Get in Line Brother #18c - McCarthy, the Financial Side and Bits and Pieces

This will be my last planned foray into the McCarthy indictment.

The Financial Side

1. Civil Taxes, Penalties and Interest. McCarthy agrees to pay the tax, interest and civil fraud penalty on the tax on "the net income on all funds held in foreign bank accounts" for calendar years 2003-2007. He had not yet filed his 2008 tax return, so presumably he will report that correctly and not be subject to any penalty. The amount of tax and thus resulting interest and fraud penalty is not stated, so this promise to pay apparently does permit him to contest the amount of tax on which interest and civil fraud penalty will be based. Note that this agreement assumes other foreign accounts used for tax evasion; by contrast, his sentencing factors are designed to consider only the UBS account disclosed by UBS. He further agrees to cooperate in making the appropriate calculations. The settlement is basically the same as the current voluntary disclosure initiative, except particpants in the initiative pay a 20% accuracy related penalty rather than the 75% fraud penalty.

2. FBAR Penalty. McCarthy agrees to a single FBAR penalty of 50% in the one identified UBS account for the highest amount year during the period from 2003-2008. Why are the other accounts left out of this penalty? He did after all admit willfulness in failing to file them. Note, however, that this settlement is consistent with the current voluntary disclosure initiative, except that the penalty for that single year is 50% rather than 20% as is offered in the voluntary initiative, but the 20% applies to all foreign accounts whereas McCarthy's deal is 50% of a single account. Real comparisons to the financial cost of the current iniative therefore cannot be made because the plea documents do not provide the necessary information.

Bits and Pieces

1. Grand jury matters. The defendant agrees to "give up any and all objections that could be asserted" to the IRS about the IRS recieving "materials or information obtained during the criminal investigation of this matter, include materials and information obtained through the grand jury process." I have blogged facets this issue here. So, I summarily note here, that the agreement is a recognition that these materials were not obtained in an IRS investigation because the IRS can share with other IRS components the fruits of its investigation without any such waiver from the defendant (or taxpayer). This agreement is really an attempt by the Government to end run FRCrP Rule 6(e) which imposes grand jury secrecy. The agreement seems to treat Rule 6(e) as a right that the person to whom the materials relate can waive. My understanding is that the rationale of Rule 6(e) sweeps broader than that and goes to the heart of the grand jury system to keep such matters secret until released in a proper way. The proper way grand jury material gets released is in the courtroom, a public forum, pursuant to a proper proceeding or by a Rule 6(e) order. Because of the plea agreement, there is no public proceeding in which all of these documents will be introduced and thus available to the IRS. (I suppose the IRS could force them into the public record in a sentencing hearing proceeding about the tax loss number and, perhaps, about the proper Section Two Part S calculations.) And, a Rule 6(e) order for the release to the IRS for civil tax purposes is expressly prohibited by Supreme Court authority. (I guess the IRS might be able to thread that needle by having the defendant agree to contractual restitution for these amounts and seeing if the court would have some type of public proceeding to permit it to dump the documents into the public record, but that would be too blatant an end-run around Rule 6(e).) I have had this genre of battle with an AUSA before who requested a similar waiver. I told him that my client would give it, but I did not think a waiver really solved his 6(e) problem. I think he agreed with my analysis because he then backed off the request and found another way to get around 6(e) -- by delivering all the documents back to the defendant whereupon the IRS had access to them through its usual processes. The solution may not be available in the McCarthy case because the documents are probably not the defendant's documents. The IRS would have to release them to UBS and whether or not UBS would then have an incentive -- either by compulsory process or otherwise -- to give them over to the IRS civil division is unknown. However, the agreement could have required McCarthy to request these documents from UBS and then turn them over to the IRS. The point I am making at too much length is that the Government simply solved the problem in the wrong way.

2. Restitution? The plea states that "Defendant understands that the Court may order defendant to pay any additional taxes, interest and penalties that defendant owes to the United States and may order defendant to pay any additional fines that defendant owes to the United States." Plea ¶ 5. The plea cites no authority for the taxes, penalties and interest reimbursement, and I am aware of no authority for it unless the defendant agrees to contractual restitution which would, then, permit court enforcement of the contract. In this regard, independent of contractual restitution, restitution is permitted only for the crime of conviction (tax crimes is not one, but the crime of conviction is not a tax crime). The crime of conviction is the failure to file an information report, and there is no dollar harm to the United States from failure to file an information report. Of course, the IRS does have the full array of tax determination, assessment and collection tools for any tax, interest and penalties.