California Attorney, a Prior Tax Offender and Embezzler, Pleads Guilty to tax Evasion (10/21/19)

I received an email from IRS CI announcing the following plea

James Roy McDaniel, 66, who pleaded guilty before United States District Judge S. James Otero to one count of tax evasion, is scheduled to be sentenced on February 3, 2020.  At sentencing, McDaniel could receive a statutory maximum sentence of five years imprisonment. 

McDaniel was a licensed California attorney for more than two decades, until he pleaded guilty in late 2004 to one felony count of subscribing to a false income tax return. In 2005, McDaniel was sentenced to three years in federal prison for that crime, and he surrendered his license to practice law in California. In that case, McDaniel’s failure to report income resulted in a tax loss of $677,368 to the federal government, according to court documents. McDaniel’s additional income was the result of his embezzlement of over $1.6 million from two prominent families he represented as an attorney.  McDaniel served time in state prison for the embezzlement. 

The IRS subsequently assessed McDaniel more than $1.4 million in taxes, interest and penalties for the tax years 1997 through 2001, court papers state. 

According to the signed plea agreement, McDaniel willfully attempted to evade paying his debt to the IRS by creating two shell companies – Davis Bell Consulting LLC and James Roy Consulting LLC – where he directed payments for tax and estate planning consulting work he performed after being released from prison. During a scheme that allegedly ran from May 2008 until December 2012, McDaniel attempted to mislead federal tax authorities and conceal his income by directing other people to sign documents identifying themselves as the sole managing members of the shell companies. As part of the scheme, McDaniel directed them to open bank accounts where he deposited checks for his tax and estate planning work. 

McDaniel continued to earn income for tax and estate planning consulting work during each of calendar years 2008 to 2018, but willfully failed to report his income, and willfully failed to file tax returns with the IRS for tax years 2011 to 2018. 

McDaniel admits that from 2012 through 2017, he received taxable income of at least $527,944, and subsequently owes unpaid taxes of $184,126, in addition to the $1.4 million previously assessed. 

I'll post a link to the DOJ Tax or USAO web page on the plea when I have it.

JAT Comment:  

1.  This is not your typical tax crimes case.  The typical tax crimes offender is a one-time offender and is not charged again after serving his time.  There is more than one possible reason for that.  The first is that the offender learned his lesson and will not commit tax crimes again.  The second is that perhaps the IRS and DOJ do not want to fire their limited prosecutorial bullets at repeat offenders who may seem incapable of learning lessons.  Still, I suppose that some of these repeat offenders have to be tried simply to discourage others who might be tempted after being convicted for tax crimes.

Make Tax Crimes Great Again Caps for Sale (10/14/19)

I am offering for sale the "official" cap -- Make Tax Crimes Great Again (see image at right).

I offer them for a per unit cost that covers my costs of purchase, tax and mailing.  Here is the breakdown, with the costs depending upon the number purchased by me which I will then pass on.

Number Ordered	My Per Cap Cost	Tax	Total	Your Price
12	$25.73	$1.54	$27.27	$30.00
20	$20.23	$1.21	$21.44	$25.00

As you can see, I am not really looking to make money on the sale of caps.  I suspect that the difference between my purchase price and sales price is just a bit more than the cost to mail the caps, but not much.

Let me know if you are interested by emailing me at jack@tjtaxlaw.com. After I determine the number interested, I will set the final Purchase Price and then advise where to send the check and provide the delivery address for the caps.  Keep in mind that the caps are not yet made.  I am told that the time to make and deliver the caps to me is about 2 weeks.

A Reminder on the Cheek Good Faith Defense -- It Usually Does Not Work (10/12/19)

The United States Attorney for Nevada announced here the sentencing of William Waller Jr., a Las Vegas real estate broker and the owner of Burbank Holdings or Platinum Properties for convictions of tax evasion and willful failure to file.  His sentence was 78 months and restitution imposed is $1,459,535.70.  Key excerpts are:

According to court pleadings and evidence presented at trial, Waller sought to evade taxes by incorporating a shell entity, opening bank accounts in its name, and directing his income into those accounts rather than accounts in his own name.  He also dealt extensively in cash and reduced his equity in his home, the only asset he held in his own name, thereby making it an unattractive asset for the IRS to seize.  

Waller testified at trial that he believed that he was not required to file tax returns or pay taxes, but acknowledged that he was influenced by the teachings of several prominent tax defiers. These included one, who had been convicted three times of tax fraud, and another, who had been stripped of his CPA license. Waller also admitted to purchasing and watching tax defier courses, including one on how to beat criminal tax charges.  Following the defendant’s testimony and the conclusion of the trial, the jury returned guilty verdicts on March 18, 2019.

The first two sentences of the second paragraph describe, somewhat cryptically, his Cheek good faith defense.  That defense is that, in effect, he, in good faith, did not intend to violate a known legal duty.  See Cheek v. United States, 498 U.S. 192 (1991), here, defining willfulness (an element of most Internal Revenue Code (Title 26) tax crimes) as voluntary, intentional violation of a known legal duty.  United States v. Pomponio, 429 U.S. 10, 13 (1976), here.  As I have conceptualized that element of the crime, (i) the duty must be knowable (the law must be clear and not ambiguous, per the line of cases going back to James v. United States, 366 U.S. 213 (1961), here) and (ii) the defendant must have known the knowable duty.  A defendant's good faith belief that he is not violating the law is a defense.  In other words, real, good faith ignorance of the law (but not feigned ignorance) is a defense.

In Cheek, the defendant was successful in establishing that he was entitled to an instruction properly advising the jury of the defense, thus entitling him to retrial where the Government must prove that he intended to violate a known legal duty.  The defendant lost on retrial.  United States v. Cheek, 3 F.3d 1057 (7th Cir. 1993), cert. denied, 510 U.S. 1112 (1994), here.

I don't have statistics on how many cases in which this defense has been raised on trial it has been successful, but my sense from watching these cases over a number of years is that it is rarely successful.  It certainly did not work for Mr. Waller in the case prompting this blog.

I thought I include some discussion of the Cheek good faith defense from Michael Saltzman and Leslie Book, IRS Practice and Procedure (Thomsen Reuters 2015), here, ¶12.05. Selected Criminal Tax Topics (of which I am the principal author):

Eleventh Circuit Remands for Better Restitution Calculation (10/5/19)

In United States v. Sheffield, ___ F.3d ___ (11th Cir. 2019), here, the Court remanded to the district court for a more precise calculation of restitution imposed on a tax preparer falsely claiming tax credits of $1,000 per return.  Basically, the Court held that the calculation was easy -- $1,000 times the number of returns.  Hence, there was no excuse for any estimation or duplication (which there apparently was, as even admitted by the Government).

In this regard, the Court of Appeals observed:

The Supreme Court, citing a 2018 publication by the Government Accounting Office, recently noted that approximately 90% of restitution orders in criminal cases are uncollectible. See Lagos v. United States, 138 S. Ct. 1684, 1689 (2018). As the district court surmised, it is highly unlikely that Ms. Sheffield and her co-defendants will be able to satisfy a restitution obligation of over $3 million. 

At oral argument, Ms. Sheffield asserted that the duplicate entries totaled $136,000. The government, for its part, stated that the duplicate entries amounted to only $31,000. If Ms. Sheffield is correct about the extent of the duplication error in the spreadsheet, that error amounts to a mere .04% of the government’s proposed total of $3,461,638. So one may wonder why it is that we are reversing a multimillion dollar restitution order when the result on remand is likely to be approximately the same and payment (at least full payment) is unlikely. The reason is a simple one. Ms. Sheffield has the “right not to be sentenced on the basis of inaccurate or unreliable information,” United States v. Giltner, 889 F.2d 1004, 1008 (11th Cir. 1989), and is not required to pay restitution she is not responsible for.

DOJ Tax New Crime-Fraud Strategy (10/3/19)

I recommend to readers this short introduction to DOJ Tax's recent initiatives for the crime-fraud exception to the attorney-client privilege.  Sarah Paul and Daniel Strickland, Tackling the Tax Division’s New Crime-Fraud Strategy (Bloomberg Tax 10/2/19), here.

A good discussion of the attorney-client privilege and the crime-fraud exception in a current context is in Paul Rosenzweig, Michael Cohen, Attorney-Client Privilege and the Crime-Fraud Exception (Lawfare 4/10/18), here.

I have written before on the crime-fraud exception.  Here are some key blog entries (in reverse chronological order):

• Third Circuit Reverses District Court on Application of Work-Product Privilege for Email to Return Preparer (Federal Tax Crimes Blog 1/30/17), here.
• Update on the Zukerman Indictment - Potential Waivable Conflicts of Interest of Advocate as Witness (Federal Tax Crimes Blog 5/28/16; 6/21/16), here.
• Second Circuit Affirms Application of Crime-Fraud Exception to the Attorney-Client Privilege (Federal Tax Crimes Blog 10/10/15; 5/24/16), here.
• Third Circuit on Crime-Fraud Exception to Attorney-Client and Work-Product Privileges (Federal Tax Crimes Blog 12/12/12), here.

N.C. Doctor Sentenced for Tax Evasion (10/2/19)

One of the downsides of paying too much attention to Federal Tax Crimes is to see people who abuse the privileges that they have received in life.  Here is a case of a doctor who had a privileged position.  Certainly, he had a good education (he did get in and graduate from medical school) and was ahead, financially and in status, of most Americans.

This doctor, Dr. David Russell, was convicted and sentenced to prison for tax evasion.  He got a rather light slap on the wrist (sentenced to 12 months and a day, so that he will get significantly less than 12 months with the good time credit).  I just wonder if the minority mechanic down at Joe's Body Shop who did roughly equivalent things would have gotten such a lenient sentence.  I won't know that, because it is a counterfactual.

The DOJ Press Release is here, and the key excerpt is:

According to documents and information provided to the court, from May 2012 to December 2015, Dr. David Russell, 66, took several actions to evade payment of federal income taxes, interest, and penalties he accrued over six previous tax years. Russell ignored a duly-issued Internal Revenue Service (IRS) summons to appear before an IRS collections officer with his pertinent financial records.  After the IRS sought and received a court order compelling Russell to comply with the summons, he provided minimal information and omitted records related to any financial accounts and assets he may have had. Russell also hid his assets from the IRS by depositing his paychecks on a reloadable debit card and having wages issued in the name of a company he controlled rather than directly to himself.  He also used a business to pay personal expenses.  In addition to evading the payment of these taxes, Dr. Russell failed to timely pay the taxes due for the years 2013 through 2015.

JAT Comment:

1. None other than the introduction.

Guilty Plea for Lying on Pre-Sentencing Financial Disclosure Form (10/2/19)

I previously reported on the guilty plea and sentencing of Casey Padula for tax and bank fraud.  See  Another Offshore Account Guilty Plea Coupled with Bank Fraud Conspiracy (Federal Tax Crimes Blog 3/25/17), here; and Offshore Account Tax and Bank Fraud Conspiracy Sentencing (Federal Tax Crimes Blog 7/19/17), here.  Well, Padula is back with a guilty plea for lying on his pre-sentencing Financial Disclosure Form.  See DOJ Press Release, here. 

Key excerpt from the Press Release:

According to documents filed with the court, Casey Padula, age 51, formerly of Port Charlotte, Florida, made the false statements on a financial disclosure statement he was required to submit to the government after pleading guilty to tax and bank fraud. On July 17, 2017, in the prior prosecution, Padula was sentenced to 57 months in prison on one count of conspiracy to defraud the United States and commit bank fraud. Padula admitted using offshore entities and accounts to commit the tax fraud. Padula also committed bank fraud by carrying out a fraudulent short-sale transaction designed to reduce or eliminate his $1.5 million mortgage at Bank of America. Pursuant to his plea agreement, Padula was required to provide a full and accurate financial disclosure statement to the government. Instead Padula submitted a false financial disclosure statement in which he failed to disclose numerous assets, including a boat valued at almost $340,000, at least $80,000 in cash, and a $90,000 Mercedes he had recently purchased for his daughter.

JAT Comments:

1.  I suspect that some level of lying on the financial disclosure form is not uncommon.  (That happens on tax returns as well.)  And, as the saying goes, "Pigs get fat, hogs get slaughtered"

District Court Confuses Analysis in Approving Magistrate's R&R Imposing FBAR Willful Penalty (9/26/19)

I previously reported on the Magistrate's Report and Recommendation in United States v. Rum (M.D. Fla. No. 8:17-cv-826-T-35AEP). See Magistrate Recommends Sustaining Imposition of FBAR Willful Penalty (Federal Tax Crimes Blog 8/28/19), here.  Rum objected before the district court.  By order dated 9/26/19, the district court has confirmed and adopted the Magistrate's Report and Recommendation as part of the district court's order.  See Order, here.

The district court's order is short and fairly perfunctory. But, I do think the district court confused its analysis of what the Magistrate did.  In relevant part, the Magistrate found that (i) the summary judgment evidence was sufficient to grant judgment for the Government on the issue of willfulness and (ii) the administrative record was adequate to show that the IRS had not acted arbitrarily and capriciously under the APA in exercising its discretion in setting the amount of the willful FBAR penalty.

The district court,  however, seems to conflate the two issues.  Here is the key paragraph (with footnotes):

For this reason, too, Mr. Rum’s challenge to the Magistrate Judge’s decision on the basis that the Judge “Did Not Apply the Correct Standard of Review for A Motion for Summary Judgment” also fails. (Dkt. 72 at 19) Mr. Rum seems to suggest that the Magistrate Judge improperly engaged in fact-finding at the summary judgement stage of the case. (Dkt. 72 at 20) This assertion is plainly wrong. The Magistrate Judge was not making a de novo determination that Mr. Rum’s testimony was not credible or deciding whether Mr. Rum acted willfully. Rather, the Magistrate Judge reviewed the administrative record, as he was constrained to do, n1 to determine whether the record supported the Agency’s decision that Mr. Rum acted willfully. His evaluation of that record was sound, and his conclusion was correct. n2 
   n1 This disposes of Objection VII in which Rum suggests the Magistrate Judge committed error in declining to go outside the administrative record to consider his challenges to the Agency’s decision. (Dkt. 72 at 17-18) The Magistrate Judge correctly observed that “a court shall only review the record before it to ensure that the agency engaged in reasoned decision-making.” (Dkt. 71 at 20). The Supreme Court’s decision in Dep’t of Commerce v. New York, 139 S. Ct. 2551 (2019), does not alter that longstanding precedent except in very limited circumstances not present on this record.
   n2 The remaining objections, not specifically addressed herein, are either bound up in the matters here discussed, or are just a rehash of arguments made in the summary judgment motion, which were thoroughly and correctly disposed of by the Magistrate Judge’s Report and Recommendation.

I have bold-faced the troubling analysis.  Under the Magistrate's R&R (and the law), the administrative record did not limit the scope of the inquiry on the issue of willfulness but rather only on the amount of the FBAR penalty over which the IRS had discretion.

For further information, I link here the Government's response brief on the objections to the R&R.

§ 7202 Convictions Reversed for Improper Bad Acts Evidence (9/23/19)

In United States v. Snyder, United States v. Snyder, 2019 U.S. App. LEXIS 28326 (6th Cir. 9/19/19) (unpublished), here, Snyder fell into the not uncommon trap of using company (Attevo) withheld trust fund tax for purposes other than paying over to the IRS and went one step further by using funds that should have been deposited to employee 401(k) plans.  The company failed.  The trust fund tax was not paid.  Snyder was indicted "on seven counts of willfully failing to pay over taxes, see 26 U.S.C. § 7202, and one count of embezzling from an employee-benefit plan, see 18 U.S.C. § 664."  Snyder was acquitted on two § 7202 counts and convicted on the remaining counts.

On appeal, Snyder argued that the trial court abused its discretion in allowing the introduction and use of evidence in closing argument that Snyder had failed to file personal tax returns for some number of years.  That evidence is so-called "bad acts" evidence that must run the gamut of FRE 404(b), which limits the use of such evidence, and 403, which requires exclusion of relevant evidence if prejudicial or confusing.  The court generalized the law as follows:

“The government may not use evidence of prior bad acts to show that a defendant’s character made him more likely to commit the charged crime.” United States v. English, 785 F.3d 1052, 1055 (6th Cir. 2015); see Fed. R. Evid. 404(b)(1). However, such evidence “may be admissible for another purpose, such as proving . . . intent . . . [or] absence of mistake.” Fed. R. Evid. 404(b)(2). Even if the evidence is admissible under Rule 404(b), the district court may still exclude it “if its probative value is substantially outweighed by a danger of,” among other things, “unfair prejudice, confusing the issues, [or] misleading the jury.” Fed. R. Evid. 403. 

Because the tax charges against Snyder are specific-intent offenses, this is the kind of case in which evidence of prior bad acts might be admissible. See United States v. Johnson, 27 F.3d 1186, 1191–92 (6th Cir. 1994). But that does not mean such evidence “is automatically admissible.” Id. at 1192 (emphasis added).  

Under Rule 404(b), prior bad acts are inadmissible if they “are too unrelated” to the charged conduct or “too far apart in time to be probative of” the defendant’s specific intent. United States v. Clay, 667 F.3d 689, 696 (6th Cir. 2012). Likewise, dissimilar or long-ago bad acts are usually inadmissible under Rule 403, because they have “a powerful impact on a juror’s mind” despite their “slim probative value.” Ibid. There is “too much of a risk that the jury will generalize from prior examples of bad character.” Id. at 697.

Bottom-line, the Court felt that the failure to file tax returns was too dissimilar to the crime of willful failure to pay over trust fund tax charged under § 7202.

Of course, admission of such evidence is reversible only if not harmless, as is often the case.  The Court seemed particularly troubled about the prosecutor's use of the evidence in closing argument:

If Pizzola’s testimony had amounted only to an isolated blurt, the error likely would have been harmless (as Snyder conceded at oral argument). But Pizzola’s comment was not the only reference to Snyder’s personal tax troubles: Terry, the other IRS witness, also testified about them. And to make matters worse, the government’s closing argument expressly invited the jury to make the propensity inference Rule 404(b) exists to prevent: “[Y]ou heard testimony that the defendant wasn’t even paying his own taxes. He’d done it before, and he was doing it this time.” The government’s misuse of the testimony makes it impossible to dismiss the erroneous admission of this evidence as harmless.

While the district court gave a limiting instruction, this is not “a sure-fire panacea for the prejudice resulting from the needless admission of” propensity evidence. United States v. Haywood, 280 F.3d 715, 724 (6th Cir. 2002). “As empirical studies have shown, evidence of prior bad acts influences factfinders even when the court gives a limiting instruction.” Clay, 667 F.3d at 697. A limiting instruction may be “insufficient to mitigate these potential risks,” and it does not preclude a new trial. Id. at 700–01. See also United States v. Jenkins, 345 F.3d 928, 939 (6th Cir. 2003).

 Accordingly, the Court vacated the § 7202 convictions but affirmed the embezzlement conviction.

New IRS Relief Program for Expatriates Renouncing U.S. Citizenship (9/12/19)

The IRS recently announced a relief program for persons renouncing U.S. citizenship with respect to their tax compliance, including Section 877A, here, titled "Tax responsibilities of expatriation."  See IRS web page titled "Relief Procedures for Certain Former Citizens," here.

I have not practiced in the area of taxation involving U.S. citizenship renunciations.  I know the general rules and enough when presented with a need to either do some serious additional study or refer the client to someone who is an expert.  So, I have nothing personally to offer on the subject addressed in this new relief program.  The key point of this posting is to alert readers of the potential opportunity to take advantage of the relief program.

I do point readers to two articles written by attorneys who do practice in the area:

• Alan Winston Granwell, Andrea Darling de Cortes, William M. Sharp, New IRS Procedure Provides Favorable Path for Non-Compliant Expatriates to Become Tax Compliant (Holland & Knight Alert 9/11/19), here.
• Kevin Packman, Is the New IRS Expatriation Initiative Really Better than an Existing Program and Law? (Mondaq 9/10/19), here.
• Virginia La Torre Jeker, J.D., Ground-Breaking Development: IRS “Amnesty” Relief for Certain Expatriates! (US Tax Talk 9/6/19), here.

Interestingly, both articles are by attorneys in the same firm, Holland & Knight.

Here are the Highlights from the first article:

• New Procedure. On Sept. 6, 2019, the Internal Revenue Service (IRS) announced an important new procedure to enable certain non-compliant U.S. citizens who relinquish their U.S. citizenship to become U.S. tax compliant.
• Primary Targets. "Accidental Americans" who were unaware of their U.S. tax obligations.
• Eligibility and Filings. In general, 1) past compliance failures were non-willful, 2) past tax liability not in excess of $25,000 for the five years prior to, and the year of, expatriation and 3) less than $2 million in net assets as of expatriation date. Eligible taxpayers must file U.S. tax returns, including all required schedules, international information returns and Foreign Bank Account Reports (FBARs), for the five years preceding and the year of expatriation.
• Benefits and Takeaway. Qualifying taxpayers become compliant without having to pay any past due U.S. taxes, penalties or interest and avoid classification as a "covered expatriate," a designation that could result in extremely detrimental tax consequences. For qualifying expatriates, the new procedure provides a taxpayer-friendly pathway to U.S. tax compliance, thereby avoiding potentially detrimental U.S. tax consequences and adverse reputational risk.

The same article has the following Background (footnotes omitted):

U.S. citizens are subject to taxation on their worldwide income based on citizenship and not residency, which is the common standard globally. The U.S. worldwide taxation regime and associated tax compliance is complicated and burdensome for U.S. taxpayers, particularly those living abroad. Thus, for many "Accidental Americans," the enactment in 2010 of the Foreign Account Tax Compliance Act (FATCA), may have been the tipping point in their decision to expatriate. After FATCA was enacted, expatriations increased significantly.

Confusion Regarding the Cheek Willfully Element of Specific Intent to Violate a Known Legal Duty (9/8/19)

In United States v. Severino, 2019 U.S. App. LEXIS 26560 (11th Cir. 2019) (unpublished), here, the Eleventh Circuit affirmed Severino's "convictions and 65-month sentence for aiding and assisting in the preparation of false tax returns, wire fraud, and aggravated identity theft."  Severino was a return preparer, and, based on the convictions, an abusive preparer.  On appeal, Severino argued that the Court failed to give a proper willfulness instruction that he had requested for the aiding and assisting counts, § 7206(2).  Severino made other arguments on appeal, but I focus on the willfulness instruction issue which is framed by the Eleventh Circuit's pattern criminal jury instructions.

The Eleventh Circuit's pattern jury instructions for criminal cases are available, here.  Those pattern instructions (with annotations and comments) cover 747 pages.  In order to focus on the pattern jury instructions in issue here, I used the Eleventh Circuit's Pattern Jury Instruction Builder, here, which I have discussed previously.  I "built" the pattern jury instructions in question with Annotations and Comments here.

The relevant pattern jury instructions are:

• B9.1A On or About; Knowingly; Willfully – Generally
• B9.1B On or About; Knowingly; Willfully – Intentional Violation of a Known Legal Duty
• O109.2 Aiding or Assisting in Preparation of False Documents Under Internal Revenue Laws 26 U.S.C. § 7206(2)

The aiding and assisting, § 7206(2) counts, have the same willfully element as in most of the other commonly employed Title 26 tax crimes defined to mean specific intent to violate a known legal duty.  Thus, DOJ CTM 13.07 Willfulness, here, says:

Willfulness has the same meaning in Section 7206(2) cases as it has for other criminal tax violations: “the word ‘willfully’ in these statutes generally connotes a voluntary, intentional violation of a known legal duty.” United States v. Bishop, 412 U.S. 346, 360 (1973); see also Cheek v. United States, 498 U.S. 192, 200 (1991); United States v. Ervasti, 201 F.3d 1029, 1041 (8th Cir. 2000).

As readers of this blog know, many crimes have a willfully element but the element is not always interpreted the same.  As the Court said in Bryan v. United States, 524 U.S. 184, 191-192 (1998), here:

Houston Attorney Convicted of Klein Conspiracy and Tax Evasion (9/6/19)

DOJ Tax announced here that Jack Stephen Pursley, also known as Steve Pursley, was convicted of one count of defraud conspiracy, 18 USC § 371 (also called a Klein conspiracy) and three counts of tax evasion, § 7201.  I posted on the original indictment.  See Houston Attorney Charged With Tax Crimes Related to Offshore Accounts (9/21/18), here.

Key excerpts from the Press Release on the conviction are:

According to the evidence presented at trial, Jack Stephen Pursley, also known as Steve Pursley, conspired with a former client to repatriate more than $18 million in untaxed income that the client had earned through his company, Southeastern Shipping. Knowing that his client had never paid taxes on these funds, Pursley designed and implemented a scheme whereby the untaxed funds were transferred from Southeastern Shipping’s business bank account, located in the Isle of Man, to the United States. Pursley helped to conceal the movement of funds from the Internal Revenue Service (IRS) by disguising the transfers as stock purchases in United States corporations owned and controlled by Pursley and his client. 

At trial, the government proved that Pursley received more than $4.8 million and a 25% ownership interest in the co-conspirator’s ongoing business for his role in the fraudulent scheme. For tax years 2009 and 2010, Pursley evaded the assessment of and failed to pay the income taxes he owed on these payments by, among other means, withdrawing the funds as purported non-taxable loans and returns of capital. The government showed at trial that Pursley used the money he garnered from the fraudulent scheme for personal investments, and to purchase assets for himself, including a vacation home in Vail, Colorado and property in Houston, Texas.

The docket with links to many of the key documents is on Court Listener, here.

Court Rejects Government Summary Judgment Motion in FBAR Willful Penalty Collection Suit (8/28/19)

In United States v. Schwarzbaum (S.D. Fla. No. 18-cv-81147), Order on Motion for Summary Judgment dated 8/23/19, here, the Court denied summary judgment for the Government in an FBAR willful penalty collection suit.  The Court Listener docket entries with available links to some of the underlying docket entries is here.  (Readers wanting to follow the case might check in on the docket entries link for updates.)

Basically, the court rather cryptically concludes that willfulness is an intent issue that requires a fact trial, whichever standard is used.  Whether or not denial of the summary judgment motion was proper, I don't think there is enough meat for me to chew on there.  So I leave that part of the decision to readers.

The issue that did catch my attention was the fact that this taxpayer entered OVDI in 2011 and opted out of the civil penalty regime in OVDI, thus taking his chance the resulting audit.  He apparently lost that bet.  But, one of the consequences of joining OVDI was that he gave one or more consents to extend the statute of limitations for the FBAR penalty assessment (as was required by the program).  The Court, also somewhat cryptically, held the consent(s) to be valid (Slip Op., at 8-9):

To the extent that Schwarzbaum argues that the penalties are time-barred, the argument lacks merit. Although Title 31 does not expressly authorize the extension of the applicable statute of limitations by agreement, it does not expressly prohibit such extensions. Schwarzbaum has failed to point to any legal authority indicating that such extensions would be improper. See  [*9] Melford v. Kahane & Assocs., 371 F. Supp. 3d 1116, 1126 n.4 (S.D. Fla. 2019) (“Generally, a litigant who fails to press a point by supporting it with pertinent authority, or by showing why it is sound despite a lack of supporting authority or in the face of contrary authority, forfeits the point. The court will not do his research for him.”) (internal quotations and citation omitted). Notably, Schwarzbaum does not dispute that he signed consents agreeing to extend the time during which FBAR penalties could be assessed and collected. See ECF Nos. [44-5], [44-6], [44-7]. Rather, in his Reply he acknowledges the lack of authority, argues that the USA relies upon three irrelevant cases in its Response, and then endeavors to distinguish them. However, Schwarzbaum ignores that it is he who bears the burden of establishing the defense of statute of limitations in the first instance. See, e.g. Feldman v. Comm’r of Internal Revenue, 20 F.3d 1128, 1132 (11th Cir. 1994) (“When a taxpayer raises the affirmative defense of the statute of limitations, the taxpayer bears the burden to prove that defense.”) (citation omitted). Here, Schwarzbaum has failed to provide any authority to support his argument that an agreement to extend the time to assess FBAR penalties under Title 31 is invalid.

I have previously discussed the statute of limitations issue:

• Report on Webinar on Opting Out and Litigating FBAR Penalties (Federal Tax Crimes Blog 1/17/13; with Caveat Update on 2/1/13), here.  Item 10 on that blog is:

 10. On consents to extend the statute of limitations (sometimes called waivers), Mr. Breen confirmed that the Form 872 extends the statute only if the statute was open when the consent was signed by the IRS but the consent (waiver) for the FBAR penalty is a traditional statutory waiver of an affirmative defense and thus applies to even years otherwise closed at the time it is signed by the IRS. (At least, that is the IRS's position and, I suspect, it is correct because there is no statute such as Section 6501(c)(4) that is interpreted to require an open statute when the consent is signed.

Magistrate Recommends Sustaining Imposition of FBAR Willful Penalty (8/28/19)

In United States v. Rum (M.D. Fla. No. 8:17-cv-826-T-35AEP), Magistrate Report and Recommendation dated 8/2/19, here, the Court granted the Government's Motion for Summary Judgment sustaining the FBAR willful penalty at 50% for a single year.  The Court Listener docket entries with available links to some of the underlying docket entries is here.  (Readers wanting to follow the case might check in on the docket entries link for updates.)

The Report is 36 pages long.  I will not provide a detailed analysis here but just point out some of the key points that caught my attention.  Overall, it just did not look good for Rum, which is why the Magistrate recommended that the FBAR willful penalty in the 50% amount be sustained.

1.  Rum unquestionably had a foreign account and it was reportable.  So the issue was willfulness.

2.  Rum claimed that he created the account to hide assets from potential judgment creditors rather than the IRS, but the facts were not consistent with that claim.

3.  UBS sent Rum an annual notice that information was provided for him to meet his U.S. tax reporting obligations.

4.  Rum answered the Form 1040 Schedule B foreign account question no, and did not report any income from the account over the years.

5.  In 2004, Rum signed a document for the foreign account (UBS) that said:  "“In accordance with the regulations applicable under US law relating to withholding tax, I declare, as the holder of the above-mentioned account, that I am liable to tax in the USA as a US person.”

6.  In 2008, Rum moved the account from UBS to another Swiss bank, Arab Bank.  (On the timeline, of course, the U.S. was moving aggressively against UBS in 2008.)

7.  Rum claimed that a tax preparer prepared the tax returns, but the returns indicated that they were self prepared.

8.  If a preparer did prepare the returns, Rum admitted that he did not disclose to the prepare the foreign account; Rum claimed the preparer never asked about foreign accounts.

9.  Rather than join OVDI, Rum attempted a quiet disclosure.  (Easy to hindsight on that, given the ugly facts, and the fact that UBS turned on U.S. clients to protect their own skin, a characteristic of Swiss banks generally.)

FBAR Collection Suit Settled Before Jury Verdict Announced (8/27/19)

I previously reported on pretrial skirmishing in the Government's FBAR collection suit in United States v. Dadurian (S.D. Fla. 9:18-cv-81276).  See Court Denies Motion for Partial Summary Judgment on FBAR Willful Penalties (Federal Tax Crimes Blog 8/16/19), here, and Two New FBAR Opinions -- Nothing New Here (Federal Tax Crimes Blog 6/27/19), here.  I report here on the conclusion of the case.

The case went to trial and was submitted to the jury.  Before the verdict was announced, however, the parties settled the case, where the Government originally sought judgment for $2.7 million, for $1 million.  (However, see below as to how the settlement will be effected.) Apparently, there was some drama involved because the jury reached a verdict before the settlement was finally reached, so the parties had to choose to complete the settlement or accept the jury verdict (then unknown, although reached).  See FBAR Trial Settles With Recklessness Standard, TNT (8/29/19) (with the estimable Lee A. Sheppard contributing to the article).  I do not have a link to the article because it is behind a paywall, and getting Tax Analysts' permission to post is a nuisance, as well as (in my experience) requiring some wait period before posting.  Those with a TNT subscription should just go look at it there, although the important details are no different than I offer here drawn solely from the court documents I retrieved from Court Listener (which everyone can access free here).

The jury verdict held Dadurian liable for the accounts she had caused to be set up, but as noted the jury verdict does not control.  I have not attempted to determine the amount of the liability based on the jury verdict, but it was substantially less than the $2.7 million the Government claimed.

Here are the relevant documents from Court Listener:

• The Stipulation Regarding Settlement, here.
• The Jury Verdict (Mooted by the Settlement), here.

JAT Comments:

1.  Nothing particularly unusual here except, of course, the drama in having to choose between the settlement and the unknown jury verdict.

2.  The Stipulation Regarding Settlement is, I think, somewhat noteworthy as to how the settlement gets effected.  Here is the relevant part:  “The material terms of the settlement are as follows: Dadurian will stipulate to a judgment in the full amount of the penalties, plus interest accruing under 31 U.S.C. § 3717. The United States will agree to mark the judgment satisfied if Dadurian pays the United States $1,000,000.00 within 90 days of today.” So, there will be a judgment indicating Dadurian's liability for the full amount and then the judgment liability will be settled for $1 million.  (I guess this sentence is redundant, but that seems a strange way to effect a settlement; it seems to me the more straightforward way to settle would be to enter judgment in the amount of the settlement; if anyone knows why the settlement was structured in this way, please make a comment or email me at jack@tjtaxlaw.com.

Addendum 8/27/19 2:45pm:

3.  With regard to Comment #2, Bob Steinberg, an attorney-CPA, in Palmetto Bay Fl., asks whether this settlement format will give rise to cancellation of indebtedness income.  I think I can argue that both ways (if I had to).  Still, I would presume that somebody addressed that issue in reaching the settlement.  However, I would appreciate any analysis of that issue that readers may make either by comment or by email jack@tjtaxlaw.com.

Taxpayer Charged with False SFCP NonWillful Certification (8/26/19)

DOJ Tax issued a press release titled "Former CPA Indicted for Failing to Report Foreign Bank Accounts and Filing False Documents with the IRS," here.

This is the first time (at least that I can recall) that DOJ Tax has included a charge for false non-willful declaration in a SFCP submission.  Here are the pertinent parts of the press release:

According to the superseding indictment, Booker, a former Certified Public Accountant, owned a cocoa trading company that was organized under the laws of the Republic of Panama.  Booker allegedly operated that company from Venezuela, Panama, and his former residence in Fort Lauderdale, Florida.  The superseding indictment further alleges that, for calendar years 2011 through 2013, Booker failed to disclose his interest in financial accounts located in Switzerland, Singapore, and Panama on annual Reports of Foreign Bank and Financial Accounts (FBARs) as required by law.  Booker also allegedly filed false individual income tax returns for tax years 2010 through 2012 that failed to report to the IRS all of Booker’s foreign bank accounts. 

Booker is also charged with filing a false “Streamlined Submission” in conjunction with the Streamlined Domestic Offshore Procedures. The IRS Streamlined procedures allowed eligible taxpayers residing within the United States, who failed to report gross income from foreign financial accounts on prior tax returns, failed to pay taxes on that gross income, or who failed to submit an FBAR disclosing foreign financial accounts, to voluntarily disclose their conduct to the IRS.  The superseding indictment alleges that Booker’s Streamlined submission falsely claimed that his failure to report all income, pay all tax, and submit all required information returns, such as FBARs, was due to non-willful conduct.

The press release has a link to the superseding indictment here.  The key allegations on Streamlined are in paragraphs 39-41 on p. 11 of the Superseding Indictment.  These allegations are:

39. The Streamlined Domestic Offshore Procedures (the "Streamlined procedures") allowed eligible taxpayers residing within the United States who failed to report gross income from foreign financial accounts on prior tax returns, failed to pay taxes on that gross income, or who failed to submit an FBAR disclosing foreign financial aceounts, to voluntarily disclose their conduct to the IRS.  Taxpayers who were eligible under the Streamlined procedures were subject to substantially lower penalties than those provided by other 1RS programs. 

40.  In order to be eligible for treatment under the Streamlined procedures, taxpayers were required to file amended tax returns for the most recent three years for which the U.S. tax return due date had passed. Taxpayers who wished to take advantage of the Streamlined procedures were required to certify under the penalties of perjury that their failure to report all income, pay all tax or submit all required returns was due to non-willful conduct. Under the terms of the Streamlined procedures, the IRS defined non-willful conduct as conduct that was due to negligence, inadvertence, or mistake, or conduct that was the result of a good faith misunderstanding of the law. 

41. On or about October 14, 2015, BRIAN NELSON BOOKER submitted to the IRS a Certification by U .S. Person Residing in the United States for Streamlined Domestic Offshore Procedures (IRS Form 14654, "Streamlined submission"). In his Streamlined submission, the defendant certified under the penalties of perjury that he "learned about the FBAR filing requirements in 2008" and that he "mistakenly believed that only personal financial accounts had to be reported on the FBAR." The defendant also certified under the penalties of perjury that he was eligible for treatment under the Streamlined procedures and that his failure to report all income, pay all tax, and submit all required information returns, including FBARS, was due to non-willful conduct.

Court Listener has the docket entries, here,

JAT Comments:

Houston Attorney and Others Charged with Tax Crimes (8/21/19)

The USAO for SD Texas announced issued a press release titled "Houston Personal Injury Attorneys and Case Runners Indicted," here.  I don't know that there is anything exceptional about the case, but being from Houston this caught my attention.  I don't know any of the players mentioned in the press release.

Here are the key excerpts:

The charges against Stern and his alleged co-conspirators stem from a long-running criminal scheme to evade taxes. Stern also allegedly obtained his personal injury cases through barratry - the illegal practice of soliciting law firm clients by paying kickbacks to middlemen known as “case runners.”  

Stern and his co-conspirators sought to enrich themselves by illegally recruiting clients through the payment and receipt of illegal kickbacks in order to generate personal injury cases and legal fees, according to the charges. They allegedly worked to conceal and disguise the payments and hide their resulting income from the IRS by filing false documents with them. These allegedly included tax returns, 1099 forms and an offer in compromise that falsely reported material information including amounts of income, expenses and taxes due and owing. 

Once Stern became aware of the investigation, he allegedly worked to obstruct justice by ordering others to destroy subpoenaed documents and instructing co-conspirators not to cooperate. 

According to the indictment, Stern employed multiple devices to disguise his illegal kickback payments to case runners as legitimate referral fees paid to attorneys or as other types of legitimate payments that would be deductible under the tax laws. Stern allegedly funneled kickback payments to case runners Ratcliff and Marcus Esquivel (charged in a separate case) through the accounts of Bradley and Plezia. The charges allege Stern claimed the payments were legitimate referral fees to Bradley and Plezia rather than illegal kickbacks to Ratcliff and Esquivel. 

The indictment also alleges Stern wrote referral fee checks in the names of attorneys who never received the checks. Instead, Morris would allegedly cash the checks with forged endorsements at check-cashing locations and use the funds to pay illegal kickbacks owed to himself and other case runners for Stern’s referrals.    

Stern allegedly also filed 1099 forms that falsely reported to the IRS the nature of the payments and to whom they were made. On his tax returns, Stern falsely reported the illegal, non-deductible kickback payments as legitimate, deductible business expenses, which greatly reduced his tax burden, according to the charges. 

Bradley and Plezia allegedly filed false tax returns to facilitate the scheme.  Ratcliff failed to report many of the kickback payments he received as income on his company’s tax returns, according to the charges. Stern and Morris also allegedly caused another attorney to file false tax returns and a false offer in compromise with the IRS to help cover-up the scheme. 

All defendants are charged with conspiracy to defraud the United States. If convicted, they each face up to five years in prison. For willfully filing a false tax return, Stern, Ratcliff and Bradley face another three years of imprisonment. Aiding and assisting in the preparation and presentation of false tax returns carries another potential three-year-term, for which Stern and Morris are charged. If convicted of witness tampering or obstruction of justice, Stern could be sentenced up to 20 and 10 years, respectively.
The press release has the standard disclaimer: 

* * * * 

An indictment is a formal accusation of criminal conduct, not evidence.
A defendant is presumed innocent unless convicted through due process of law.

FBAR Collection Suit for over $105 Million (8/20/19)

A fellow practitioner alerted me to the FBAR collection suit in United States v. Burga (N.D. Cal. No. 19-cv-03246.)  The Court Listener docket entries are here.  As of this writing, the docket entries (through 8/2/19) show routine entries other than the complaint.  The complaint (from Court Listener) is here.

Note on access to court listener documents, see the last paragraph of this blog.

The complaint is against Francis Burga and her deceased husband (with Francis serving as administrator).  The willful FBAR penalties are $52,581,605 against each, husband and wife, and thus aggregate $105,163,210.  There are also late payment penalty, fees and interest on the base FBAR penalties.

The complaint is pretty damning.  Here are some items in the complaint:

1.  The defendants had "financial interest in at least 294 foreign bank accounts, in various countries, during at least years 2004 through 2009." (Compl. par. 12, which lists the accounts from p. 3 to p. 11.)

2.  The defendants created a Liechtenstein foundation that established complex structures of entities, numbering at least 25, based in Liechtenstein, Switzerland, Singapore and other European and Asian countries.  (Compl. par. 33-35.)

3.  The defendants signed documents with UBS indicating that they were U.S. citizens subject to U.S. tax and directing that statements not be sent to them and that the account not invest in U.S. securities (which would have triggered a U.S. information reporting by UBS).  (Compl. pars. 39-41,)

4.  During an audit in 2007 (apparently August 7, 2007), Mr. Burga told the IRS Revenue Agent conducting the interview that he and Ms. Burga did not have any foreign bank accounts, foreign corporations or foreign trusts.  (Compl. par. 44.)

5.  Immediately after the IRS interview, Mr. Burga moved all of the funds (over $6 million) from the UBS account and into a Liectenstein stiftung, for which Mr. Burga was founder and owner.  (Compl. pars. 45 & 46.)

6.  "Mrs. Burga has admitted that Mr.Burga is liable for the civil FBAR penalties assessed."  (Compl. par. 55.)

7.  The complaint does not have a spreadsheet with the amounts of the willful FBAR penalty for each account per year.

There is a related summons enforcement suit filed in 2018, styled United States v. Burga (N.D. Cal. 18-cv-01633), here on Court Listener.