Individual B, the Houston Attorney in the Smith NPA, Is Unmasked (12/1/20; 12/2/20)

I recently posted on the Brockman indictment and the Smith NPA.  One Big Fish Indicted and Lesser Big Fish Achieves NPA for Cooperation (Federal Tax Crimes Blog 10/16/20), here.  In that post I noted:

11.  (Added 9:30pm):  Being from Houston, I was particularly interested in the Houston lawyer who assisted Smith. The Houston lawyer is identified as Individual B in NPA Exhibit A, Statement of Facts.  In summary, Individual B did some very bad acts, creating offshore structures and disguising Smith's participation in those offshore structures.  Brockman (identified as Individual A) referred Smith to Individual B.  I don't know who the Houston lawyer is, but suspect that having practiced in Houston during this period, I likely know Individual B (whoever he or she is).  If anyone knows and is willing to share that information, please let me know.

The Houston attorney, Individual B, is named in a Motion to Dismiss in part for lack of Venue and to Transfer to the Southern District of Texas, here.  The relevant paragraph is (p. 11 of Motion, p. 18 of pdf) (bold-face supplied):

Fourth, and by contrast, the Statement of Facts made by Smith (“Individual Two”) in connection with his Non-Prosecution Agreement describes the extensive role of “Individual B, a lawyer in private practice in Houston, Texas who specializes in foreign trusts and ‘asset protection’ planning,” whom the defense recognizes to be Carlos Kepke. Keneally Decl. Ex. M at Statement of Facts ¶ 5. Mr. Kepke’s practice is located in Houston, Texas, as reflected on his website, his LinkedIn Profile, and the State Bar of Texas lawyer profile. Keneally Decl. Ex. N, Ex. O, Ex. P. The defense is not aware of Mr. Kepke’s role in this investigation, but he is an obvious potential witness.

Kepke's web site is here.  On that web site, he touts his work on Offshore Structures for U.S. Income Tax and Estate Tax Savings.

JAT Comments:

Comisky Article on Tax Evasion and Money Laundering (11/26/20)

Readers of this blog will likely be interested in a recent practice point offering from the ABA Tax Section, Ian M. Comisky, May Tax Evasion Be Charged as a Money Laundering Offense? The Times Are A-Changing (ABA Tax Times 8/25/20), here.  (To access the document ABA or Tax Section membership may be required.)  Comisky (bio here) is a long-time practitioner and commentator on the interface of tax crimes and money-laundering.

Here are some paragraphs introductory and one more (from the already short offering) to tease the interest (footnotes omitted):

Tax evasion has never been a predicate offense for a money laundering charge in the United States. The government, however, has employed mail and wire fraud offenses to charge money laundering arising out of a tax crime. This article reviews the basics of U.S. money laundering laws, the use of mail and wire fraud crimes to transform tax offenses into money laundering, and recent developments worthy of discussion.

The basic U.S. money laundering laws are contained in Title 18 of the U.S. Code: section 1956 (laundering of monetary instruments, referred to herein as the primary money laundering statute) and section 1957 (engaging in monetary transactions in property derived from specified unlawful activity). The primary money laundering statute involves one who engages in a financial transaction knowing that the property represents the proceeds of some form of unlawful activity, which, in turn, involves the proceeds of a specified unlawful activity (SUA) with certain types of knowledge or intent. There is a tax intent money laundering provision contained within the primary money laundering statute, but the defendant must engage in a transaction with SUA proceeds (taxes are not an SUA), and then engage in conduct that violates one of the two primary U.S. criminal tax provisions. Historically, the government would encounter a defendant who engaged in a different type of illegal activity (e.g., securities fraud, which is an SUA) and then later transferred the proceeds from that activity in a way that evaded taxes with those proceeds. In those circumstances, a tax intent money laundering offense could be charged.

There are two other provisions of the primary money laundering statute where money is represented to be from illegal activity: one involving what is known as international money laundering and a “sting provision.” Noteworthy, the international money laundering provision does not require the use of proceeds from a prior offense but only the transfer of funds with an intent to promote an SUA. A violation of the money laundering statute is a twenty-year felony and permits forfeiture of property involved in or representing the proceeds of the offense.

For purposes of this discussion, the statute references SUAs that are defined by way of a combination of predicate offenses listed in the money laundering statute itself and offenses listed in the Racketeering Influenced and Corrupt Organizations Act (RICO). Despite there being well over two hundred and fifty SUAs, what is notable is what is absent: any violation of the Internal Revenue laws dealing with tax offenses. Although a tax offense is not a direct predicate for money laundering, both mail fraud and wire fraud are listed as SUAs. Because the use of the mails or the use of the wires is likely to occur in connection with the filing of a tax return, tax evasion could, in theory, create a mail or wire fraud violation that is itself a predicate for a violation of the money laundering laws.

* * * *

It is of concern, nonetheless, that the government has begun charging money laundering for what is nothing more than a traditional tax offense accomplished in part via wire fraud. The government certainly has sufficient statutory tools under the Internal Revenue Code for charging a conspiracy to defraud and failing to file FBARs that do not require the use of the U.S. wire fraud statute. The money laundering charges, as noted, permit the forfeiture of all property involved in or traceable to the offense and the advisory sentencing guidelines are more severe for money laundering than for tax offenses.

JAT Comments:

Third Circuit Sustains Application of Gun Possession Prohibition to Tax Felon (11/25/20)

In Folajtar v. Attorney General of the United States, ___ F.3d ___, 2020 U.S. App. LEXIS 37006 (3rd Cir. 2020), here, decided yesterday, the Court held that a tax felon (tax perjury, § 7206(1)) was subject to the prohibition in 18 USC § 922(g)(1) denying felons the right to possess firearms.  Basically, Folajtar argued that, because her nonviolent crime did not implicate valid reasons to deny her Second Amendment right to bear arms, she should be exempted from the prohibition.

Most readers of this blog will understand the nature of the claims made and resolved by the Court in the case.  The case raises the constitutional issue, but also the political issue of the Second Amendment.  There was a strong dissent, wrapping the political argument into the legal argument.  Already, one of the pundits who straddles the legal / political divide is suggesting that this opinion is a good opportunity for the conservative majority on the Court (enhanced by Amy Coney Barrett) to bolster gun rights.  Jonathan Turley, Barrett Reloaded? A New Third Circuit Decision Could Prove The Perfect Base For A Second Amendment Blowout (Res Ipsa Loquitur 11/25/20), here.

 Until and unless the Supreme Court holds differently, tax crimes practitioners must make sure that to advise clients being prosecuted or at the risk of prosecution for tax crimes that their gun “rights” will be proscribed by conviction.

Update on Brockman Indictment (11/11/20)

I previously posted on the Brockman indictment in ND CA.  One Big Fish Indicted and Lesser Big Fish Achieves NPA for Cooperation (Federal Tax Crimes Blog10/16/20), here. There have been some developments via pre-trial motion practice that I note in this blog.  (Readers may follow these and future developments either on PACER (requiring fees) or on CourtListener, here, which, once a CourtListener user has first accessed via PACER, makes the docket entries and documents available for free.)

1. Brockman has moved to transfer the venue for the tax counts (tax evasion, Counts Two through Eight) to the Southern District of Texas, the district of Brockman’s residence or “in the alternative, for a bill of particulars necessary to fully litigate this motion.”  (Dkt. 21, here) This would, if granted, have the effect of severing the tax counts from the other counts, generally considered more serious counts.  But, it appears that Brockman may be up to something broader than just transfer of those tax counts to SD TX, for he advises in p. 3 n. 1 that he intends to file a motion to transfer the entire case to SD TX “for several reasons, including Mr. Brockman’s serious health issues.”  If the entire case is transferred to SD TX, there may then be a motion to sever some of the counts for separate trials.

The motion for transfer of the tax counts is based on venue requirement that criminal cases be brought in the district where the crime occurred.  The particular motion is filed now rather than as part of the larger motion because 18 USC § 3732(b) requires the motion be file 20 days after arraignment.  That is why Brockman advised the court that he will file the broader motion later.

The Government opposes the motion (both the primary and the alternative).  Dkt. 24 here.

2.  The Government has moved for an order permitting it to disclose third party tax return information pursuant to 26 U.S.C. § 6103(h)(4)(D), in order for the government to comply with its obligations pursuant to 18 U.S.C. § 3500, Rule 16 of the Federal Rules of Criminal Procedure, and Brady v. Maryland and its progeny.”  (Dkt. 25, here.)  The Government identifies a range of potentially sensitive information that the IRS has gathered in the investigation and thus is subject to § 6103’s confidentiality requirements.

JAT Comments:

These are fairly mundane are relatively short filings, so I don’t discuss them further.  Students of tax crimes might want to follow the development of the case through the docket entries because, given the stakes and the resources available to both sides, the case should be well litigated, with a raft of pretrial motions from which the student can learn.

Thoughts on NonProsecution for Trump (11/9/20)

Yesterday, Josh Blackman, law professor at South Texas College of Law, posted this blog:  Would President Biden's Nominee for Attorney General Pledge Not to Prosecute Former-President Trump? (The Volokh Conspiracy 11/8/20), here.  Blackman argues that the Senate, controlled by Republicans, can condition advice and consent to the Attorney General nominee upon the AG nominee agreeing or promising not to prosecute Trump and his associates (whatever associates really means, see below).  I understand that prosecuting Trump for crimes is probably not good for the country, given the passion that almost half the country has for Trump.  I think, however, there is some reason to warrant further investigation as to whether Trump committed serious crimes, including tax crimes, I thought I would state my thoughts on what might be a good resolution of the issue.  I frame my thoughts in terms of tax crimes but it would apply generally for all federal crimes.  And, I frame the discussion in terms of nonprosecution (whether that nonprosecution takes the form of Presidential pardon, full letter immunity, or nonprosecution agreement).

1.  The tax crimes for which nonprosecution is granted to Trump should be identified perhaps without specifying details (such as specific years or tax loss, etc.).  The nonprosecution could be, for example, for all tax or tax related crimes prior to January 2021.  The tax crimes could be listed such as 26 U.S.C. § 7201 (tax evasion) or 18 U.S.C. § 371 (tax conspiracy, offense or defraud).  [As I said above, a similar technique could be applied for other crimes, but I think the crimes for which the country grants nonprosecution should be named.]  I don’t think that Trump should be required to admit specific crimes in the nonprosecution agreement, because he simply won’t do that and investigating the crimes would take too much time and be divisive.  Any crimes Trump commits after January 2021 are not within the scope of nonprosecution.

2.  In return for the country’s gift of nonprosecution, Trump must pledge that he will not attempt to pardon himself or any of his “associates” as Blackman calls them.  [This will require that the agreement be reached before he leaves office.]  I would include in associates that he will not pardon the following: V.P. Pence and all White House officers or appointees (even if serving in a voluntary capacity), cabinet-level appointees, all agency political appointees, all Trump family members, all Trump off-the-Government books minions (like Rudy Giuliani, etc., and Trump players such as Manafort, Stone, etc.), and Trump’s affiliated business entities and their officers, employees or agents.  (This may not be a complete list.)

3. Trump’s civil liabilities to the Government may be pursued.  In the tax area, Trump must agree to cooperate with the IRS and DOJ Tax as necessary to determine tax liabilities, penalties and interest for himself and his affiliated entities.  Trump may still assert any defenses he may otherwise have (e.g., nonliability for the tax or penalties, statutes of limitations, etc.), but Trump must assist and cooperate with the IRS and DOJ Tax in the determination of his liabilities.  On the statute of limitations issue, for years not otherwise within the three or six-year statute of limitations, the IRS would still have to meet the substantial burden of proving fraud by clear and convincing evidence.  (I mention DOJ Tax here only protectively, for the determination of the liabilities is initially an IRS function alone unless it somehow gets to court.)

Smith NPA and the FBAR Costs (Fines or Penalties?) Described (11/6/20)

I have written about the travails, self-imposed, of Robert T. Brockman and Robert F. Smith.  See Private Equity Guru Smith Got a Hell of a Deal (Federal Tax Crimes 10/23/20), here, and One Big Fish Indicted and Lesser Big Fish Achieves NPA for Cooperation (Federal Tax Crimes 10/16/20), here.  I offer another installment today, focusing on Smith who achieved a nonprosecution agreement (‘NPA”).  

My subject today is the FBAR penalties.  The Smith NPA, here, provides (par. 3.(i)) that Smith will pay FBAR penalties (boldface applied by JAT).

all penalties and interest computed by the IRS, pursuant to Title 31 U.S.C. §§5314 and 5322, in the amount of $82,930,165, related to Robert F. Smith's failure to timely file truthful and accurate Foreign Bank Account Reporting Forms TD F 90-22.1 ("FBARs"), reporting his financial interest in the foreign bank accounts referenced in the Statement of Facts for the calendar years 2012, 2013, and 2014.

Assuming that the NPA is accurate, the penalties and interest relate to the criminal FBAR penalty in § 5322, here, with respect to the reporting requirement in § 5314, here.  One problem is that, exception in the title of the section, § 5322 describes the monetary imposition as a criminal fine rather than a penalty.  The civil willful penalty, by contrast, is stated to be a penalty, both in the title and in the actual provision.  See § 5321(a)(5)(C), here.  I am not sure the quantified amount of $82,930,165 is consistent with the "fines" that could be imposed under § 5322.  Moreover, I am not sure that the criminal fines in § 5322 could be imposed without a conviction for the crime.  If anyone can provide more information on these issues, I would greatly appreciate it.

Assuming that the quantified amount includes, in whole or at least in significant part, the civil willful penalty under § 5321(a)(5)(C), I would like to develop an issue I have on the application of the civil willful penalty.  The willful penalty maximum of the greater of $100,000 or 50% of the amount in the unreported accounts.  Note that the penalty is stated as a maximum and can be less than the maximum, in the IRS's discretion.

Robert Frank Editorial on Decline in Enforcement Resources and Tax Evasion (11/3/20)

Noted economist Robert H. Frank (Wikipedia here) has written an excellent NYT op-ed: Without More Enforcement, Tax Evasion Will Spread Like a Virus (NYT 10/30/20), here.  Excerpts

Few people enjoy paying taxes, but as Oliver Wendell Holmes Jr. reminded us, “Taxes are what we pay for civilized society.” On reflection, most of us therefore offer at least implicit support for penalties against tax evasion — penalties that have little meaning unless backed by significant enforcement resources.

Yet prodded mainly by anti-tax Republicans, Congress has cut the Internal Revenue Service budget steadily since 2011. By 2019, the agency was auditing only one in every 222 individual returns, down from one in 90 in 2011. Similar reductions have occurred for corporate returns, and were proportionately larger for the wealthiest individuals and largest corporations.

These cuts have not saved the government money. The former I.R.S. commissioner John A. Koskinen estimated, for example, that every $1 trimmed from the agency’s budget has resulted in $4 in lost revenue. But this estimate refers only to direct, or first-round, losses. Because the extent to which people comply with tax laws depends strongly on the behavior of others around them, the ultimate revenue losses are certain to be much larger.

* * * *

What the reductions in I.R.S. funding will continue to unleash, then, is a characteristic feature of all behavioral contagion processes: an explosive chain of feedback loops that greatly amplify any initial change in behavior.

Court of Appeals Finds No Harm Attorney's Failure to Assure Client Understood Relevant Conduct for Sentencing Loss Calculations (10/29/30)

In Jones v. United States, 2020 U.S. App. LEXIS 33857 (6th Cir. 2020), unpublished, here, the Court by Order denied Jones’ request for a certificate of appealability ("COA") from the district court’s denial of a motion under 28 USC § 2255 to vacate, set aside or correct his sentence.  The Order rejected Jones’ allegations of ineffective assistance of counsel, a common complaint in § 2255 motions.

The Court reasoned (cleaned up)

A COA may issue “only if the applicant has made a substantial showing of the denial of a constitutional right." 28 U.S.C. § 2253(c)(2). When the district court's denial is based on the merits, the petitioner must demonstrate that reasonable jurists would find the district court's assessment of the constitutional claims debatable or wrong.

Reasonable jurists would not debate the district court's determination that trial counsel did not render ineffective assistance. To establish ineffective assistance of counsel, a defendant must show deficient performance and resulting prejudice. Strickland v. Washington, 466 U.S. 668, 687 (1984). The performance inquiry requires the defendant to show that counsel's representation fell below an objective standard of reasonableness. In the context of a guilty plea, the prejudice inquiry requires the defendant to show that there is a reasonable probability that, but for counsel's errors, he would not have pleaded guilty and would have insisted on going to trial. The test is objective, not subjective; and thus, to obtain relief on this type of claim, a petitioner must convince the court that a decision to reject the plea bargain would have  been rational under the circumstances.  With respect to claims of ineffective assistance of counsel during sentencing, prejudice is established if the movant demonstrates that his sentence was increased by the deficient performance of his attorney.

Reasonable jurists could not debate the district court's ruling that Jones failed to establish prejudice from counsel's alleged failure to advise him that the loss amount would include loss from relevant conduct not charged in the counts to which he pleaded guilty. Jones claimed that he discovered only after reviewing the presentence report that, because of the relevant conduct he would receive a 16-point increase in his offense level under USSG § 2B1.1(b)(1)(I). Jones also notes that counsel acknowledged that a psychologist testified on his behalf during sentencing, and that the psychologist explained that Jones had difficulty understanding "how things worked and was often confused. . . about the positions that the government took, as well as some of the things that took place." Therefore, he contends that counsel “should have taken extra steps . . . to ensure that [he] understood [the plea agreement]" before signing it. He also argues that he made a substantial showing that he would not have accepted the plea offer had he been made aware that pleading guilty would increase the amount of restitution by 2 million dollars. Because Jones claims that he would have proceeded to trial had counsel accurately advised him of his sentence exposure, he was required to establish that a decision to reject the plea bargain would have been rational under the circumstances.

Reasonable jurists would agree with the district court's conclusion that, in light of the strong case against Jones and his failure to cite any evidence that he had a viable defense to the twenty-five counts brought against him, he failed to establish that it would have been rational for him to proceed to trial had he known of the potential increase in his offense level and restitution amount. A petitioner must produce contemporaneous evidence that suggests that, absent counsel's allegedly deficient performance, he would have elected to proceed to trial instead of accepting the plea agreement. Moreover, at the plea hearing, Jones admitted the accuracy of the statement of facts attached to his plea agreement, and he acknowledged that the applicable guidelines range was not a guarantee of his eventual sentence. In these circumstances, knowledge that his guidelines range might be higher than anticipated—a fact that would be true regardless of whether he pleaded guilty or was found guilty at trial—would not make it rational for a defendant to abandon his plea agreement and risk conviction on twenty-two additional counts. Reasonable jurists could not debate that Jones failed to establish prejudice.

JAT Comments:

Fourth Circuit Affirms District Court Decision in Tax Crimes Case to Limit Taxpayer's Reading Excerpts From Book on Cheek Willfulness Issue (10/24/20)

In United States v. Gerard, 2020 U.S. App. LEXIS 33341 (4th Circuit 10/22/20), here and govinfo here, the Court affirmed the taxpayer’s conviction for “for conspiracy to commit tax fraud” but remanded for the district court to address the elements of the obstruction of justice enhancement for sentencing purposes.  Although the opinion is an unpublished opinion, I thought the following from the opinion might be interesting to readers:

We further conclude that the district court did not err in barring Gerard from reading three books to the jury in support of his defense that he had a good faith belief that his tax minimization plan was lawful. We review a district court's evidentiary rulings for abuse of discretion, and will only overturn a ruling that is arbitrary and irrational. United States v. Farrell, 921 F.3d 116, 143 (4th Cir.), cert. denied, 140 S. Ct. 269 (2019). Rule 403 of the Federal Rules of Evidence states that "[t]he court may exclude relevant evidence if its probative value is substantially outweighed by a danger of . . . unfair prejudice, confusing the issues, misleading the jury, undue delay, wasting time, or needlessly presenting cumulative evidence." We agree with the district court that Gerard's request to read all three books would amount to something similar to the presentation of expert testimony, but without the opportunity for the Government to cross-examine the expert. Furthermore, as the district court observed, Gerard did not have to prove that his tax minimization system was lawful, only that his good faith belief in the lawfulness of his system was credible. See Cheek v. United States, 498 U.S. 192, 201-02 (1991) (holding that a defendant in a criminal tax case can assert a defense of ignorance or misunderstanding of the tax law, leading to "a good-faith belief that he was not violating any of the provisions of the tax laws"). Moreover, as the court observed, Gerard's proposal to read all three books would confuse the jury. We note that, even though the court permitted Gerard to read excerpts from the books, Gerard chose to read excerpts from just one of the three books, suggesting that it was not so imperative that he read each book to the jury.

Corporate Taxpayer (AIG) "Settles" Tax Shelter Litigation Admitting Tax Shelters Were Shams (10/24/20)

The SDNY U.S. Attorney (Acting) issued this stunning press release yesterday:  Acting Manhattan U.S. Attorney Announces Settlement Of Tax Shelter Lawsuit Against AIG For Entering Into Sham Transactions Designed To Generate Bogus Foreign Tax Credits (USAO 10/23/20), here.   Key excerpts for this blog entry (most of the release) are:

Audrey Strauss, the Acting United States Attorney for the Southern District of New York, announced today the settlement of a tax refund lawsuit brought by insurance and financial services company AMERICAN INTERNATIONAL GROUP, INC. (“AIG”) involving seven cross-border financial transactions that the United States asserted were abusive tax shelters designed to generate bogus foreign tax credits that AIG improperly attempted to use to reduce its tax liabilities in the United States.  AIG filed this tax refund lawsuit in 2009, seeking to recover disallowed foreign tax credits and other taxes related to the 1997 tax year.  The United States obtained overwhelming evidence that these transactions lacked any meaningful economic substance, were devoid of any legitimate business purpose, and instead were designed solely to manufacture hundreds of millions of dollars in tax benefits to which AIG was not entitled.  According to the terms of the settlement, approved yesterday by United States District Judge Louis L. Stanton, AIG agreed that all foreign tax credits that AIG claimed for the 1997 tax year and all later tax years for these same transactions, totaling more than $400 million, would be disallowed in their entirety.  AIG further agreed to pay a 10% tax penalty.

Acting U.S. Attorney Audrey Strauss said:  “AIG created an elaborate series of sham transactions that were designed to do nothing – and in fact did nothing – other than generate hundreds of millions of dollars in ill-gotten tax benefits for AIG.  Our system of taxation is built upon the premise that all citizens and corporations must pay the taxes they owe, no more and no less.  People and companies who game that system to avoid paying their fair share of taxes undermine public trust in our tax laws.  We will continue to be vigilant in holding accountable those who use economically empty transactions to avoid paying their taxes.”

As alleged in filings in Manhattan federal court:

During the mid-1990s, AIG Financial Products Corp. (“AIG-FP”), a wholly-owned subsidiary of AIG, designed, marketed, and entered into seven cross-border structured finance transactions with various foreign banks.  These complicated transactions, involving hundreds of agreements, numerous shell companies, and intricate cash flows, had no economic substance but rather exploited differences in U.S. and foreign tax laws to create profits from U.S. tax benefits.  In particular, the transactions generated more than $400 million in foreign tax credits that AIG used to reduce its U.S. tax liabilities.  The U.S. has a worldwide tax system that taxes companies on income earned abroad, but also grants credits for foreign taxes paid.  AIG, was able to turn a profit by obtaining credits from the U.S. Treasury for foreign taxes it did not actually pay in full.  AIG obtained more than $61 million in foreign tax credits during the 1997 tax year alone, the tax year resolved by the settlement. 

In 2008, the Internal Revenue Service (“IRS”) issued a Notice of Deficiency to AIG that, among other things, disallowed the foreign tax credits AIG had claimed in connection with the seven transactions and asserted a 20% tax penalty.  In 2009, after paying the deficiency, AIG filed a lawsuit against the United States in Manhattan federal court challenging the IRS’s determination and demanding a refund.  In response, the United States asserted that the IRS had correctly disallowed the tax benefits because the transactions had no economic substance, a basic requirement for seeking tax benefits. 

According to the terms of the Settlement, AIG agreed that all foreign tax credits that AIG claimed in connection with the seven cross-border transactions that were the subject of the litigation would be disallowed in full for the 1997 tax year and all subsequent tax years during which the transactions were operating, totaling more than $400 million.  AIG further agreed to pay a 10% penalty.  The settlement allows AIG to retain certain income expense deductions relating to six of the transactions that were structured as borrowings, as well as remove certain amounts related to the transactions from its taxable income.  In addition, the settlement resolves certain of AIG’s tax refund claims unrelated to the cross-border transactions stemming from AIG‘s restatement of its publicly filed financials.

One nuance not in the press release is that the press release suggests that the penalty is 10%.  The IRS originally proposed a substantial understatement penalty and a negligence penalty.  Both of those penalties are 20% but only one can apply, so that the taxpayer's maximum exposure before the settlement was 20%.  Under the settlement, the taxpayer concedes the substantial understatement or negligence penalties for the bullshit transaction.  (See paragraph 7 of the Stipulation and Order of Settlement.)  That might suggest that the settlement could be read to imply some level of merit in the taxpayer's position, although I suspect that, from the Government's perspective, it was viewed that as simply a nuisance cost to the Government to resolve this bullshit litigation without expenditure of resources required to litigate the matter.

Of course, large corporations who should know better making sham (aka bullshit) tax shelter claims are not particularly unusual as I have noted on this blog.  But this litigation has one nuance that jumped out that I had not really focused on before – that is, the role of counsel bringing suits to sustain tax shelters that are shams.  I guess that problem lurked in all of the other civil litigation involving bullshit tax shelters.  But it just hit me here.  (I never personally had to face that issue because over my career of practice, I declined to represent taxpayers or promoters in civil tax cases involving bullshit tax shelters; although I do have an anecdote about that which I recount at the end of the blog.  See JAT Comments par. 2)

The question I ask is how exactly does an attorney sign the initial pleading and otherwise participate in a suit, either in the Tax Court or in one of the refund forums (district court or Court of Federal Claims), alleging that a sham tax shelter is entitled to the claimed tax benefits?  OK, I know, the argument is that sham is in the eye of the beholder so long as the technical tax traps appear to be checked off (even when sometimes they are not)?  The question I ask and cannot answer here is what is the role of the lawyers making such claims in litigation?  But, just think about how much energy (creative and  otherwise), time and resources were spent unnecessarily in creating the sham tax shelter to start with and then marshaling it through the administrative audit process (audit and appeals) and litigation before the taxpayer admitted the whole deal was a sham.  Isn’t there some better way to deploy our resources?

Private Equity Guru Smith Got a Hell of a Deal (10/23/20)

Today, the Wall Street Journal published what, I understand, is called an “explainer” about the Brockman indictment and the Smith nonprosecution agreement (“NPA”).  See Laura Saunders The IRS Reels in a Whale of an Offshore Tax Cheat—and Goes for Another (WSJ 10/23/20), here.  I previously wrote on these events.  One Big Fish Indicted and Lesser Big Fish Achieves NPA for Cooperation (10/16/20), here.  

The WSJ article provides a good bullet point high-level summary of the events.  I write today to provide some nuance to a sound bite quote that I gave for the article.  The quote, at the end, is:  "Jack Townsend, a lawyer who publishes the Federal Tax Crimes blog, says, 'He got a hell of a deal, considering what he did.'"

My statement was based only on the publicly disclosed facts in the NPA and the Statement of Facts (Exhibit A) with the NPA, which are here and here, respectively.  Those publicly disclosed facts may not tell the whole story as to why Smith achieved an NPA rather than some other disposition (I discuss some possible other dispositions below.)  

Just on those facts, Smith’s deal is exceptionally good for him.  He committed years of tax evasion, then attempted to do a Streamlined disclosure (after being rejected from OVDP) where he had to certify nonwillfulness and submit amended returns and delinquent or amended FBARs which he did and which were false.  That pattern, particularly, the second step Streamlined disclosure was just incredibly stupid.  If he had done only the OVDP and been accepted into OVDP, he likely would have avoided prosecution if his OVDP submissions and cooperation were truthful and complete.  Two caveats on that, however: (i) OVDP did not “guarantee” nonprosecution but, as a practical matter it would if the disclosure and cooperation were good (I am not aware of any prosecution of an OVDP participant whose cooperation was truthful and complete); and (ii) his behavior on the subsequent Streamlined suggest at least that his amended return and delinquent or amended FBAR submissions in the posited counterfactual OVDP if it had gotten that far likely would not have been truthful and thus would not have resulted in the key relief generally offered by OVDP – nonprosecution.

What I address today is why, given the facts in the NPA and Statement of Facts, DOJ would have given Smith an NPA for such egregious behavior (by which I don’t mean just the dollars involved, but more importantly his overall behavior to cheat and avoid getting caught with continued lies).

The Statement of Facts and the NPA do not really address that issue, except that in the press release his cooperation was emphasized.  I presume that the cooperation is not only the cooperation in exposing his own criminal conduct but more importantly in indicting and prosecuting Brockman.  So, this raises some speculations / questions.

1. Did Smith get an NPA because the Government did not have the necessary proof to convict Smith and the NPA was the best the Government could do, particularly if it helped nail a bigger fish?  In other words, the facts in the Statement of Facts could have been provable only after Smith’s cooperation after his lawyers negotiated the commitment for an NPA.  Hence, rather than indicting Smith with a weak case, the Government might have been motivated to grant the NPA in order to get his cooperation against Brockman as well as obtain the monetary benefits accorded by the NPA.  That’s a matter of what each party’s hand was as they negotiated Smith’s disposition.  I just don’t know that.

Fourth Circuit Holds Taxpayer Liable for Willful FBAR Penalty (10/21/20; 11/3/20)

In United States v. Horowitz, ___ F.3d ___, 2020 U.S. App. LEXIS 33074 (4th Cir. 2020), here, the Fourth Circuit held that the taxpayer, who joined OVDP and opted out, was subject to the willful FBAR penalty.  On the issues presented, the Court held:

1. The Court applied the expansive definition of willfulness that has taken hold to mean recklessness, a standard significantly less stringent than the Cheek standard applicable to tax and FBAR crimes that the taxpayer must specifically intend to violate a known legal duty.  In the course of this holding, the court rejected the taxpayers’ argument that finding willfulness only from a false declaration to the Schedule B foreign account question would eviscerate the two tier willful and nonwillful FBAR penalty regime.  In this case, of course, there was more to support willfulness than just the Schedule B false answer.  (My experience is that, with good facts, a no answer or a blank answer to the foreign account question can still avoid for the willful penalty.)
2. The Court rejected the argument that the regulations which had not been updated to include the change in the maximum willful penalty from $100,000 to 50% of the amount in the account barred an FBAR willful penalty exceeding $100,000.  Readers will recall that a couple of early cases so held, but since there the clear trend is to reject the argument.
3. The Court rejected the argument that the penalty had been abated (or the assessment reversed) and thus was not properly assessed.  The facts show some administrative confusion about that, but the Court concluded that the assessment stood and was timely.  [Added 11/3/20 10:00am:  Les Book has an excellent discussion of this aspect of the opinion:  Leslie Book, Circuit Court Weighs in on Meaning of Willfulness, Maximum Penalty and SOL Issues in Important FBAR Case (Procedurally Taxing Blog 11/3/20), here.]

JAT Comments:

One Big Fish Indicted and Lesser Big Fish Achieves NPA for Cooperation (10/16/20)

I write today about two related developments involving the tax misdeeds of private equity moguls that readers will have probably already read about in the popular news:  (i) Robert T. Brockman the biggest mogul and alleged tax cheat of the two was indicted in the Northern District of California (the indictment is here and the Court Listener Docket Entries is here), with an alleged criminal amount of $2 billion (revised at 5:00pm - I understand this is the omitted income amount rather than the bottom line tax loss); and (ii) Robert F. Smith, the smaller mogul (but still a large one) and now admitted tax cheat, reached a nonprosecution agreement (“NPA”) wherein he agreed to pay $139 million in tax and penalties (presumably with interest thereon as appropriate (the US Attorney’s press release on the NPA is here, the NPA and an Exhibit are linked on the press release)).

So, what’s this commotion all about?  I have not studied the indictment in detail, but here are key points (some with my inferences) that I derive from either the press release and two articles (Kadhim Shubber  & Miles Kruppa, Billionaire Robert Brockman charged in $2bn tax evasion case (Financial Times 10/15/20), here; and Jaclyn Peiser, A Texas billionaire evaded $2 billion in taxes, feds say. Now he’s charged in the ‘largest-ever’ tax fraud case (WAPO 10/16/20), here)

• This is said to be the largest tax fraud case ever.  The criminal cases against the Son-of-Boss professional enablers involved, in the aggregate more dollars, but I assume the this is the largest single taxpayer (as opposed to enabler of multiple taxpayers) case.
• Smith is not named in the indictment except by pseudonym which is typical for uncharged co-conspirators.  Smith has agreed to cooperate to achieve his NPA.  (The NPA is linked in the press release linked above.)  In addition to cooperation against Brockman and perhaps others, Smith agreed to pay about $139 million in tax and penalties.  Smith achieved some positive notoriety in 2019 by agreeing to “pay off all the student loans for the graduating class of Morehouse College, an all-male, historically Black college in Atlanta.  (WAPO article.)  I discuss aspects of the NPA below in my comments.  (I wonder whether Smith's generosity at the time was motivated in significant part to contribute in some way to achieving an NPA.)
• The pattern alleged for Brockman’s offshore evasion is just a variation of a theme that we have seen in offshore tax evasion but ramped up with many intrigues outlined in the indictment.
• The charges also included allegations that between 2008 and 2010, Brockman lied to investors and allegedly bilked them out of nearly $68 million. (WAPO article.)
• Smith attempted a voluntary disclosure in 2014 but apparently was already on the IRS radar screen and was rejected.  He probably attempt to do a voluntary disclosure because one or more of the offshore banks had turned information over to DOJ Tax or the IRS.
• The US attorney said Mr Smith had used a Houston lawyer to direct his offshore nominees.  The Houston lawyer is not named.

The counts charged against Brockman are from the attachment to the indictment (some of these have multiple counts):

• 18 U.S.C. § 371 – Conspiracy (Offense and Defraud)
  5 yrs prison, $250k fine, 3 yrs sup. rel., $100 special assessment;
• 26 U.S.C. § 7201 – Tax Evasion
  5 yrs prison, $250k fine, 3 yrs sup. rel., $100 special assessment, costs of prosecution;
• 31 U.S.C. §§ 5314 & 5322(b) –FBAR Violations
  10 yrs prison, $500k fine, 3 yrs sup. rel., $100 special assessment;
• 18 U.S.C. § 1343 – Wire Fraud Affecting a Financial Institution;
  30 yrs prison, $1M fine, 5 yrs sup. rel., $100 special assessment;
• 18 U.S.C. § 1956(a)(1)(B)(i) – Concealment Money Laundering;
  20 yrs prison, $500k fine or twice the gross gain or loss (whichever is greater), 3 yrs sup. rel., $100 special assessment;
• 18 U.S.C. § 1956(a)(1)(A)(ii) – Tax Evasion Money Laundering;
  20 yrs prison, $500k fine or twice the gross gain or loss (whichever is greater), 3 yrs sup. rel., $100 special assessment;
• 18 U.S.C. § 1956(a)(2)(B)(i) – International Concealment Money Laundering;
  20 yrs prison, $500k fine or twice the gross gain or loss (whichever is greater), 3 yrs sup. rel., $100 special assessment;
• 18 U.S.C. § 1512(b)(2)(B) – Evidence Tampering;
  20 yrs prison, $250k fine, 3 yrs sup. rel., $100 special assessment;
• 18 U.S.C. § 1512(c)(1) – Destruction of Evidence;
  20 yrs prison, $250k fine, 3 yrs sup. rel., $100 special assessment;

Even without considering the multiple counts the concept of stacking will tell readers that the maximum sentence if conviction on all counts is around 130 years. (revised 10/17/20 11:40am: my actual calculations of all counts shows 800 years maximum incarceration). Of course, the Sentencing Guidelines and Booker variance (if appropriate) will produce a much smaller actual sentence.  My rough and ready calculation of the offense level considering only $2 billion tax loss and acceptance of responsibility (although he has not accepted yet) shows a sentencing range of 168-210 months with good time credit of 21.6-27 months.  revised at 5pm: this is true even if $2 billion was the omitted income amount because it would almost certainly produce at tax loss of $550 million, the top of the table and even if the tax loss were less, the Guidelines calculation would not be reduced much).  

(Added 9:30pm):  The following is a summary of key facts (selective) from the Smith NPA Exhibit A, Statement of Facts:  Foreign Bank notified Smith of intent to participate in the Swiss Bank Program that would require outing Smith.  Smith filed preclearance request for OVDP.  The preclearance request was denied.  Smith filed a false FBAR omitting accounts and filed income tax return omitting income and including false Form 8275.  Smith attempted Streamline disclosure, filing false FBARs and false income tax returns.  (Although not stated in the Statement of Facts, the Streamlined filing would have required that Smith represent that his conduct was not willful, a representation that based on other admission would have been false.)  These actions were willful.

JAT Further Comments:

District Court Grants Summary Judgment for Government on § 7431 Wrongful Disclosure Claims to Third Party Recordkeepers but Not Other Third Party Summonses (10/13/20)

In Williams Dev. & Constr. v. United States, 2020 U.S. Dist. LEXIS 187212 (D. S.D. 10/8/20), CL here, the IRS Criminal Investigation (“CI”) agent issued 15 IRS administrative summonses falling into two relevant categories:  (i) third party recordkeeper summonses (here to financial institutions) and (ii) third party summonses that are not third party recordkeeper summonses.  The summonses stated that they were issued "In the Matter of Craig A. or Craig Arthur Williams." From the opinion, it appears that Williams is a Houston, TX, based taxpayer and has several related companies.  The IRS subsequently withdrew two summonses.  The taxpayer and related companies originally petitioned the district court in South Dakota to quash all of the summonses.  One problem on the motion to quash was that there was only one summonsee in South Dakota, the venue in which the taxpayer sought to quash all summonses.  Thus, the action to quash could continue only as to the South Dakota summonsee, Citibank, N.A.  (See prior Magistrate’s Order dated 12/10/19, here.)

While the case was pending, the taxpayer filed an amended complaint including a claim for damages under § 7431 for unauthorized disclosure of return information.  The new claim was that the summonses (all of them) improperly disclosed taxpayer return information in violation of § 6103.  In relevant part, the claim was that the disclosure of (i) the taxpayer subject to the investigation, (ii) the taxpayer’s address, (iii) the IRS agent's identity as a CI agent and (iv) the taxpayer identification number.  The Government moved for summary judgment.  The Court mostly granted the IRS motion but denied as to disclosures of tax identification numbers to the third party (i.e., nonrecordkeeper) summonses.

The discussion of the issues resolved in the opinion may be summarized:

• All of the items (subject of the investigation, fact of CI investigation and taxpayer identification) are return information.  So, the question is whether the disclosures were authorized under § 6103(k)(6), called the investigatory purposes exception.  As explained by the Court, “The investigatory purposes exception authorizes IRS employees to ‘disclose return information’ in connection with their official duties relating to a criminal tax investigation ‘to the extent that such disclosure is necessary in obtaining information, which is not otherwise reasonably available.’”  Further,

New IRM provision on Offers in Compromise Including FBAR Penalties (10/8/20)

I just picked up this provision in the IRM, here:

5.8.4.24.2 (09-24-2020)

Foreign Bank and Financial Reporting (FBAR) Assessments

An offer may be submitted which includes FBAR assessments or a taxpayer who submitted an offer to compromise their tax liabilities also has assessments based on FBAR. Since, the IRS does not have authority to compromise assessments based on FBAR, the taxpayer should be requested to submit an amended offer to remove FBAR liabilities which are included on the Form 656.

Note: FBAR penalties are assessed under Title 31 and do not appear in IDRS.

If the taxpayer has a liability for assessments under FBAR, an offer for tax liabilities other than the FBAR may be investigated. During the review of the taxpayer’s financial information, the OE/OS should conduct additional investigation actions to determine if the taxpayer continues to have assets outside the United States. Review the ICS history to determine what research may have been conducted by a field revenue officer. The OE/OS may also issue an other investigation (OI) to an ATAT or International RO group to research FinCEN and/or CBRS to assist in identifying current foreign assets in which they retain an interest.

Note: The taxpayer may also have pending assessments related to Offshore Voluntary Disclosure Initiative.

If the taxpayer is unable or unwilling to submit an amended offer removing the FBAR liabilities, the offer should be closed as a processable return.

JAT Comments:

1.  I am not sure how or if compromises of the FBAR penalties may be achieved.  I assume that there is some way to do that outside the IRS processes for tax liabilities.

2.  The known route to compromises of tax liabilities may be a side benefit of avoiding an FBAR penalty assessment under the various IRS programs (e.g., OVDP and Streamlined) where a substitute penalty is assessed as a miscellaneous tax penalty (sometimes called the “in lieu of” penalty).

This blog is cross-posted on the Federal Tax Procedure Blog, here.

Second Circuit Affirms Conviction of Lawyer Offshore Account Enabler (10/4/20)

In United States v. Little, 2020 U.S. App. LEXIS 31384 (2d Cir. 9/30/20), here, the Court affirmed the conviction and sentencing of Michael Little, a lawyer who enabled the Seggerman family to cheat on their taxes, using in part failure to file FBARs.  I have written on Little before (see blogs on him, including in some blogs the Seggermans), here

I discuss here only two points from the opinion.

1. Willfulness.

The Court rejected Little’s Cheek defense that there was insufficient evidence to prove that he knew the legal duty.  The Court handled the defense summarily (Slip Op. pp. 5-6):

            We conclude that substantial evidence supports the jury verdict on each of the challenged counts. In a nutshell, Little contends that he merely misunderstood the byzantine tax code. But Little is a British-trained barrister admitted to the New York Bar with a quarter-century of experience in complex international financial transactions who, for much of his life, has claimed German domicile for tax [*7]  purposes. A reasonable juror could easily conclude that the failures of such a sophisticated professional to report his income to the IRS, including compensation from the Seggerman family, and to report foreign bank accounts into which his compensation was funneled, were willful acts. See United States v. MacKenzie, 777 F.2d 811, 818 (2d Cir. 1985) (permitting the inference of "knowledge of the law" from the "[d]efendants' backgrounds," including education). Similarly, Little's sophistication supports a conclusion that he was willfully misleading the Seggerman family's accountants when he informed them that the transfers from Lixam Proviso were merely "gifts from a kind benefactor from overseas" and not distributions.

2. Jury Instructions on Conscious Avoidance / Willful Blindness

The Court rejected Little’s claim that the conviction should be reversed because the Court improperly instructed the jury on conscious avoidance (usually called willful blindness, but the Second Circuit often uses conscious avoidance).  Again, the Court rejects the defense summarily as follows (Slip Op. 6):

First, Little challenges the "conscious avoidance" instructions on the failure to file return counts, the failure to file FBAR count, and the conspiracy count; and second, that the district court's instructions as to willfulness erroneously converted the standard into a reasonableness standard. Conscious avoidance instructions are permissible only when the defendant mounts a defense that he lacked "some specific aspect of knowledge required for conviction" and "a rational juror may reach the conclusion beyond a reasonable doubt that the defendant was aware of a high probability of the fact in dispute and consciously avoided confirming that fact." United States v. Coplan, 703 F.3d 46, 89 (2d Cir. 2012) (citation and internal quotation marks omitted). Here, each predicate is met: Little defended himself by claiming ignorance of his obligations under the Tax Code and, because of Little's legal education and the relative straightforwardness of his obligations, a reasonable juror could conclude that Little was aware of a high probability that his actions were unlawful.

 So, in this case, the conscious avoidance / willful blindness instruction was properly given.

 JAT Comments:

ICIJ Investigations In the News - Panama Papers and Suspicious Activity Reports (9/22/20; 9/25/20)

I offer two related items in which the International Consortium of Investigative Journalists (“ICIJ”) is involved.  I have written on ICIJ with respect to the so-called “Panama Papers” which involved ICIJ’s investigation into offshore accounts via access to and disclosure of the Panama-based law firm Mossack Fonseca’s files helping tax evaders, including persons subject to U.S. tax.  Most readers of this blog will already be familiar generally with the Panama Papers.  

1. Yesterday, DOJ posted this release:  “U.S. Taxpayer in Panama Papers Investigation Sentenced to Prison (DOJ 9/21/20), here.  The defendant, Harald Joachim von der Goltz (also identified with several pseudonyms) pled guilty to “one count of conspiracy to commit tax evasion; one count of wire fraud; one count of money laundering conspiracy; four counts of willful failure to file Reports of Foreign Bank and Financial Accounts, FinCEN Reports 114; and two counts of false statements.”  The pattern is familiar.  Von der Goltz conspired with others to conceal assets and income (defraud / Klein conspiracy), using offshore accounts and shell companies.  He was assisted by Mossack Fonseca and others, including a Panamanian lawyer and a U.S. accountant.

2. ICIJ is at it again having gained access to a trove of FinCEN Suspicious Activity Reports that indicate some inattention by major banks and perhaps FinCEN who should be paying attention and even likely violations of money laundering, tax and related laws. The entry page for ICIJ’s revelations is here.  See also ICIJ’s the following ICIJ pages for further information:

• FAQs on “What is the FinCEN Files investigation?”, here.
• About Suspicious Activity Reports, here.
• About the FinCEN Files investigation, here.

The latter article summarizes:

The FinCEN Files investigation was able to trace banks’ roles in hiding money looted from government treasuries, scammed from pensioners, and generated through drug sales, illegal gold mining and other illegal activities.

The findings expose – from the inside – the consequences of allowing banks themselves to lead the world’s anti-money laundering defenses against kleptocracy, crime and terror, even as they earn huge profits from these same malefactors.

They also show how laundered money provides the lifeblood for corrupt authoritarian regimes and the enemies of democracy worldwide.

The Treasury Department documents reveal how major banks continued to move staggering sums of suspect cash even while on criminal probation after highly touted money-laundering crackdowns by U.S. and U.K. authorities.

ICIJ’s analysis of the FinCEN Files and U.S. authorities’ enforcement actions indicates that imposing fines and deferring prosecutions of banks and declining to prosecute bank executives hasn’t stopped banks from continuing to profit from moving suspect transactions

3.  (Added 9/25/20 11:30am).  Relating to Item 1 above, Richard Gaffey, aka Dick Gaffey, 76, the accountant / enabler for von den Goltz and other offshore tax cheats was sentenced by the same judge on 9/24/20 "to 39 months in prison for wire fraud, tax fraud, money laundering, aggravated identity theft, and other charges."  See DOJ Press Release, titled U.S. Accountant in Panama Papers Investigation Sentenced to Prison (9/24/20), here.  As described in the press release, Gaffey was a bad actor as enabler of offshore and related tax cheating.

JAT Comments:

District Court Grants Government Summary Judgment on FBAR Civil Willful Penalty (9/19/20)

In United States v. Toth, 2020 U.S. Dist. LEXIS 169173 (D. Mass. 2020), CL here, the Court granted the Government’s motion for summary judgment that Toth was liable for the FBAR civil willful penalty.  The holdings break no new ground, so I just list the holdings:

1. The maximum penalty is the greater 50% of the account(s) that should have been reported or  $100,000, rather than being capped at $100,000.  This is the mainstream holding (after a couple of early aberrations).  (Slip Op. 7-10.)

2. The submissions on the motion satisfied the Government’s burden to prove Toth’s failure to file FBAR for 2007 was willful.  (Slip Op. 10-12.)

3. Lenity does not apply to reduce the amount of the willful penalty.  (Slip Op. 12-13.)

4. The Eighth Amendment’s excessive fines prohibition does not apply. (Slip Op. 13-18.)

5. The penalty does not violate Due Process. (Slip Op. 18-19.)

The CL docket entries are here.

Prior blog entries on the Toth case (in reverse chronological order) are:

• In Willful FBAR Collection Suit, District Court Rejects Reconsideration of Finding of FBAR Willfulness As Discovery Sanction (Federal Tax Crimes Blog 12/28/19), here.
• Government FBAR Willful Penalty Suit Survives Motion to Dismiss (Federal Tax Crimes Blog 5/9/17), here.