Josephberg was tried and convicted of all counts in a 17 count indictment. The counts broke down into the following categories:
(i) two tax evasion counts in violation of Section 7201 -- (a) evasion of payment of personal income taxes for the years 1977-1980 and 1983-1985 (Count 1) and (b) evasion of assessment of personal income taxes for 1997 and 1998 (Counts 3 and 4)The facts summarized from the Second Circuit opinion relevant to the tax issues I will discuss here and in later blogs were:
(ii) two separate conspiracies to defraud - one, the ubiquitous conspiracy to defraud the IRS in violation of 18 USC Section 371 and the second a conspiracy to defraud a health insurer in violation of 18 USC Section 1347 -- both being charged in one count (Count two);
(iii) subscribing false income tax returns for the years 1997 and 1998, in violation of Section 7206(1) (Counts 5 and 6);
(iv) failure to file personal income tax returns for 1999-2002, in violation of Section 7203 (Counts 7-10);
(v) failure to pay income tax for the years 1999-2003 in violation of Section 7320 (Counts 11-15);
(vi) tax obstruction in violation of Section 7212 (Count 16); and
(vii) health care fraud in violation of 18 USC Sections 1347 and 2 (Count 17).
1. Josephberg was an investment banker who along with others entered into deferral tax shelters using no risk straddles starting in the late 1970s. In discussing this no risk straddle, the Court referred to its opinion in United States v. Atkins, 869 F.2d 135 (2d Cir. 1989), cert denied, 493 U.S. 818 (1989). (Atkins, by the way, is the darling of prosecutors who angst about the criminality of technical tax shelters which, in prosecutor's minds, at least violated the so-called economic substance doctrine.) This tax shelter, if it worked at all, resulted in the deferral of taxable income into later years, as defendant claimed on his returns. By 1981, the accumulated deferred gains were substantial and the particular opportunity for deferral was closed by statute, so that the income could no longer be deferred under the strategy used. Josephberg entered a new strategy that, if successful, continued the deferral until the IRS began investigating 1985. Quoting from the record, these strategies were "pre-arranged," "manipulated," "rigged," and "riskless." (So, one wonders, what did the Court really think about these tax shelters?)
2. The IRS began what appears to have been a civil investigation only in 1985. In 1986, the IRS sent Josephberg a letter asserting a tax liability for the years 1977-1980 (the years the first tax shelter strategy was employed). Josephberg appealed to the IRS Appeals Office and, in 1993, the IRS issued a notice of deficiency. (The opinion does not address why the civil statute of limitations was still open at the time of the initial audit or through the internal IRS appeals process, but civil fraud, of course, keeps the statute open indefinitely.) Josephberg petitioned the Tax Court for redetermination of the IRS claims in the notice of deficiency. In the Tax Court case involving the years 1997-1980, the Tax Court entered summary judgment against Josephberg based upon deemed admissions after he failed to respond to the IRS's requests for admissions. In the Tax Court case for the year 1985, the Tax Court dismissed for lack of prosecution. The IRS assessed the tax, penalties and interest pursuant to the Tax Court's actions and commenced collection action after Josephberg failed to pay timely upon notice and demand for the assessed taxes, penalties and interest. Josephberg then, over a period of many years, committed many obstructive acts designed to impair and impede the IRS's ability to collect the assessed taxes, penalties and interest. (The acts were many, but, although the court summarized many of them, I do not here because not relevant to my discussion; suffice it to say that the obstructive acts were ample in quantity and quality).
3. For the 20 years spanning 1979-1998, Josephberg claimed and carried forward a substantial net operating loss ("NOL") stemming from his earlier tax shelter activity beginning in the late 1970s. These were the same activities that, in the 1993 notice of deficiency related to those years, the IRS had determined to be "not bona fide economic transactions, but pre-arranged, manipulated, fixed, rigged & risk-free transactions that generated artificial tax losses." The notice of deficiency was sustained by the Tax Court as noted in paragraph 2 above. Nonetheless, Josephberg continued to carry forward substantial NOL based on these losses into 1993 through 1998.
4. Josephberg also failed to pay employment taxes (withholding, Social Security and Medicare) for a domestic employee (the ubiquitous "nanny").
5. Josephberg failed to file timely income tax returns for 1999-2003.
6. By the time of trial in 2007, the total tax debt dating back to 1977 was approximately $17,000,000. The district court made its Guidelines calculations under the 2006 Guidelines, but imposed a non-Guidelines downward variance to 50 months imprisonment. (The Court of Appeals does not say what the Guidelines sentence was; I do not know all of the sentencing factors, but $17,000,000 would have produced a base offense level of 26 with an indicated Guidelines range of 63-78 months (even without upward adjustments that likely would apply), so his sentence was a pretty good defendant-friendly Booker sentence).)
DISCUSSION OF TAX DUE AND OWING
I discuss the tax due and owing issue (here referred to as "tax due") in the balance of this blog and defer other issues to later blogs.
As I have noted in other blogs (see here), tax evasion has an element of a tax due. Under standard criminal law and procedure, the Government must prove each element of an offense beyond a reasonable doubt. As I have noted in those earlier blogs, this can be a formidable requirement for the Government in some cases, and thus the Government has used short cuts which the courts sometimes allow. Various techniques are used by the court in doing that (such as, in the recent court of appeals decision in Boulware (discussed here) permitting what is in effect a presumption of E&P in the absence of the defendant at least entering proof that there was insufficient E&P to produce the tax due element of the tax evasion crime.
The Josephberg Court dealt with another of these short cuts. The short cut was the admission of IRS records, principally the IRS certificate of assessment, to prove there was a tax due. The Second Circuit in Josephberg held, in effect, that the IRS certificate of assessment may be some evidence sufficient to get the jury on the tax due issue. Actually, the holding is not that crisp, because the Second Circuit noted that, in the case itself, the Government also introduced the notices of deficiency and Tax Court default judgments preceding the assessments, as proof of tax due, but the decision suggests the court might have gotten there with just the certificate of assessment.
The key concern I have about the Second Circuit's holding in Josephberg (and the cases upon which it relies) relates to its impact upon and erosion of the requirement that the Government prove all elements -- including tax due -- beyond a reasonable doubt. The proof the Court found sufficient is not, in my judgment, proof or adequate proof at all to convince a reasonable juror of tax due beyond a reasonable doubt. The fact that it is hard for the Government to make that proof is no reason to erode the requirement that it make that proof.
I attach here an excerpt of the current draft my Federal Tax Crimes book as revised to include the discussion of Josephberg in the context disussed in this blog.
I do note that, if I am correct that there is an inherent problem in the Government using this genre of short cut to avoid the difficulties imposed by the normal requirement that it prove the elements of the crime beyond a reasonable doubt, the Government is not without adequate tools to fight tax cheating. For example, in Josephson, the problem with having to prove beyond a reasonable doubt the underlying tax liability may have been that the years on the evasion of payment charge were so old (late 1970s and early 1980s). The Government could charge tax obstruction for that or even, on the facts, aiding and assisting under Section 7206(2). In Josephson, the Government did charge tax obstruction as a separate count and obtained conviction for much the same conduct or type of conduct that it used to meet the element of an affirmative attempt in the evasion counts. Tax obstruction as an alternative to tax evasion is, of course, less sexy, but it gets the job done. And, ultimately, in a case like this, the Government does not need so many counts -- 17 in Josephberg -- because under the Sentencing Guidelines (pre- and post-Booker) excess counts don't count. (Indeed, one of the purposes of the Guidelines was to avoid such count proliferation.) If the Government's claims about such marginally provable crimes are correct, it can still get them into the sentencing calculation through the relevant conduct concept in the Guidelines which permits the tax loss for other related crimes to be included (the Court of Appeals noted elsewhere in the decision that the pattern of tax misbehavior was related conduct). But the Government should not be able to bootstrap convictions on the underlying crime based on such shortcuts that erode the requirement that the Government prove the elements of the crime beyond a reasonable doubt.