Crossing the Line in Tax Planning (4/22/14)

I report today on a civil case that shows how a civil dispute can involve a situation that perhaps should have been a criminal case.  In Moreland v. Koskinen, 2014 U.S. Dist. LEXIS 53308 (ND AL 2014), here, the taxpayers, husband and wife, complained that the IRS had denied their first time homebuyer credit.  (The precise procedural posture of the case is unclear, but I assume it was a refund suit; the taxpayers appeared pro se.)  Essentially, the taxpayers created a paperwork façade to give the appearance of qualifying for the credit, but the facts outside the paperwork showed that they did not qualify.

The law requires that property acquired from a related person does not qualify.  The Morelands and Mollie Holland, another otherwise unrelated taxpayer  (unrelated in the sense of the statutory disqualification), wanted to qualify otherwise unqualified properties.  In order to give the appearance that the properties qualified, they created a paperwork façade to make it appear that the Morelands temporarily owned property disqualified as to Ms. Holland so that she could "purchase" the property from the Morelands and vice-versa.

The key part of the decision is (bold-facing by JAT):

In the present case, the paperwork related to all of the real estate conveyances at issue appears to indicate, on its face, that Kevin Moreland purchased the Killen property from Noble and Donna Holland, who are not related to him in any way. If the technical form of that transaction were the only relevant consideration, Kevin and Melissa Moreland might be entitled to the receive the FTHBC. However, when viewed as a whole and in the light of all of the credible evidence, it is clear that the substance of the transaction was very different from its form. In substance, Noble and Donna Holland engaged in a property swap with Janie Moreland for the purpose of making it appear that their respective children qualified for the First Time Home Buyer Credit. There was no actual transfer of the subject properties. Noble and Donna Holland never took possession of the Killen property, and Kevin and Melissa Moreland never vacated it. Kevin and Melissa Moreland paid Noble and Donna Holland only a very small percentage of the money they purportedly owe for the property, and the Hollands never tried to collect from the Morelands. Similarly, Janie Moreland never took possession of the Leighton property, and Mollie Holland did not even move into that property after it had purportedly been transferred to her. Mollie Holland never paid Janie Moreland anything for the Leighton property, and Janie Moreland has never tried to collect anything from Mollie Holland. 

Stated in terms that are most favorable to the parties involved, the only substantive transactions that took place were the transfer of the Killen property from mother (Janie Moreland) to son (Kevin Moreland), and the transfer of the Leighton property from parents (Noble and Donna Holland) to daughter (Mollie Holland). Stated less charitably, each family, in exchange for the sum of $8,000, concocted a scheme to defraud the United States government via the Internal Revenue Service. Under either construction, plaintiffs are not entitled to the First Time Home Buyer Credit.

The case involved only one set of the taxpayers involved, the Morelands.  The other set also claimed the credit.  The Court described their situation as follows:

Mollie Holland claimed a First-Time Home Buyer Credit ("FTHBC") on her Form 1040EZ Income Tax Return for 2010.29 The IRS granted her the credit, but she decided in early 2014 to return all the money she received because, after further consultation with the IRS, she determined she was not entitled to the credit and that "it wasn't right" for her to retain the money.

Attorney-client Privilege Waiver By Putting State of Mind In Issue -- Reasonableness and Good Faith (4/21/14)

In AD Investment 2000 Fund LLC v. Commissioner, 142 T.C. No. 13 (2014), here, the Tax Court (Judge Halpern) held that, by putting the taxpayer's intent and good faith in issue to contest the substantial understatement penalty, the taxpayer had waived the attorney-client privilege with respect to the opinion received for this tax shelter ploy.  The opinion is short and direct and definitive for the case.  The tax shelter involved was the Son-of-BOSS shelter, which readers already know is bullshit.

I need to state the context.  I do this in order to address also the attorney-client privilege as it arose in TIFD III, which I discussed several days ago in a different penalty context.  See GE Ducks Any Penalty for Its Bullshit Tax Shelter -- For Now (Federal Tax Crimes 4/17/14). here.

AD Investment involved the substantial understatement penalty in Section 6662(d)(1), here.  The threshold requirement for that iteration of the accuracy related penalty is that the tax involved with the position exceed a "substantial" amount, defined rather insubstantially as the greater of (i) 10% of the tax required to be shown the return or (ii) $5,000 for individuals and $10,000 for corporations.  AD Investment involved a partnership proceeding, and the existence of the threshold must await partner level proceedings where the tax is actually determined.

Assuming the threshold exists, the penalty applies to the understatement except for the portion of the understatement for which the taxpayer has either (i) substantial authority or (ii) reasonable basis and made a return disclosure of the position.  As the statute now reads, the except clause excluding a portion of the understatement does not apply to tax shelters.  For the year involved, the blanket exclusion of tax shelter items did not apply; in pertinent part, the reduction of the base subject to the penalty applied if the position had substantial authority (an objective test) and the taxpayer reasonably believed that the tax shelter position was more than likely correct (a combined subjective test requiring that the taxpayer believed it and objective test requiring that the taxpayer have reasonably believed it).  The taxpayer in AD Investment averred the presence of these two tests to avoid the penalty.

In addition, the accuracy related penalty, including the substantial understatement penalty, may be avoided if the taxpayer acted with reasonable cause and good faith.  Section 6664(c), here. This is a defense to the application of the accuracy related penalty, although as I shall note below, in some cases, its factors blend into the elements that cause the accuracy related penalty to apply in the first place.  Stobie Creek Investments, LLC v. United States, 82 Fed. Cl. 636, 708 (Fed. Cl. 2008), aff'd, 608 F.3d 1366 (Fed. Cir. 2010).

According to Judge Halpern, the key point in issue was whether the partnership reasonably believed that its position was more likely than not correct.  Under the Regulations, there are two ways to satisfy this requirement.  First, the taxpayer alone makes the determination in good faith.  Second, "The taxpayer reasonably relies in good faith on the opinion of a professional tax advisor."

Under traditional interpretation of attorney-client privilege waiver, there would be a waiver if the taxpayer sought to avoid the penalty under the second ground -- reliance on the opinion of a professional tax adviser.  The partnership -- serving the role of the taxpayer for this purpose -- studiously avoided reliance on the second ground.  Hence, the partnership urged, it had not waived the privilege: "A generalized 'good faith' defense, not specifically relying on the advice of counsel is not a waiver of the attorney-client privilege."  Judge Halpern rejected the argument.

Here is the analysis in full for waiver on the issue of whether the penalty applies, an issue which will turn whether the partnership had a reasonable belief that the position was correct.

GE Ducks Any Penalty for Its Bullshit Tax Shelter -- For Now (4/17/14)

I have previously written on GE's bullshit tax shelter twice blessed by the district court and twice swatted down by the Court of Appeals..  See Second Circuit Strikes Down Another BS Tax Shelter (Federal Tax Crimes Blog 1/24/12); here, and Thoughts on the the Corporate Audit Lottery (Federal Tax Crimes 2/11/12), here.  The irrepressible district court, smarting over two failed attempts to approve a GE raid on the fisc, makes another go at it in TIFD-III-E Inc. v. United States, 2014 U.S. Dist. LEXIS 41472 (D. Conn. 2014), here.  (The judgment entered shortly thereafter is here.)

The Second Circuit had already approved the application of the 20% substantial understatement penalty, but, as it turns out, when pushed to the taxpayer, the tax involved, though large, would not meet the threshold requirement that the understatement be "substantial" -- defined as exceeding "(i) 10 percent of the tax required to be shown on the return for the taxable year."  Section 6662(d)(1)(A)(i), here.

Readers will recall that the 20% accuracy related penalty has another basis -- if the position is due to negligence, which has no threshold limitation.  Section 6662(c), here.  So, the Government made another run to extract from GE some penalty for having played the audit lottery and lost for its bullshit tax shelter.  Again, this time, the district court tilted for GE, thus insulating GE from any cost or penalty for playing the audit lottery.  Why?

The Court opens its opinion as follows:

Defendant, the United States, moves for an order imposing a negligence penalty on plaintiff TIFD III-E Inc. ("TIFD") for tax years 1997 and 1998. During the 1990s, TIFD's parent company, General Electric Capital Corporation ("GECC"), joined with a pair of Dutch banks ("the Dutch Banks" or "the Banks") to form an aircraft leasing company. TIFD considered the Dutch Banks to be its partners in the venture, and did not report any income allocated to the Banks on its own tax returns. During the course of this litigation, I twice found that decision to be more than reasonable; indeed, I found that the company correctly deemed the Banks to be equity stakeholders rather than lenders. TIFD III-E v. United States, 342 F. Supp. 2d 94 (D. Conn. 2004)  [*4] ("Castle Harbour I"); TIFD III-E v. United States, 660 F. Supp. 2d 367 (D. Conn. 2009) ("Castle Harbour III"). The Second Circuit twice disagreed. TIFD III-E v. United States, 459 F.3d 220 (2d Cir. 2006) ("Castle Harbour II"); TIFD III-E v. United States, 666 F.3d 836 (2d Cir. 2012) ("Castle Harbour IV"). So, after more than a decade of litigation, TIFD ultimately lost this case. In addition, the Second Circuit held that the IRS could impose a 20% accuracy penalty against TIFD for substantial understatement of its income taxes in 1997 and 1998.

Despite having "twice found that [GE's] decision to be more than reasonable," the judge candidly acknowledges that the Second Circuit disagreed.  The court then proceeds to find GE reasonable again.

I won't review the facts, for the court itself that "I assume the parties' familiarity with the facts underlying this case."  I will note that, as is common in these bullshit corporate tax shelters, a foreign bank was the linchpin to make it have the superficial appearance of working.  (Foreign banks also played an essential role in the bullshit individual Son-of-Boss tax shelters; in this regard, see my postings Credit Suisse DOJ Investigation Status and New NY Investigation (Federal Tax Crimes Blog 4/7/14), here; and NY State Agency Makes New Moves in Investigation of Credit Suisse (Federal Tax Crimes Blog 4/17/14), here.)

Excellent Article on Federal Judges' Views of Allocutions (4/17/14)

I refer students and practitioners to an excellent empirical study of federal judges' views on allocution under FRCrP Rule 32(i)(4)(A), here.  Mark W. Bennett and Ira P. Robbins, Last Words: A Survey and Analysis of Federal Judge's Views on Allocution in Sentencing, 65 Ala. L. Rev. 735 (2013), here.  I first cut and paste the introduction (footnotes omitted) and then offer some of the findings and conclusions.  I omit footnotes and references to footnotes.

I am not a victim. It was stupid. I was wrong.
--Kwame Brown, Former D.C. Councilman 1 

Others can take my life. They can take and make me out as a monster. They can treat me as a monster. But they can't take away my heart, and in my heart I know I did not do those alleged disgusting, hideous acts. 

--Jerry Sandusky, Former Pennsylvania State University Assistant Football Coach 2 

Your Honor, I cannot offer you an excuse for my behavior. How do you excuse betraying thousands of investors who entrusted me with their life savings? How do you excuse deceiving 200 employees who have spent most of their working life working for me? How do you excuse lying to your brother and two sons who spent their whole adult life helping to build a successful and respectful business? How do you excuse lying and deceiving a wife who stood by you for 50 years, and still stands by you? And how do you excuse deceiving an industry that you spent a better part of your life trying to improve?
 . . .
Apologizing and saying I am sorry, that's not enough. Nothing I can say will correct the things that I have done. . . . There is nothing I can do that will make anyone feel better for the pain and suffering I caused them, but I will live with this pain, with this torment for the rest of my life.
I apologize to my victims. I will turn and face you. I am sorry. I know that doesn't help you.
Your Honor, thank you for listening to me. 

--Bernard Madoff, Former NASDAQ Chairman 3 

INTRODUCTION 

Sentencing: "[T]hat gut-wrenching courtroom moment when a real life intersects with esoteric legal arguments and sentencing guidelines that never truly capture a case's nuances." Some individualization does, however, enter the sentencing process through allocution--the defendant's opportunity to stand up and address the court. Despite this opportunity--or perhaps because of it--many judges consider tailoring the sentence to the specifics of a case the "most difficult and draining aspect of their work." The three excerpts above illustrate how drastically different allocutions can be. While Brown and Madoff readily admitted guilt, Sandusky vehemently denied all wrongdoing and instead portrayed himself as the victim. Sandusky was sentenced to thirty-to-sixty-years imprisonment for sexual abuse, and Brown was sentenced to one day in custody plus community service for bank fraud. Soon after hearing Madoff's allocution, then-Federal District Judge Denny Chin condemned Madoff's actions as "extraordinarily evil" and imposed a 150-year sentence--three times longer than the federal probation office had recommended and more than ten times longer than Madoff's lawyers had requested. 9 Given these radically different approaches and the various sentences imposed, did the allocutions serve any valuable purpose? Did Madoff's apologetic allocution make any difference? 

In theory, allocution provides an opportunity for defendants to accept responsibility, to humanize themselves and their transgressions, and to mitigate their sentences, thus ensuring that the sentences are "tailored to fit both the crime and the person who committed it." From the earliest days of allocution to the present time, defendants' procedural rights have expanded in criminal trials, including the right to testify on one's behalf, the right to counsel, the mandatory preparation of presentence reports, and the right to object to their contents. Has this evolution of rights greatly altered the rationale behind the need for allocution? Whatever the answer to this question may be, ultimately judicial discretion is the greatest factor affecting how much weight will be accorded to a defendant's allocution. But this truism raises many critical questions, including the following: When might allocution help the defendant? When might it hurt? Do defense attorneys take allocution seriously? Do they prepare their clients adequately for allocution? How much do federal judges weigh allocution in deciding the final sentence? What features of allocution carry the most weight? 

While commentators have addressed some of these questions in a scholarly or anecdotal manner, this Article answers these questions more directly through a first-ever survey of all federal district judges regarding allocution. This Article discusses the importance of allocution and the relevance, attention, and weight federal judges place on this often-overlooked stage of the criminal-justice process. Part I explores the history of the right to allocute from its foundations in seventeenth-century common law to its modern-day application. Part II outlines our expectations prior to conducting the survey, some aspects of the participating judges' backgrounds and statuses, and the format of the survey. Part III summarizes the results of the survey. Part IV expounds on the survey's findings and includes recommendations for effective allocution and for future surveys on this subject. Finally, this Article concludes with a brief summary of the federal district judges' allocution advice.

New Report on Shifting Taxable Income Out of the U.S. (4/16/14)

U.S. PIRG reports that it is "is a consumer group that stands up to powerful interests whenever they threaten our health and safety, our financial security, or our right to fully participate in our democratic society."  See web site about page here.  It has issued the following report: U.S. PIRG, Picking Up the Tab 2014: Average Citizens and Small Businesses Pay the Price for Offshore Tax Shelters (4/15/14), pdf download here and the download page with link is here.  The press release is here.

The principle focus of the report is for the shifting of otherwise taxable U.S. income overseas, particularly by large corporations.  While that is a phenomenon in the secret offshore bank area, the report is principally concerned with transfer pricing and other opportunities to shift, of the type recently investigated by the Senate Permanent Subcommittee on Investigations, which I previously report on.  See U.S. Senate Committee Investigation of Crackdown on Offshore Tax Evasion (Federal Tax Crimes Blog 2/20/14), here.

From the press release:

• General Electric paid a federal effective tax rate of negative 11.1 percent between 2008 and 2012 despite being profitable all of those years. The company received net tax payments from the government. GE maintains18 subsidiaries in tax haven in 2013 and parked $110 billion offshore. One of the company’s most lucrative loopholes just got renewed by the Senate Finance Committee. GE alone hired 48 lobbyists to push to renew the “active financing exception.”
• Microsoft avoided $4.5 billion in federal income taxes over a three year period by using sophisticated accounting tricks to artificially shift its income to tax-friendly Puerto Rico. Microsoft maintains five tax haven subsidiaries and keeps $76.4 billion, on which it would otherwise owe $24.4 billion in additional U.S. taxes.
• Pfizer paid no U.S. income taxes between 2010 and 2012 because the company reported losses in the U.S. during those years, despite making 40 percent of its sales in the U.S. and earning $43 billion worldwide. The company operates 128 subsidiaries in tax havens and has $69 billion parked offshore which remains untaxed by the U.S., according to its own SEC filing.

NY State Agency Makes New Moves in Investigation of Credit Suisse (4/17/14)

The drumbeat against Credit Suisse continues with the New York State Department of Financial Services investigation into tax shelters in which Credit Suisse or its affiliates participated.  See Karen Rebelo and Katharina Bart, NY regulator subpoenas Credit Suisse in U.S. tax probe - source (Reuters 4/15/14), here, and Greg Farrell and David Voreacos, Lawsky Said to Subpoena Credit Suisse in Tax-Evasion Case (Bloomberg 4/15/04), here.

It is said that the subpoenas specifically seek "employment records of Roger Schaerer who was previously indicted as an enabler in the DOJ's offshore bank account drama.  See Criminal Charges for More Swiss Bank Enablers (Federal Tax Crimes7/21/11), here.

Update on Zwerner Case - Subsequent Filings (4/16/14)

I previously posted a blog on the US Motion for Summary Judgment in Zwerner.  See U.S. Motion for Summary Judgment in Zwerner (Federal Tax Crimes Blog 3/5/14), here.  I post now the subsequent documents, including Zwerner's response on the motion and the US reply to Zwerner's response.  I also post (i) Pretrial Stipulation with related proposed jury instructions and jury verdict forms and (ii) Motions in Limine that are pending.  I have bookmarked these documents in Adobe format.  I think readers will have to download the file to take advantage of the bookmarks.

• 20140307 Zwerner - D Response on US MSJ (TJ001).pdf, here.
• 20140317 Zwerner - US Reply on US MSJ (TJ001).pdf, here.
• 20140407 Zwerner - Pretrial Stipulation (TJ001).pdf, here.
• 20140407 Zwerner - Proposed Jury Instructions (TJ001).pdf, here.
• 20140407 Zwerner - US Proposed Jury Verdict Form (TJ001).pdf, here.
• 20140407 Zwerner - D Proposed Jury Verdict Form (TJ001).pdf, here.
• 20140407 Zwerner - US Motion in Limine (TJ001).pdf, here.
• 20140407 Zwerner - D Motion in Limine (TJ001).pdf, here.

I may post more on these documents when and if I have time.

U.S. Seeks to Forfeit Proceeds of Secret Swiss Account; the Enabler Turns on the Client (4/15/14)

David Voreacos, U.S. Seeks to Seize $12 Million in Swiss-Linked Tax Case (Bloomberg 4/8/14), here.  Excerpts:

U.S. prosecutors moved to seize $12.2 million they say was transferred to New York from a secret Swiss account set up by a lawyer who helped Americans hide assets from the Internal Revenue Service. 

In a forfeiture action filed today in Manhattan federal court, the government demanded the money of “Client 1” and the client’s father, who prosecutors said used a “mail and wire scheme to defraud the IRS of taxes due.” The accounts were held at “Bank A” in Zurich and “Bank B” in Switzerland, according to the civil complaint, which doesn’t name the institutions or client.
The government said the accounts were set up by Swiss attorney Edgar Paltzer, who pleaded guilty in New York on Aug. 16, admitting he committed tax fraud for more than a decade. Paltzer is cooperating with prosecutors amid a U.S. crackdown on offshore tax evasion that has targeted Swiss banks, bankers, lawyers and financial advisers. 

* * * * 

Paltzer created sham entities in the British Virgin Islands, Liechtenstein and Panama to hide the true owners of the accounts and visited the client and father in Staten Island, New York, in 2006, according to the complaint. The client and Paltzer also had dinner in Manhattan.

For a posting on Paltzer's plea, see Swiss Lawyer Pleads Guilty to U.S. Tax Crimes (Federal Tax Crimes 8/16/13), here.

Of course, one of the messages here is that those who think their enablers -- whether banks or individuals -- are honorable enough to protect them may be disappointed.

As Shakespeare said in King Henry the Fourth, part 1, Act 2, Scene 2, here, putting the following words into the mouth of Falstaff:  "a plague upon it when thieves cannot be true one to another!"

Addendum 4/15/14 5:00pm:

Article: Who is a U.S. Person for U.S. Tax and Immigration (4/15/14)

Henry P. Bubel, Jenny Longman, Lisa M. Koenig, Nikki Dryden,and Michelle Munoz-Machen, Who is a U.S.Person? Disparities between U.S. tax and immigration law, Tax Planning International Review (March 2014), here.  Highly recommended.

The introduction is (footnotes omitted):

I. The increased importance of defining a U.S. Person, for tax law purposes 

The question of who is a U.S. person has always been relevant for tax purposes because it  determines who is subject to (a) U.S. income, gift and estate tax, (b) filing Foreign Bank Account Reports (FBARs), and (c) the ‘‘exit tax’’ under what is now Section 877A of the Internal Revenue Code (the ‘‘Code’’ or ‘‘I.R.C.’’). The inquiry has become increasingly relevant, however, in the context of the Foreign Account Tax Compliance Act (‘‘FATCA’’), as foreign banks and other financial institutions must make determinations as to the identity of the beneficial owners of accounts. 

Under FATCA, foreign banks, brokerage firms, investment firms, and other ‘‘foreign financial institutions’’ must agree to report certain information on their U.S. account holders or else face withholding on certain payments made from U.S. sources beginning in July 2014. In many cases, the institutions’ own governments (through intergovernmental agreements signed with the United States that implement FATCA) may require the determination in order to report on U.S. accounts. 

In addition, the Department of Justice (‘‘DOJ’’) recently announced a new program under which Swiss banks that are not currently the subject of a DOJ investigation may request a ‘‘Non-Prosecution Agreement’’ or ‘‘Non-Target Letter.’’ In connection with this new program, the Swiss Financial Market Supervisory Authority intends to encourage all Swiss banks to send a letter to all U.S. individual and entity holders of accounts, further begging the question of who is a U.S. person for these purposes.  

As an individual’s immigration status may – but may not always – drive the determination of whether he or she is a U.S. person for tax purposes, this article summarises the various classifications comprising a ‘‘U.S. person’’ under U.S. immigration and tax law. It also provides several examples to illustrate some of the challenges posed by the disparate treatment of citizenship and residency under these different codes of law.

IRS News Release Reminding / Warning U.S. Taxpayers with Foreign Assets (4/11/14)

The IRS has used its bully news pulpit to remind U.S. persons subject to return reporting of their obligations arising from foreign assets.  IR-2014-52, April 11, 2014, here.

In part most relevant to the discussions on this blog, the release says:

Federal law requires U.S. citizens and resident aliens to report any worldwide income, including income from foreign trusts and foreign bank and securities accounts. In most cases, affected taxpayers need to fill out and attach Schedule B to their tax return. Certain taxpayers may also have to fill out and attach to their return Form 8938, Statement of Foreign Financial Assets. 

Part III of Schedule B asks about the existence of foreign accounts, such as bank and securities accounts, and usually requires U.S. citizens to report the country in which each account is located. 

Generally, U.S. citizens, resident aliens and certain nonresident aliens must report specified foreign financial assets on Form 8938 if the aggregate value of those assets exceeds certain thresholds. See the instructions for this form for details. 

Separately, taxpayers with foreign accounts whose aggregate value exceeded $10,000 at any time during 2013 must file electronically with the Treasury Department a Financial Crimes Enforcement Network (FinCEN) Form 114, Report of Foreign Bank and Financial Accounts (FBAR). This form replaces TD F 90-22.1, the FBAR form used in the past. It is due to the Treasury Department by June 30, 2014, must be filed electronically and is only available online through the BSA E-Filing System website. For details regarding the FBAR requirements, see Report of Foreign Bank and Financial Accounts (FBAR).

I am attending a tax conference in Charlottesville Virginia today.  The weather is lovely, but we are inside talking tax.  (A pitch for readers' sympathy.) 

One of the handouts is the following article by Professor Itai Grinberg, Associate Professor at Georgetown Law School, for which I cut and paste the abstract.  The complete article is here.

The Battle Over Taxing Offshore Accounts
Itai Grinberg [Profile here]

Abstract

The international tax system is in the midst of a contest between automatic information
reporting and anonymous withholding models for ensuring that nations have the ability to tax offshore accounts. At stake is the extent of many countries’ capacity to tax investment income of individuals and profits of closely held businesses through an income tax in an increasingly financially integrated world.  

Incongruent initiatives of the European Union, the Organisation for Economic Cooperation and Development (OECD), Switzerland, and the United States together represent an emerging international regime in which financial institutions act to facilitate countries’ ability to tax their residents’ offshore accounts. The growing consensus that financial institutions should act as cross-border tax intermediaries represents a remarkable shift in international norms that has yet to be recognized in the academic literature. 

The debate, however, is about how financial institutions should serve as cross-border tax intermediaries, and for which countries. Different outcomes in this contest portend starkly different futures for the extent of cross-border tax administrative assistance available to most countries. The triumph of an automatic information reporting model over an anonymous withholding model is key to (1) allowing for the taxation of principal, (2) ensuring that most countries are included in the benefit of financial institutions serving as cross-border tax intermediaries, (3) encouraging taxpayer engagement with the polity, and (4) supporting sovereign policy flexibility, especially in emerging and developing economies. This Article closes with proposals to help reconcile the emerging automatic information exchange approaches to produce an effective multilateral system.

Role of Tax Evasion and Its Prosecution in a Civilized Society (4/7/14)

Professor James Maule has a good editorial piece on this blog.  The entry is titled
How Shocking is Tax Evasion? (Mauledagain Blog 4/7/14), here.

The issue is whether tax evasion has lost its place as a seriously considered offense in the United States.  Professor Maule has a good succinct insight.  I recommend it to readers.

I am reminded of the famous Oliver Wendell Holmes quote in Compania de Tabacos v. Collector, 275 U.S. 87, 100 (1904) (dissenting), here: "Taxes are what we pay for civilized society."

Credit Suisse DOJ Investigation Status and New NY Investigation (4/7/14)

The NYT Dealbook reports that Credit Suisse is nearing the end of the investigation by DOJ for its offshore banking for U.S. taxpayers, but is facing a new investigation.  Ben Protess and Alexandra Stevenson, Credit Suisse Is Said to Be Facing Double-Barreled Inquiries (NYT Dealbook 4/6/14), here.

Regarding the DOJ investigation, the article reports:

The biggest danger to Credit Suisse, suspected of sheltering billions of dollars for American clients who evaded taxes, comes from federal prosecutors. While the Justice Department has considered a so-called deferred-prosecution agreement that would suspend any indictment in exchange for a large cash penalty and other concessions, it is also pushing for a guilty plea from a Credit Suisse subsidiary, people briefed on the case said, a punishment that banks generally avoid in all but the gravest cases. The cash penalty, the people said, is expected to exceed the $780 million that Switzerland’s largest bank, UBS, paid to resolve a similar case in 2009. 

The Credit Suisse case, the outcome of which depends on settlement talks in the coming weeks, will most likely strike a blow at overseas tax shelters, a hallmark of Switzerland’s banking system. And while the case will resolve a major liability for Credit Suisse, it won’t put the shelter problem to rest. 

The article reports a separate investigation by New York's financial regulator, Benjamin Lawsky as follows:

Just as the [DOJ] criminal inquiry is reaching its conclusion in Washington, a civil investigation has started from scratch in New York. Benjamin M. Lawsky, New York State’s top financial regulator, has requested documents from Credit Suisse and is expected to demand additional records this week, two people briefed on that case said. 

Mr. Lawsky, who will examine whether Credit Suisse lied to New York authorities about engineering tax shelters, has also petitioned a Senate subcommittee for a trove of internal Credit Suisse documents. 

The subcommittee [the U.S. Senate Permanent Subcommittee on Investigations] questioned bank executives, including Brady W. Dougan, the bank’s American chief executive, at a hearing in February, and produced a scathing report exposing “a classic case of bank secrecy.” In late March, the Senate agreed to release the internal Credit Suisse documents to “a state regulatory agency.” The people briefed on the case, who were not authorized to speak publicly, identified that agency as Mr. Lawsky’s Department of Financial Services.

* * * * 

And Mr. Lawsky’s case could bring a fine of its own. In its investigation, the New York State Department of Financial Services is expected to examine what role, if any, the bank’s New York employees played in creating the tax shelters. The agency, the two people briefed on the case said, is also seeking to recover any lost tax revenue for New York.

More On IRS Sting Operation in the Recent Indictments (4/5/14)

I recently reported on indictments arising from an IRS sting operation on offshore accounts in tax haven jurisdiction other than Switzerland.  See IRS Sting Investigation Nabs Offshore Bank Account Enablers (3/24/14), here.  Rounding out that story for now is the following article:  Laura Saunders, Offshore accounts: the next target (WSJ Marketwatch 4/4/14), here.  Here some excerpts (with bold face added by JAT to draw your attention to things I think particularly important):

This past week, an official at the Justice Department said the sting should serve as a warning about offshore accounts. 

“The Cayman case illustrates that we have ways of getting information that people don’t know about,” Assistant Attorney General Kathryn Keneally of the department’s Tax Division said at a news conference in New York. “The days of waiting for a warning sign, such as a letter from a bank, are over.” 

Keneally said that the government receives account information from many sources, including whistleblowers hoping for monetary rewards. She declined to comment on whether U.S. officials have the names of Americans who hold accounts in the Caymans or elsewhere in the Caribbean as a result of this probe. 

Taxpayers are ineligible to participate in the IRS’s limited-amnesty program for undeclared offshore accounts if U.S. authorities already have their names. The program imposes steep penalties but offers protection against criminal prosecution.
Experts believe U.S. authorities do have names of account holders in the Caymans.
“Announcements by the government about this case suggest it already has customer lists, although officials can’t confirm it,” says Bryan Skarlatos, a lawyer at Kostelanetz & Fink in New York, which has handled more than a thousand confessions by U.S. taxpayers with offshore accounts. 

* * * * 

In March of last year, the indictment says, three undercover IRS agents met with St-Cyr and VanDyk in Miami. One of the agents represented himself as a U.S. citizen who wanted to launder $2 million. 

To show how the scheme worked, Poulin, VanDyk and St-Cyr arranged several transfers of $200,000, the indictment alleges. 

In December, the funds were wired from a Virginia account to an account at Poulin’s law firm in the Turks and Caicos, according to the indictment. The $200,000 was then moved to an account in the Cayman Islands, and most of it was returned to the U.S. in February. 

Poulin allegedly told the IRS agents that most of his clients were Canadian or American. The entire $2 million was intended to be concealed, in part by using a foundation named Zero Exposure in the Turks and Caicos. 

St-Cyr and VanDyk allegedly said that they charged clients more to launder criminal proceeds than to assist in tax evasion, according to the indictment. They also said a foundation was preferred for laundering criminal proceeds, while a trust was sufficient to conceal tax evasion.

This sting operation appears similar to one involved in the Aegis criminal investigation.  I have previously blogged on some of the criminal prosecutions arising out of that investigation.  See here.  That operation involved shunting untaxed money to offshore entities as the means to evade U.S. tax.  IRS agents participating in either an IRS investigation or a grand jury investigation attended promotional meetings outside the U.S. and then did sting operations on U.S. persons (such as return preparers who enabled the evasion, either willingly or unintentionally).  This is the first time I am aware that the IRS had done a sting operation in the current round of offshore initiatives commencing with UBS in 2009, but I suspect that there are others that have been commenced earlier and will be ongoing.  We will undoubtedly hear more later.

Credit Suisse Ups Its Reserve for U.S. Tax and Securities Laws Penalties (4/4/14)

Caroline Copley and Oliver Hirt, Credit Suisse increases provision for U.S. tax deal (Reuters 4/3/14), here.

Excerpts

Credit Suisse has increased the funds it has set aside to settle a U.S. tax dispute and avoid prosecution for helping wealthy Americans hide cash from the taxman, raising the prospect it may be close to a settlement in the lengthy dispute. 

* * * * 

The bank set aside an extra 425 million Swiss francs ($480 million) to take its total provisions for tax and securities law matters in the United States to 895 million francs, it said in its annual report published on Thursday. 

Credit Suisse was told by the U.S. Department of Justice it was under investigation in 2011. The bank made a 295 million franc provision that year, but many analysts believed that sum would not suffice.

The indicated 895 million francs total reserve would, on the same conversion rate (480$/425 Swiss francs), be over $1 billion USD.  I previously reported on a penalty for the securities violation.  See Credit Suisse Take a Hit on U.S. Tax Evasion Business (Federal Tax Crimes Blog 2/21/14), here. That hit was $197 million.  It is not clear that the 895 million francs includes this amount, but for purposes of analysis,, we'll say it does.  That means that Credit Suisse expects the nonsecurities tax related hit to exceed $800 million, which would mean that the apples to apples cost to Credit Suisse exceeds UBS's $780 million costs in 2009.

Guest Blog: Litigating the FBAR Penalty in District Courts and Court of Federal Claims (3/31/14)

I am pleased to offer this guest blog entry written by Robert Horwitz, a guest blogger and prominent practitioner in civil and criminal matters, including the offshore account area.  Robert is an attorney with the Law Offices of A. Lavar Taylor.  Robert's bio is here.  The balance of this blog is his work, except that I have added links to statutes at the end of the blog.  His work is very good.

In recent years, a number of articles have appeared on litigation of the FBAR penalty.  Most of the articles focus on suits by the Government to collect the FBAR penalty or the Tax Court’s lack of jurisdiction over the FBAR penalty.  Caroline D. Ciraolo, in her 2013 Power Point ABA presentation, Assessment and Collections of the FBAR Penalty, here, noted the intriguing possibility of suing for refund of an FBAR penalty under the Tucker Act.  Expanding upon Ms. Ciraolo’s insight, I researched the issue and recently authored an article, Litigating the FBAR Penalty in District Court and the Court of Federal Claims, here,  which appeared in the Q1 2014 edition of the California Journal of Tax Litigation, the publication of the Tax Procedure and Litigation Committee of the Taxation Section of the California Bar.  The article makes the following points:

1. The Tucker Act, 28 U.S.C. §1491,  and the Little Tucker Act, 28 U.S.C. §1346(a)(2), give the Court of Federal Claims and the United States district courts, respectively, jurisdiction to hear cases for money damages against the Government.

2. Under the Little Tucker Act, district courts have jurisdiction over claims against the Government for money damages in amounts not exceeding $10,000.  The Tucker Court gives the Court of Federal Claims jurisdiction over claims against the Government for money damages in any amount founded upon the Constitution, a federal statute or regulation, or a contract.

3. The Tucker Act and the Little Tucker Act also waive sovereign immunity over claims for money damages against the United States where the claimant can “demonstrate that the source of substantive law he relies upon ‘can fairly be interpreted as mandating compensation by the Federal Government for the damage sustained.’”  United States v. Mitchell, 463 U.S. 206, 216-217 (1983).

4. Under “illegal exaction” cases, the Courts have recognized that there is jurisdiction under the Tucker Act in cases where the plaintiff seeks the return of money that was alleged to have been illegally paid to the Government.  An “illegal exaction,” occurs when money has been “improperly paid, exacted, or taken from the claimant in contravention of the Constitution, a statute, or a regulation.”  Norman v. United States, 429 F.3d 1081, 1095 (Fed. Cir. 2005).  The “prototypical illegal exaction claim is ‘a tax refund suit alleging that taxes have been improperly collected or withheld by the government,’” Kipple v. United States, 102 Fed. Cl. 773, 777 (2012)

5. To maintain an illegal exaction claim, a claimant must allege that she paid money to the federal government and seeks the return of all or a part of that sum because it was improperly paid, extracted or taken from the claimant in contravention of the Constitution, a statute or regulation.