. The trial judge refused the correct instruction. The conviction of evasion means that the jury found at least one affirmative act of evasion, but the absence of the correct instruction means that there is no way to determine if the jury found at least one act of evasion in the limitations period. The Sixth Circuit found the error harmless, citing evidence of acts in the record that could have been persuasive to the jury had the trial court properly instructed the jury.

The Fifth Circuit’s analysis is short, one paragraph spanning parts of two pages (Slip Op. 4-5), so I just quote it in its entirety:

            That same conclusion defeats Pieron’s more serious argument, which is that the district court should have instructed the jury that it could convict Pieron only if it found that he committed an evasive act within the five-year limitations period, meaning after January 9, 2012. Most of the actions alleged in the government’s Bill of Particulars took place before that date; Pieron’s proposed instruction correctly stated that, “[t]o be guilty of the crime alleged, the defendant must have committed an affirmative act of tax evasion after January 9, 2012”; and that instruction likely would have focused both the jury’s attention and the parties’ presentations at trial. But we conclude that any error as to the district court’s failure to give the instruction was harmless. See generally Skilling v. United States, 561 U.S. 358, 414 (2010); Fed. R. Crim. P. 52(a). In closing arguments, the government emphasized the 433-F forms that Pieron filed in 2012 and 2014. Those forms, as discussed above, were patently misleading; and Pieron made little effort to persuade the jury otherwise during trial and particularly during his closing argument. True, in closing arguments, the government also emphasized several instances of evasive conduct before January 9, 2012. But we see no reason to think that the jury might have overlooked his 2012 and 2014 433-F forms or otherwise found them non-evasive. Moreover, in the context of the trial record as a whole, the jury had every reason to think that Pieron’s August 2012 Foreign Bank Account Report (in which he claimed a $250,000 maximum balance for a Swiss account that held $750,000 during the relevant year) was evasive as well. The government has shown by a preponderance of evidence that the district court’s decision not to give Pieron’s proposed instruction neither affected nor “substantially swayed” the verdict. See United States v. Kettles, 970 F.3d 637, 643 (6th Cir. 2020). The omission of that instruction therefore does not entitle Pieron to a new trial.

Senate Press Release and Report on Offshore Evasion Through Shell Banks Skirting FATCA (8/28/22)

Senator Wyden led a major Senate Finance Committee investigation that produced a press release and report about use of “shell bank” to avoid the FATCA reporting requirements.  See the press release titled Wyden Investigation Uncovers Major Loophole In Offshore Account Reporting, here, and the report titled The Shell Bank Loophole, here.  The press release offers a good summary of the report (see particularly the “Key Findings” in the press release).

The following are summaries of the key points that readers of this blog may be interested in:

1. The gambit requires that the shell bank be registered with the IRS.  The press release says that establishing a shell bank with foreign accounts that do not get reported to the IRS is simple:

The key steps:

1. Establish a shell company in a FATCA partner jurisdiction, even those in well-known tax haven jurisdictions like Bermuda or the British Virgin Islands.

2. Submit IRS form 8957 to register the shell company as a foreign financial institution and obtain a Global Intermediary Identification Number (GIIN).

3. Open an account at a bank in Switzerland, or other FATCA partner jurisdiction, in the name of the shell company now registered as a financial institution. Use an attorney or other intermediary as the signatory of the account.

4. Invest in private equity firms or other investment vehicles and direct the fund manager to wire proceeds from investment activities in the United States to the shell company’s account in Switzerland or elsewhere.

The results:

•  The Swiss bank is no longer required to report that the account is held by U.S. persons because the account is held in the name of an entity with a valid GIIN number. The Swiss bank is also no longer required to conduct due diligence to determine whether the account has a U.S. nexus.

•  The shell company is now operating as a “shell bank” and can self-certify reporting offshore accounts to IRS for FATCA purposes.

•  In the absence of an audit or other federal investigation, is it highly unlikely the IRS will detect whether these accounts are concealing or underreporting assets held by U.S. persons.

More on Tax Due and Owing and Tax Deficiency (8/28/22)

In United States v. Green, ___ F.4th ___, 2022 U.S. App. LEXIS 23750 (5th Cir. 8/24/22), CA5 here and GS here [to come], the Court affirmed convictions of (i) John Green (an attorney) and Thomas Selgas for defraud conspiracy and (ii) Selgas for tax evasion.

I don't think there is anything new in the case or that the opinion presents old law in a way that even justifies making the opinion a published opinion.  Of course, the Fifth Circuit standards for publishing an opinion are not particularly high.  See generally Precedential Effect of Published Plurality Appellate Opinion That Majority of Panel Doesn't Accept (Federal Tax Procedure Blog 8/9/22), here (addressing a published Fifth Circuit opinion that 2 members of the panel disagreed with and thus was not precedent).)

There is one item that I have expressed concern about before – describing the "tax due and owing" element for evasion as "tax deficiency." (See Slip Op. 14-18.)  The Green opinion describes the evasion element as "tax deficiency," although the Court says (Slip Op. 14) that it is "also referred to in the caselaw as a 'tax due and owing.'"

I continue to be concerned about use of the term tax deficiency for the tax due and owing element for tax evasion.  I prefer the term "evaded tax" to describe the element, but the common term is "tax due and owing." Rather than recreate the wheel in describing my concern, I quote from my article, John A. Townsend, Tax Evaded in the Federal Tax Crimes Sentencing Process and Beyond, 59 Vill. L. Rev. 599 (2014), here.  In the article, I have a section discussing Tax Liability Concepts in the Criminal Tax Universe (pp. 602-611).  In that section, I discuss Civil Tax Liability and Tax Deficiency (pp. 603-604), The Tax the Taxpayer Intended to Evade - The Criminal Tax Numbers or Figures (pp. 604-606) and the Sentencing Tax Loss (pp. 606-608).  Here is the most relevant portion of the article (pp. 604-608, some footnotes omitted):

2. The Tax the Taxpayer Intended to Evade - The Criminal Tax Numbers or Figures

            I think it helpful to illustrate the concepts in an example. Assume that, for civil tax purposes, the taxpayer had $ 100,000 of income that the taxpayer failed to report and pay. Assume that the tax liability on that omitted income is $ 35,000; that liability is the deficiency. The $ 100,000 omitted income consists of two items - $ 50,000 of embezzlement income which the taxpayer knew was taxable and chose not to report and $ 50,000 of personal injury income that the taxpayer thought or could have reasonably thought was excludable under section 104 but which, for technical reasons, is not properly excludable under that section. In calculating the tax evaded as an element of tax evasion, the Government will compute the tax only on the $ 50,000 of embezzlement income and will not include the $ 50,000 of personal injury income. So, let's say the tax on $ 50,000 of embezzlement income is $ 17,500. The criminal tax number for establishing the evaded tax element in a tax evasion case is $ 17,500 (even though the deficiency is $ 35,000). The Government must prove the evaded tax beyond a reasonable doubt.

Government Files FBAR Collection Suit for FBAR Willful Penalties Aggregating $23,102,381 (Plus Interest and Costs) (8/17/22; 8/18/22)

In United States v. Nadji (D. Colo. Case No. 1:22-cv-02070), CL dkt entries here, the Government filed an FBAR collection complaint on 8/15/22. The complaint is here. The complaint requests (¶ 55, p. 8) judgment

for $23,102,381 in willful FBAR penalties, $2,631,772.60 in accrued and assessed late payment penalties, and $877,257.53 of interest, plus costs of collection, pursuant to 31 U.S.C. § 3717, as  of  August 11, 2022. The United States is entitled to recover $26,611,411.13, plus interest, penalties, and costs accruing from August 11, 2022.

According to the complaint:

1. The amounts are significant.

2. Nadji was born in Iran in 1944. While educated in part in the U.S., he “moved back to the United States and became a naturalized U.S. citizen in 1992.”

3. Nadji was wealthy, deriving his wealth from an Iranian engineering company he owned 100%. Nadji paid no tax on income from the company, either in the U.S. or Iran.

4. He had interests in four foreign bank accounts from 2009 to 2012.  

5. During those years, his U.S. returns were prepared by a tax preparer in Colorado. However, he did not disclose his foreign accounts to the tax preparer.

6. In 2014, he entered the 2014 OVDI, disclosing the four accounts and filing delinquent FBARS for 2008-2012. The complaint has a table listing the amounts Nadji reported on the FBARS for the high balances in each account for the years and aggregating the high balances for each year. 

7. The IRS removed Nadji from OVDI because he disagreed with the final closing package. I infer that his disagreement was, at least in part, with the OVDI penalty amount (which I think was 27.5% for the high year in the covered period). I presume further that he filed delinquent income tax returns and paid the resulting taxes, penalties and interest.

An Interpretive Battle Among Textualists Judges Over Statute Criminalizing False Liens Against U.S. Officers or Employees (8/13/22)

In United States v. Pate, ___ F.4th ___, 2022 U.S. App. LEXIS 22174  (11th Cir. 8/10/22), CA11 here and GS here [to come], the majority opinion sets up the issue decided in the opening paragraph:

            Title 18 U.S.C. § 1521 prohibits the filing of a false lien or encumbrance against the property of any officer or employee of the United States “on account of the performance of official duties.” In 2018, Timothy Jermaine Pate filed various false liens against John Koskinen, the former Commissioner of the Internal Revenue Service, and Jacob Lew, the former Secretary of the Treasury. There is no dispute that Pate filed the false liens to retaliate against Lew and Koskinen for acts they performed as part of their official duties. The twist here, and what makes this a case of first impression for this Court, is that Pate filed the false liens after Lew and Koskinen had left their positions with the federal government. We therefore are presented with the following question: Does § 1521 apply to false liens filed against former federal officers and employees for official actions they performed while in service with the federal government? We conclude that the answer to this question is yes—the plain language of § 1521 covers both current and former federal officers and employees. Thus, for the reasons discussed below, and with the benefit of oral argument, we affirm Pate’s convictions predicated on violations of § 1521.

The majority (Judge Lagoa with Judge Branch joining) and dissenting (Judge Newsom) opinions engage over interpretation of a criminal statute.  The three judges are Trump appointees and, not surprisingly, members of the Federalist Society, which permits an inference that they are textualists, an inference confirmed by the opinions.  The majority opinion claims that its decision is based on the plain language of the statute, reasonably interpreted of course.  The dissent claims that the plain language, as it reads the text, does not support the majority.  Both sides rely on parts of the work of the master textualist and sloganeer, Justice Scalia.  Antonin Scalia & Bryan A. Garner, Reading Law: The Interpretation of Legal Texts (2012).  Both sides deploy dictionaries, judicial sound bites, and slogans to justify the differing conclusions, with each side accusing the other of not being good textualists.  Of course, we should not expect a uniform meaning of textualism, so I suppose this type of difference is not surprising. And we should recognize that there is sufficient play in the joints of textualism to permit judges to reach their preferred conclusions.  

I think the majority has the better side of the engagement of giving a reasonable interpretation to the text.

Government Motion in Kepke Case to Exclude Expert Testimony About the Law (8/10/22)

I picked up an argument in a Government Motion to Exclude Defendant’s Proffered Expert Witness in the Kepke prosecution, United States v. Kepke (N.D. Cal. Criminal No. 3:21-CR-00155-JD), Motion dated 8/5/22, here. In general, the Government claims that Kepke’s expert witness disclosures were too cryptic to understand the expert witness’s proffered testimony, but the Government inferred that the expert witness would improperly testify about the law. Here are the three key paragraphs I focus on (Motion pp, 7-9):

             Expert witnesses are not permitted to offer opinions consisting of their interpretation of the law. See Hangarter v. Provident Life and Acc. Ins. Co., 373 F.3d 998, 1018 (9th Cir. 2004) (quoting Mukhtar v. Cal. State Univ., Hayward, 299 F.3d 1053, 1066 n. 10 (9th Cir. 2002), overruled on other grounds by Barabin v. AstenJohnson, Inc., 740 F.3d 457, 467 (9th Cir. 2014)); see also Snap-Drape, Inc. v. Comm’r, 98 F.3d 194, 198 (5th Cir. 1996). “[I]instructing the jury as to the applicable law is the distinct and exclusive province of the court.” Nationwide Transp. Fin. V. Cass Info. Sys., Inc., 523, F.3d 1051, 1058-59 (9th Cir. 2008); see also United States v. Caputo, 517 F.3d 935, 942 (7th Cir. 2008) (“The only legal expert in a federal courtroom is the judge.”); United States v. Weitzenhoff, 35 F.3d 1275, 1287 (9th Cir. 1993); CZ Services, Inc. v. Express Scripts Holding Co., 3:18-cv-04217-JD, 2020 WL 4518978, at * 2 (N.D. Cal. Aug. 5, 2020) (“[L]egal opinions are not the proper subject of expert testimony. Reed v. Lieurance, 863 F.3d 1196, 1209 (9th Cir. 2017). An expert may not give opinions that are legal conclusions, United States v. Tamman, 782 F.3d 543, 552-53 (9th Cir. 2015), or attempt to advise the jury on the law, Strong v. Valdez Fine Foods, 724 F.3d 1042, 1046-47 (9th Cir. 2013).”).

            In at least one criminal tax case, the Ninth Circuit approved expert testimony about the law where “the theory of the defense [was] that there [was] a good faith dispute as to the interpretation of the tax laws.” See United States v. Clardy, 612 F.2d 1139, 1153 (9th Cir. 1980) (citing United States v. Garber, 607 F.2d 92 (5th Cir. 1979) (distinguished by United States v. Burton, 737 F.2d 439, 444 (5th Cir. 1984)). But that does not mean that legal evidence is automatically admissible in all criminal tax trials. To the contrary, courts regularly exclude legal experts in criminal tax cases. See, e.g., United States v. Boulware, 558 F.3d 971, 974-75 (9th Cir. 2009) (affirming exclusion of expert testimony that specific “corporate distributions were legally non-taxable” as an impermissible legal opinion); see also United States v. Curtis, 782 F.2d 593, 598-600 (6th Cir. 1996) (affirming exclusion of expert testimony and distinguishing Garber); United States v. Harris, 942 F.2d 1125, 1132 n.6 (7th Cir. 1991) (evidence “may include expert testimony about case law, to the extent that the defendant claims actual reliance on that case law. Case law on which the defendant did not in fact rely is irrelevant because only the defendant’s subjective belief is at issue.”); United States v. Ingredient Tech. Corp., 698 F.2d 88, 96-97 (2d Cir. 1983) (affirming exclusion of expert testimony and distinguishing Garber); United States v. Alessa, 3:19-cr-00010, 2021 WL 4498638, at *4 (D. Nev. Sept. 30, 2021) (evidence of a conflict in the law is irrelevant if Defendant was not aware of the conflict).

            Here, Mr. Read’s proposed testimony must be excluded because, reading between the lines (as we must because the disclosures do not reveal Mr. Read’s actual opinions), it seems likely that Mr. Read plans to testify about his understanding of the law. At best, Mr. Read’s opinion that certain offshore structures are permissible or even common is tantamount to testimony that, in his opinion, Defendant’s actions were legal. This is exactly the type of opinion that is prohibited under Ninth Circuit law because “‘[w]hen an expert undertakes to tell the jury what result to reach, this does not aid the jury in making a  decision, but rather attempts to substitute the expert’s judgment for the jury’s.’” United States v. Diaz, 876 F.3d 1194, 1197 (9th Cir. 2017) (quoting United States v. Duncan, 42 F.3d 97, 101 (2d Cir. 1994)). And any minor probative value the proffered testimony might have would be substantially outweighed by a danger of unfair prejudice, confusing the issues, and misleading the jury.

Brockman, Defendant in Pending Major Tax Crimes Case, Dies (8/6/22)

As readers of this blog and other blogs and news in general know, the Government has been pursuing a major tax crimes case against Robert Brockman.  See One Big Fish Indicted and Lesser Big Fish Achieves NPA for Cooperation (Federal Tax Crimes Blog 10/16/20), here; and Brockman Found Competent to Stand Trial (Federal Tax Crimes Blog 5/24/22), here.  

Brockman died late yesterday, Friday, June 5.  See David Voreacos and Neil Weinberg, Robert Brockman, Software Developer Who Fought IRS, Dies at 81 (Bloomberg 8/6/22), here (highly recommended).   This moots the criminal case, but the civil side (involving both administrative investigations and civil cases) will continue.

One of the IRS civil initiatives that continues is a jeopardy assessment (meaning an assessment made for a tax normally requiring a notice of deficiency and opportunity to litigate in the Tax Court before assessment).  I discuss jeopardy assessments in my Federal Tax Procedure Book (2022 Practitioner Edition) beginning at p. 503. (The book may be downloaded at the links provided here.)  A jeopardy assessment permits a taxpayer assessed to bring an expedited proceeding in the district court, and Brockman has done so.  Brockman v. United States (S.D. Tex. Case No. 4:22-cv-00202), Courtlistener docket entries here.  According to the docket entries, oral argument was held on 8/3/22 (Dkt. #56 & 57) and the Court notified of the death on 8/6/22 (Dkt. #59).  (I could not find on PACER a similar notice to the Court, but the same Judge is assigned to both cases; the CourtListener docket entries for the criminal case are here.)

Brockman also has a case pending in the Tax Court.  Brockman v. Commissioner (T.C. Docket #764-22), here.  The documents in the case are not available on the U.S. Tax Court DAWSON web site.  All that has happened in that case is Brockman’s filing of the Petition, the IRS’ Answer, and Brockman’s Reply to Answer.

2022 Editions of Federal Tax Procedure Book Online at SSRN (8/3/22)

The Federal Tax Procedure Book Editions (Student and Practitioner) are available on SSRN for viewing or downloading.  The links for the editions are on the FTP Blog page in the right-hand column titled "Federal Tax Procedure Book (2022 Editions)," here,

Please note that related items are available on the pages linked in the right-hand column of this Blog.

3rd Circuit Affirms Bedrosian FBAR Will Penalty Liability Based on His Counsel's Judicial Admissions as to Amount (7/23/22)

In Bedrosian v. United States, ___ F.4th ___,2022 U.S. App. LEXIS 20260 (3rd Cir. 7/22/22), CA3 here, and GS [to come], the Court sustained the district court’s application of the FBAR willful penalty. Given the history which I cover in earlier blogs, the holding on the issue of Bedrosian’s willfulness is not surprising. See Bedrosian on Remand -- Held Bedrosian Acted Recklessly and thus Subject to FBAR Civil Willful Penalty (Federal Tax Crimes Blog 12/6/20), here; and Bedrosian on Appeal; Interesting and Potentially Important Opinion on Jurisdiction in FBAR Penalty Cases (Federal Tax Crimes Blog 12/21/18; 1/10/19), here. The earlier Third Circuit opinion is Bedrosian v. United States, Dep't of Treasury, IRS, 912 F.3d 144 (3d Cir. 2018), 3^rd Cir. here and GS here.

The one interesting aspect of the appeal is that the Court, although finding the Government’s proof was deficient as to the amount in the accounts subject to the penalty (thus precluding calculation of the penalty), Bedrosian through counsel made “judicial admissions” as to the amount that the Court of Appeals could invoke to supply the missing proof. The Court said (Slip Op. pp. 18-19, cleaned up): 

Still, even though the District Court did not address this argument, we may affirm on any basis supported by the record, even if it departs from the District Court’s rationale. And while arguably some of the statements Bedrosian made in the District Court proceedings are not judicial admissions, the statement made in opening argument acknowledged the true state of the facts. The concession that “there was about 2 million U.S. dollars” in the undisclosed account makes the IRS’s $975,789.17 penalty below the statutory maximum (50% of the account balance). We therefore affirm the District Court’s judgment on this alternative ground.

 JAT Comments:

Update Information from Kepke Prosecution (7/15/22)

I have posted before on the indictment of Carlos Kepke, a Houston tax attorney who, according to the allegations, assisted clients (including Brockman and Smith) set up offshore structures for tax evasion. See here. There is an excellent recent article on Kepke and various points in the trajectory (including sting operations) of his investigation Neil Weinberg & David Voreacos, The Sting That Snagged the Tax Lawyer to a Pair of Billionaires (BloombergLaw 7/12/22), here (subscription required). 

Much of the information in the article appears to be from the affidavit in support of the search warrant obtained for Kepke’s office/residence. That search warrant affidavit has been filed in Kepke’s criminal case. United States v. Kepke (N.D. Cal. No. 3:21-cr-00155). The docket entries and documents in the case are available on PACER (requires subscription and fee to download), but the docket entries and many documents are free on CourtListener. The CL docket entries are here. The docket entry for the search warrant affidavit is 44, Attachment 3. The affidavit is here.

I found the affidavit to be great reading. I am particularly interested in the Kepke prosecution because I was formerly (1977-198) an associate in a law firm in Houston where Kepke was a partner. Kepke was doing the same type of stuff described in the affidavit then. I did not do anything with Kepke while with the firm except, on two occasions, to bring foreign tax questions to him because he was the firm’s foreign tax “expert.”  I found that on those occasions, his foreign tax advice was incorrect when I checked it further on my own. (On the most egregious occasion, Kepke who had a high billing rate (higher than his level of competence in my opinion based on two anecdotal instances) grossly inflated his claimed time spent by a multiple of 8 (Kepke always had huge monthly "billable" hours although not spending that much time at the firm); I convinced the billing partner to write off Kepke’s overstated claim of time (at exorbitant rate) spent giving me the incorrect advice.)  In any event, through some serendippity, I did review some documents from Kepke's practice regarding offshore strategies. He was doing then the same genre of structuring as described in the affidavits.

I won’t try to summarize all in the affidavit, but will just offer some items that I found particularly interesting that may be of interest to others:

Smith was identified through a bank disclosure in the DOJ Swiss Bank Program. Aff. 6-7, ¶ 13.)  DOJ Tax forwarded the Smith information to IRS CI, whereupon IRS CI recommended that the DOJ Tax authorize a grand jury investigation of Smith. (Aff. 7, ¶ 14). (Apparently there were Forms 211 filed for a whistleblower award with respect to Smith, but I don’t know the relationship of the Forms 211 information to the ultimate major recoveries from Smith.)  Kepke was implicated through the Smith investigation. 

11th Circuit Reverses Conviction for Ineffective Assistance of Counsel for Not Filing a Rule 29 Motion re Affirmative Act of Evasion (7/13/22; 7/14/22)

As I promised yesterday, I have added substantially below for the paragraphs after paragraph 1. I made these additions on 7/14/22 3:30 pm.

The Eleventh Circuit issued the opinion in Hesser v. United States, ___ F.4th ___, ____ (4th Cir. 7/13/22), CA11 here and GS here [to come]. I have not fully digested the opinion and am not prepared to offer meaningful, nuanced comments that will be useful to readers of the Federal Tax Crimes Blog. I will stew on the opinion a bit before commenting. My detailed comments will come later as addenda to this blog.

Let me try to summarize at a high level what happened. A jury long ago convicted Hesser of “tax fraud under 18 U.S.C. § 287 and 18 U.S.C. § 2 and one count of attempted tax evasion under 26 U.S.C. § 7201.”  (A quibble, I would not describe § 287, labeled in the Code “False, fictitious or fraudulent claims,” as tax fraud since that term is often applied to other tax crimes, such as even § 7201.)  On Rule 29 motion after the jury verdict, the district court sustained the convictions. On direct appeal, the 11^th Cir. affirmed the convictions but remanded for further consideration of restitution. United States v. Hesser, 800 F.3d 1310 (11th Cir. 2015), GS here. Hessell then sought post-conviction relief under 28 USC § 2255 from the counts of conviction for "tax fraud" and tax evasion, alleging ineffective assistance of counsel. (Ineffective assistance of counsel is a common claim in § 2255 cases, although usually without merit.)  The district court granted the relief for the tax fraud counts but denied the relief for the tax evasion count.  Hesser appealed after obtaining a Certificate of Appealability from the 11^th Circuit. On the § 2255 appeal, the 11^th Circuit held that, on its view of the record, Hesser had been denied effective assistance of counsel because counsel failed to argue for Rule 29 judgment of acquittal at the close of the prosecution's case-in-chief on the basis that the prosecution had not adequately presented an element of the tax evasion crime – affirmative act of evasion. The 11^th Circuit reasoned that, had counsel timely requested Rule 29 relief, the district court would have erred as a matter of law in not granting that relief on the affirmative act of evasion element. So counsel’s failure to request that relief establishes that counsel’s representation was not effective, thus requiring vacation of the conviction. Whew (just trying to pack the gravamen of the case into those words wears me out; there is a lot of nuance underlying that summary).

Teaching Tax Through Movies -- Loverly (7/11/22)

 I was in my former life an Adjunct Professor at University of Houston Law School where I taught courses in Tax Procedure and in Tax Crimes.  Often in the courses, I would mention My Cousin Vinny to illustrate (often by stretch) some point relevant to the classes.  

This offering caught my attention.  Alice G. Abreu (Temple), Teaching Tax Through Film Is Not As Crazy As It Sounds, 19 Pittsburgh Tax Rev. 183 (2022), here.  I was intrigued to see what Professor Abreu offered her students in the way of teaching tax law through the movies. I offer the relevant portions (pages 205-207 of the article (pages 24-26 of the pdf), footnotes omitted).

The films for this course were chosen for a breadth of genres and eras from the 1960s to last year. Some were animated; some were about superheroes; some were musicals. I aspired for every student to enjoy at least one film, and I hope they enjoyed many more. At the same time, an underlying need was to choose films that highlight specific tax topics. Although all films raise important tax issues, some are more clearly on point for the topics we covered.

Article on Coinbase Tool for Identifying Owners of Cryptocurrency (7/7/22)

I am not steeped in the cryptocurrency craze.  Basically, I thought the attraction was the ability to do financial transactions in guaranteed secrecy, a feature particularly attractive to many such as money launderers and tax evaders.  I have had some posts on it.  See the Cryptocurrences tag here.  Still, I do not deal with cryptocurrencies in my practice or research.  So that is my caveat.

The following article caught my eye:  Sam Biddle, Cryptocurrency Titan Coinbase Providing "GEO Tracking Data" to ICE (The Intercept 6/29/22), here.  I thought some readers might be interested, so I pass it on.

Some excerpts:

            Coinbase Tracer allows clients, in both government and the private sector, to trace transactions through the blockchain, a distributed ledger of transactions integral to cryptocurrency use. While blockchain ledgers are typically public, the enormous volume of data stored therein can make following the money from spender to recipient beyond difficult, if not impossible, without the aid of software tools. Coinbase markets Tracer for use in both corporate compliance and law enforcement investigations, touting its ability to “investigate illicit activities including money laundering and terrorist financing” and “connect [cryptocurrency] addresses to real world entities.”

             According to the document, released via a Freedom of Information Act request, ICE is now able to track transactions made through nearly a dozen different digital currencies, including Bitcoin, Ether, and Tether. Analytic features include “Multi-hop link Analysis for incoming and outgoing funds,” granting ICE insight into transfers of these currencies, as well as “Transaction demixing and shielded transaction analysis” aimed at thwarting methods some crypto users take to launder their funds or camouflage their transactions. The contract also provides, provocatively, “Historical geo tracking data,” though it’s unclear what exactly this data consists of or from where it’s sourced. An email released through the FOIA request shows that Coinbase didn’t require ICE to agree to an End User License Agreement, standard legalese that imposes limits on what a customer can do with software.

        *  *  *  *

6th Circuit Affirms Convictions and Holds that § 7206(2) Does Not Require Filing of the Fraudulent Return (6/30/22)

In United States v. VanDemark, ___ F.4th ___, (6th Cir. 6/30/22), CA6 here and GS here [to come], the Court affirmed the conviction of VanDemark, rejecting Vandermark’s appeals from denials of his motions for “acquittal on three of these counts and a new trial on all six counts." The six counts were (Slip Op. 4):

Counts One and Two dealt with the Supermarket’s 2013 and 2014 corporate returns. Counts Three and Four concerned Vandermark’s 2013 and 2014 personal returns. Count Five charged VanDemark with structuring payments, in violation of 31 U.S.C. § 5324(a)(3). And Count Six charged VanDemark with making false statements to federal agents, in violation of 18 U.S.C. § 1001.

VanDemark is described (Slip Op. 1) as “a millionaire car salesman who tried to hoodwink the IRS” and the owner of “the Used Car Supermarket, which sells cars from two lots in Amelia, Ohio.”  (I had never heard of Amelia, Ohio, so I just point to the Wikipedia entry for Amelia, here.)  Basically, he skimmed cash receipts in large amounts, in the time-honored way that many cash retail businesses do so, but customized to his particular business. Since this is a variation of garden variety tax evasion, I won’t go into the detail on the skimming.

Some interesting items:

1. How did he use the cash he skimmed? The Court says (Slip Op. 3):

             It turned out that VanDemark used most of this cash to pay the mortgage on his multimillion-dollar mansion. Wary of attracting the IRS’s attention, VanDemark asked an employee at his bank to confirm the IRS reporting threshold. She told VanDemark that the bank had to report “[a]nything over 10,000 in cash” to the IRS. (R. 73, Trial Tr. (Luck), PageID 1086-87.) So with this information in hand, VanDemark began to make cash payments toward his mortgage several times a month, keeping each payment below $10,000.

Note that the VanDemark’s employee made the inquiry to the bank, but the bank employee answered to VanDemark.  (No explanation of the missing link there.)

District Court Rejects Motions for Acquittal and New Trial on Tax Perjury Convictions (6/29/22)

In United States v. Thompson, No. 21-cr-00279-1, 2022 U.S. Dist. LEXIS 99469 (N.D. Ill. June 3, 2022), CL here, the court denied Thompson's motions for acquittal and, in the alternative, a new trial. Thompson had been convicted of "two counts of making a false statement with the intent to influence the Federal Deposit Insurance Corporation (the FDIC) and a mortgage lending business, in violation of 18 U.S.C. § 1014, and five counts of filing a false tax return, in [*2]  violation of 26 U.S.C. § 7206(1)."

I focus on certain tax aspects of the opinion, although I note that the court held (Slip Op. 28-38) that, for the § 1014 conviction in the Seventh Circuit, literal falsity was not required. 

Special Agents Assisting the Grand Jury Make Surprise Visit.

As often happens in a tax investigation, IRS CI Special Agents make a surprise early morning visit, which is often the target's or subject's first indication of the investigation, designed to catch him or her off-guard and, even when given the modified Miranda warnings, more amenable to an interview without counsel. Here is the court's description of that interview. In this case, the Special Agents were, respectively FDIC and IRS Special agents, and were assistants to a grand jury rather than agents conducting agency administrative investigations.

             At 8:15 a.m. on December 3, 2018, Evans [Special Agent with the FDIC Office of Inspector General] and Special Agent Jason Gibson (Gibson), [*13]  with IRS Criminal Investigation, visited Thompson at his house unannounced to interview him. Tr. 935:16-936:4, 944:12-19. Evans testified that, during the interview, they discussed Thompson's loan at Washington Federal, Evans and Gibson asked him questions about the loan, and Thompson provided information about the loan. Tr. 938:16-25. Specifically, Evans told Thompson that he was investigating Washington Federal, but he never told Thompson that Thompson himself was the subject of an investigation or that Thompson's taxes or tax deductions were the subject of an investigation. Tr. 950:23-951:8. At some point during or at the end of the interview, Gibson served Thompson with a grand jury subpoena that called for Thompson to appear and provide records, including but not limited to federal tax records and records used to prepare federal tax returns, loan and credit applications, records related to the purchase of Thompson's primary residence, his rental residence, and a third property located in Michigan. Tr. 939:1-22, 941:9-942:6, 948:19-22; GX 411.

I infer that, although not expressly stated, Thompson was at least a subject of the grand jury investigation. The opinion does not state whether he was given modified noncustodial Miranda warnings or whether Thompson made incriminating admissions during the interview. I have to assume that defense counsel made whatever he could from the described event.

 Denial of Good Faith Jury Instruction for Tax Perjury.