Second UBS Client, Chernick, Sentenced (11/31/09)

The press reports today proclaim the sentencing of Jeff Chernick on October 30. (See, e.g., the associated press article here.) The sentence is 3 months of incarceration (no good time credit), 6 months of home confinement, and no fine. The Government had requested 9 months incarceration for the alleged substantial cooperation Chernick had given, but probably signaled the judge that some home confinement may be OK. The Government's 9 months request was 50% of the low end of the Sentencing Guidelines calculated range. The 3 incarceration and 6 months home confinement gives the Government its request of 9 months, but, as I have said before, if you must be incarcerated, home confinement is the way to go.

The sentencing judge, Judge Cohn, was unmoved by a request for probation, reasoning that a sentencing that amounts to a "slap on the wrist" is "negative publicity," which "informs the public that you can cheat on your income taxes and get away with probation."

Chernick paid back taxes and a $4.5 million penalty. In the plea agreement he had agreed to a 50% FBAR penalty, which on the reported $8 + million foreign accounts would account for most of the reported penalty.

Chernick also prostrated himself (figuratively) before the court with the appropriate mea culpa and contrition.

Chernick had accounts at UBS and NZB Neue Zürcher Bank (sometimes NZB Neue Zuercher Bank).

Chernick had attempted a voluntary disclosure (even before the special initiative was announced and found that the Government already had him in its sight.

JAT editorial comment: I am not sure I see a material difference between Rubinstein (1 year home confinement) and Chernick (3 months incarceration and 6 months home confinement).

Questions to readers: Do you see a material difference between persons who cheat through foreign accounts and persons who cheat the old fashion, historically more visible way who do not get such lenient sentencing (the ordinary cheats who are routinely sentenced to significant jail time, even post-Booker)? What is the explanation(s) for the leniency for cheating through foreign accounts? (In this regard, I assume that, at least in the gut, there may be some difference between (i) a foreign account tax cheat who funds the foreign account with U.S. tax paid money or money not subject to U.S. tax and (ii) a foreign account tax cheat who funds the foreign account with money that was subject to U.S. tax but U.S. tax was not reported and paid (e.g., funds that went to the foreign account without U.S. reporting or by claiming improper deductions).)

First UBS Client, Rubinstein, Sentenced

The New York Times Deal Book and other publications report today that the first UBS client to plead in the current round, Steven Michael Rubinstein (previously blogged here), was sentenced yesterday to home confinement for one year. If you gotta go, that's the way to go.

Rubinstein is the first of the former UBS clients to be sentenced. Jeffrey Chernick (blogged here and here) will be sentenced tomorrow. I have not seen the sentencing filings in the Chernick case. If any reader has one or more of those filings, I would appreciate receiving them via email -- jack@tjtaxlaw.com.

The New York Times Deal Book report is here.

Reports and Rumors on Offshore Accounts After 10/15

Jeremiah Coder of Tax Notes reports today on statements made at the UCLA Tax Controversy Institute in Beverly Hills, CA. Jeremiah Coder, Offshore Disclosure Process Will Continue to Produce Benefits, IRS Officials Say, 2009 TNT 207-1 (10/29/09). The key points from Mr. Coder's report for my readers are:

1. For foreign account holders who did not make it under the 10/15 wire, the IRS Deputy Chief Victor Song says "It's never too late to say you're sorry." Song sang the praises of the regular voluntary disclosure program which is still open. JAT Note: There was no reported discussion about using the quiet voluntary disclosure for these individuals. My gut tells me he was talking about the noisy disclosure.

2. A leading tax litigator, Ed Robbins of Hochman, Salkin et al, is reported to have said that the passing of the 10/15 deadline will mean severe civil penalties for those who disclose. It is not clear from the article that he was responding to Mr. Song's comment. Nor is it clear exactly what he meant by severe (many thought 20% was severe). Whatever it is exactly he certainly meant that, relative to 20%, it would be more severe. JAT Note: It is interesting to note that, even in the criminal cases to date, the Government is just going for 50%, so one could infer that the playing field is the 30% between 20% and 50%. That is, one could infer that if that is what one is inclined to do.

3. Stating the attitude of the prosecutor and apparently responding to the report of 7,500 persons joining the 10/15 voluntary disclosure initiative, Sandra Brown, a tax prosecutor, is reported to have said that securing the admissions of "7,500 felons" was "a great success." JAT Note: I wish she would have subtracted from this number my clients, none of whom were or are felons. I hope my clients will indulge me some advocate's wiggle room in that statement. Beyond that, I don't know that it serves the Government well for a Government official to refer to these persons as felons, even if that some of them may be. Certainly not all of them are. The Government well knows that it could not have obtained convictions of anything near this number even if it knew everything and had the resources to try them all. And, at the margins, such posturing might serve to limit future disclosures. Sure the IRS wants the mea culpa, but will often accept a shrouded mea culpa that gives the taxpayer some room to say to himself or herself that he or she is not a felon. I just think use of that word is counterproductive. Thus, I think the IRS would have gotten significantly fewer voluntary disclosures in this program if the it had required in its template letter an admission as follows: "I admit that I am a tax felon."

4. The same prosecutor said that the Government now will be able to take its Swiss success and move country by country. JAT Note: That sounds nice, but leaves some questions open. After the Government wraps up UBS, is it done with Switzerland. I would think not, and the next easy pickings for the Government might be the other Swiss banks. The treaty interpretation that permitted the UBS disclosures should equally apply to other Swiss banks, unless there were some understanding with the Swiss Government that the treaty interpretation would apply for now only to UBS. Moreover, which other tax haven country banks had sufficient U.S. presence to permit them to be susceptible to the type of pressure the U.S. could bring against UBS via the deferred prosecution agreement and John Doe summons?

Issue Preclusion #2 - Conspiracy Theories and Getting to Perhaps (10/28/09)

Back on the preclusion theme I discussed yesterday here, I look at the case of United States v. Rigas, 584 F.3d 594 (3d Cir. 2009).

In Rigas, the defendants had been charged in New York (SDNY) on a broad federal conspiracy charge as follows:

Count One of the New York Indictment alleges a wide-ranging conspiracy (1) to create the false appearance that Adelphia's operating performance was strong and that Adelphia was reducing its debt burden, (2) to use Adelphia assets for the personal benefit of members of the Rigas family, and (3) to make false and misleading statements.

The Court focused its analysis on object (2), above, since it "most closely overlaps with the charges in the Pennsylvania Indictment."

The defendants were convicted of the conspiracy charge in the New York indictment. Then the Government (all right the grand jury) charged them in Pennsylvania on a federal tax conspiracy charge -- the ubiquitous defraud conspiracy charge.

Conspiracy Theories - Issue Preclusion #1

I picked up this relatively new case, United States v. Thyfault, 579 F.3d 748 (7th Cir. 2009), decided August 26, 2009 dealing with issue preclusion from a not guilty verdict. Thyfault may be read or downloaded here. Of course, everyone knows that a defendant found not guilty cannot be retried on the specific charge. But, can the defendant be retried on a related count for which the jury hung? I shall return to that issue is discussing the Rigas case in a later blog. The Rigas case may be read or downloaded here.

In the opening paragraph of Thyfault, Judge Bauer summarizes the facts to set up the issue as follows:

On November 4, 2004, a multi-count superceding indictment charged Michael Thyfault and other individuals with multiple mail fraud and tax evasion offenses. The indictment accused the defendants of being the prime movers in a major scheme to defraud Intercounty Title Company of Illinois ("Inter-county") and related entities. The scheme involved theft and mismanagement of Intercounty's escrow funds over a ten-year period, during which time Intercounty's deficits were covered by thefts from its escrow account. Thyfault was charged with one count of conspiracy to commit mail fraud and four counts of mail fraud. The jury acquitted Thyfault on the conspiracy count, but was unable to reach a verdict on the mail fraud counts. The government then sought to retry Thyfault on the mail fraud counts; Thyfault moved to dismiss the charges on the basis of issue preclusion, arguing that his conspiracy acquittal precluded the government from attempting to prove his intent to defraud, an element of the mail fraud charges. The district court agreed and granted the motion. The government brings this appeal, contending that the district court erred in granting Thyfault's motion because a rational jury could well have found that Thyfault intended to violate the law, but not in agreement with others as charged in the conspiracy. We reverse.

Tax Protestor or Tax Scholar - The Geithner Defense

I was reading yet another tax protestor criminal case (United States v. Hendrickson, 664 F. Supp. 2d 793 (ED MI 2009)), and found references to protestor or scholar, which reminded me of the old nursery rhyme:

Tinker, Tailor,
Soldier, Sailor,
Rich Man, Poor Man,
Beggar Man, Thief.

See Wikipedia entry here.

Tax protestors -- the bad amongst which DOJ now calls tax defiers -- are not normally noteworthy to mainstream tax practitioners or students, but in the nursery rhyme litany above, most would be characterized as thiefs, and certainly not protestors or scholars (OK, they are not in the litany, but perhaps we could insert them). These guys are just tax terrorists seeking to throw a monkey wrench or IED equivalent into the tax system. Still, I think a snippet from Hendricksen is interesting because it deals with the Geithner defense (you didn't prosecute Geithner, therefore you can't prosecute me). Hendricksen had published how to tax protest books made the standard arguments and even for himself had bought into and practised his assertions. In his criminal case, he asserted inter alia that the Government had selected him because of his prominence in the tax protestor community (through his book, Cracking the Code, and web site). On that issue, the defendant invoked a variation of the Geithner defense. Here's how the court dealt with the argument, nicely also handling his claims that he was a scholar rather than a protestor:

In any event, whether Defendant is more properly characterized as a "protestor" or a "scholar," the Government has precisely the same legitimate interest in prosecuting him. Regardless of whether Defendant has affirmatively sought notoriety, fame, or publicity, and regardless of whether he has urged others to follow his lead or has instead attempted to dissuade them from doing so, he acknowledges that "thousands" of people have read Cracking the Code, that a significant number of these readers have "filed tax forms consistent with" his analysis of the tax laws as elucidated in this book, and that this has resulted in the IRS issuing "millions in refund checks to filers who had claimed that money was improperly withheld." (Defendant's 1/15/2009 Motion to Dismiss, Br. in Support at 3 (footnote omitted).) Under these circumstances, the Government could permissibly conclude that the prosecution of Defendant would serve as an effective deterrent to those who might be inclined to apply his analysis to their own tax filings, and that this might staunch the flow of more widespread, but potentially harder to detect, submission of "zero wage" tax forms by readers of Cracking the Code. See Kelley, supra, 769 F.2d at 218. Indeed, the courts have recognized that prominence alone -- whether derived from protest activities or from political or social stature in the community -- is a permissible factor in selecting individuals for prosecution. See, e.g., United States v. Hastings, 126 F.3d 310, 314-15 (4th Cir. 1997) ("[A] person's public renown may be properly considered among other factors when deciding whether to pursue criminal sanctions for a violation of the law."). n16

n16 Notably, by citing Treasury Secretary Timothy Geithner and former Senate Majority Leader Tom Daschle as individuals who have "blatantly and admittedly violated the tax laws" but have nonetheless avoided criminal prosecution, Defendant's 5/22/2009 Suppl. Br. at 3), Defendant implicitly acknowledges the value of prosecuting prominent violators of the tax laws, regardless of whether such violations stem from any opposition to those laws. That the Government has failed to prosecute all such prominent violators surely does not detract from its legitimate interest in doing so in a particular case. [END OF FOOTNOTE]

Finally, the Court fails to see how Defendant could possibly strengthen his appeal to First Amendment principles, and thereby distinguish the rulings in Hazel and the other above-cited cases, by denying that he has engaged in any sort of protest against the Government, its laws, or its tax policies. These decisions, after all, do not recognize the Government's right to prosecute a defendant because of his or her protected First Amendment activity, but in spite of this protected activity. The First Amendment embodies "a profound national commitment to the principle that debate on public issues should be uninhibited, robust, and wide-open, and that it may well include vehement, caustic, and sometimes unpleasantly sharp attacks on government and public officials." New York Times Co. v. Sullivan, 376 U.S. 254, 270, 84 S. Ct. 710, 721 (1964). Moreover, the Supreme Court has emphasized that "[t]o punish a person because he has done what the law plainly allows him to do is a due process violation of the most basic sort." Bordenkircher v. Hayes, 434 U.S. 357, 363, 98 S. Ct. 663, 668 (1978). The law of selective prosecution rests upon precisely these principles, permitting limited judicial inquiry into a matter that ordinarily "rests entirely in [the prosecutor's] discretion" -- namely, "the decision whether or not to prosecute," Bordenkircher, 434 U.S. at 364, 98 S. Ct. at 668 -- in order to ensure that the exercise of this discretion remains within "constitutional constraints," Wayte, 470 U.S. at 608, 105 S. Ct. at 1531 (internal quotation marks and citation omitted). Under this law, a prosecutor has no greater (or lesser) latitude, and the relevant constitutional constraints are no weaker (or stronger), when the subject of prosecutorial discretion is a vehement protestor against the government than when he or she is engaged in scholarly discourse. To hold otherwise would be to permit what the law of selective prosecution is designed to prohibit -- namely, prosecutorial decisions based upon the nature or content of an individual's protected First Amendment expression.

Plainly, then, it is of no aid to Defendant to establish that he is a scholar engaged in a neutral study of the tax code, rather than a critic of or protestor against federal tax law or policy. Both "abstract discussion" and "vigorous advocacy" qualify as protected forms of expression under the First Amendment, see N.A.A.C.P. v. Button, 371 U.S. 415, 429, 83 S. Ct. 328, 336 (1963), so the proper disposition of Defendant's claim of selective prosecution cannot turn upon the characterization of Cracking the Code as one or the other. In either event, Defendant's burden is precisely the same -- to show that he was selected for prosecution on the impermissible basis of his protected speech, and not on grounds (such as prominence) that the Government may legitimately consider. As explained, Defendant has not made a sufficient showing on this point to warrant discovery on his claim of selective prosecution, much less dismissal of the charges against him on this ground.

Interestingly but perhaps not surprisingly, Hendricksen is represented in this judicial crusade by Mark Lane, an attorney and noted conspiracy theorist who wrote Rush to Judgement among other books. Mr. Lane's Wikipedia entry is here. Mr. Lane has also represented another well known tax protestor, Robert Schultz. See United States v. Schultz, 517 F.3d 606 (2d Cir. 2008) (Lane on brief for Schulz appearing pro se), and We the People Foundation, Inc. v. United States, 485 F.3d 140 (D.C. Cir. 2007) (with Schulz on brief).

DOJ SG 5K1 and § 3553(e) Departure Request for Rubinstein

You will recall that Mr. Rubinstein was the first of the UBS clients to plead (see my original Get-in-Line Brother blog here). Mr. Rubinstein pled to a § 7260(1) count with a maximum incarceration period of 3 years. Sentencing time is nigh. Apparently the Guideline range for Mr. Rubinstein is 18 to 24 months. The Government has filed it's SG 5K1 and § 3553(e) request which, in its entirety (exclusive of sealed submissions), is:

1. On April 1, 2009, defendant Steven Michael Rubinstein was charged with a complaint alleging that he filed a false tax return, in violation of Title 18, United States Code Section 7206(1). On June 26, 2009, the defendant waived indictment, and entered a plea of guilty to a one-count Information charging the same. The defendant admitted to failing to disclose of the existence of and the income associated with an undeclared Swiss bank account at UBS, AG.
2. Pursuant to an agreement with the United States, the defendant cooperated with the United States in its ongoing investigation into offshore tax evasion. Since entering into this agreement, the defendant has provided substantial assistance in the investigation of others who have committed offenses against the United States. This substantial assistance has been timely, significant, useful, truthful, complete, and reliable.
3. In February 2009, pursuant to a deferred prosecution agreement, UBS AG, Switzerland's largest bank, provided the United States Department of Justice the identities and account information for certain United States clients that were believed to have not disclosed the existence of or reported the income associated with offshore bank accounts at UBS in Switzerland.
4. Information provided by UBS pursuant to the deferred prosecution agreement has led to the investigation of more than 150 United States taxpayers. The defendant was the first such person to be prosecuted. To date, six additional former UBS customers have been prosecuted throughout the United States. Additionally, a federal grand jury in the Southern District of Florida returned a one-count conspiracy indictment against Swiss banker, Hansruedi Schumacher, and Swiss attorney, Matthias Rickenbach (Case No. 09-60210-CR-HURLEY).
5. On the heals of the deferred prosecution agreement, the Internal Revenue Service announced a six-month program to encourage Americans to voluntarily disclose the existence of offshore bank accounts. In exchange for coming forward, the IRS agreed to reduced penalties and to not recommend prosecution of the taxpayer. In an average year, less than 100 individuals take advantage of the Internal Revenue Service's voluntary disclosure program. The IRS recently announced that so far this year more than 7,500 taxpayers voluntarily disclosed the existence of their offshore assets.
6. The prosecution and guilty plea of this defendant has generated tremendous publicity. This publicity, without a doubt, contributed, in part, to the drastic increase of taxpayers who voluntarily disclosed their offshore accounts to the IRS.
7. The United States will provide, under seal, to this Court details of additional substantial assistance provided by the defendant.
8. The defendant's current advisory guideline range is 18 to 24 months. Pursuant to the plea agreement, the United States will ask this Court to sentence the defendant to the low-end of the advisory guideline range. Pursuant to Title 18, United States Code, Section 3553(e), and Section 5K1.1, United States Sentencing Guidelines, the United States asks this Court to reduce the defendant's sentence by one-third percent and to impose a sentence of 12 months.

Just a couple of points about this filing:

1. Paragraph 8 needs some clarification. Context makes clear that the Government did not intend to be stingy in its recommendation of a "one third percent" reduction which would be virtually nothing. The Government really meant a "one-third" reduction from 18 months which is the bottom of the advisory range. And, of course, even here, surely the Government does not really mean a 12 month sentence which would insure Mr. Rubinstein's incarceration for a longer period than if he receives a 12 month and 1 day sentence (the old good time credit thing).

2. The Government says that its voluntary disclosure program normally generates only about 100 disclosures by individuals a year. The Government cannot be including the quiet disclosures made by filings with the service center. I have only anecdotal experience from my own practice and talking with others having similar practices, but I think it fair to project from this experience that the quiet disclosures are in the thousands each year. Of course, there is no way for the Government to quantify that since no one that I know of embazons in red on the amended returns "Voluntary Disclosure - Quiet Type" (indeed, then it would not be quiet). Quiet voluntary disclosures are an important compliance measure to collect the back revenue (with interest) and get those now compliant taxpayers back into the system or back fully into the system.

3. DOJ Tax wants to give credit for the effect Rubinstein's plea had on encouraging others to join the voluntary disclosure program. Yet, since DOJ Tax usually seeks publicity to encourage others to do right, should that be an extra factor warranting a downward departure? Surely, now practitioners will argue that it does. Perhaps they can argue that the publicity of the convictions spread by the news media and even blogs such as this warrant departure, particularly if the Government makes a 5K1 departure request for other reasons.

Tax Crimes Developments at NYU Federal Tax Institute

Lee Sheppard reports today in Tax Notes on developments at a New York University Institute on Federal Taxation. Lee A. Sheppard, Tax Schemes are Proliferating, Official Tells NYU Conference, 2009 TNT 200-1. The key points I note for tax crimes are:

1. As the title suggests, tax schemes are proliferating. Some of the tax schemes are variations on historic scams. In any event, there should be continuing business for persons practicing in the tax crimes area.

2. On the IRS Voluntary Disclosure front, the following is, in my mind, the key observation:

On average, those who took advantage of the amnesty will lose roughly 50 to 60 percent of the amount in an ordinary deposit account, that is, one without significant earnings, and a higher percentage if the account was an investment account. The amnesty offered a great deal to the traditional tax cheat, said Charles Rettig of Hochman, Salkin, Rettig, Toscher & Perez, but those who missed the October 15 deadline might still want to use the regular voluntary disclosure program to avoid potential criminal prosecution. (For the IRS amnesty instruction, see Doc 2009-14388 [PDF] or 2009 TNT 120-8 .)

3. And, on Voluntary Disclosure:

Matthews marveled at the vast sums that people were willing to park in bank accounts with no paper evidence that they owned the money, and often paper saying that some nominee owned it. He wondered whether these people would be as trusting of other tax havens now that they had been chased out of Switzerland.

I could say more on this, but my readers would think I am just piling on the Swiss banks (not that any thing I would say would materially increase the pile).

4. More important for tax procedure than tax crimes, the historic division of representation in the various forums for civil litigation is blurring. Ms. Sheppard report: "And taxpayer selection of forum does not mean one set of lawyers: IRS lawyers and Justice lawyers are working together in all courts."

Reasonable Doubt - What is It? (10/16/09)

A comment by Anonymous to an earlier blog here addressed whether, as a variation of a theme of jury nullification in reaction to prosecutorial overreaching, juries might require that guilt be "super proven." I thought my readers might find some background discussion on the criminal burden of proof issue. I offer some materials from my Federal Tax Crimes book (the one in process for the next edition).

------------------------------------

In a criminal tax prosecution, just as any other criminal prosecution, the Government bears the burden of proving guilt beyond a reasonable doubt. The Supreme Court has explained the compelling need for this burden as follows:

The reasonable-doubt standard plays a vital role in the American scheme of criminal procedure. It is a prime instrument for reducing the risk of convictions resting on factual error. The standard provides concrete substance for the presumption of innocence -- that bedrock “axiomatic and elementary” principle whose “enforcement lies at the foundation of the administration of our criminal law.” . . . “[A] person accused of a crime . . . would be at a severe disadvantage, a disadvantage amounting to a lack of fundamental fairness, if he could be adjudged guilty and imprisoned for years on the strength of the same evidence as would suffice in a civil case.”

The Court then held that “we explicitly hold that the Due Process Clause protects the accused against conviction except upon proof beyond a reasonable doubt of every fact necessary to constitute the crime with which he is charged.”

Courts and commentators have noted the utilitarian function of burdens of persuasion to a civilized society such as we imagine ours to be. In criminal cases, societally, it is oft stated that it is better to acquit a guilty person than convict an innocent one; Blackstone even stated that it is better to acquit 10 guilty persons than convict one innocent one. But, even in this simple – perhaps simplistic – construct for analysis, can or are we willing to say that it is better to acquit 100 guilty persons than convict one innocent person? And, when we layer on the fact that different major crimes present different risks to the community, can the equation of the risks of conviction of the innocent be assessed differently in different cases and contexts? Specifically, for example, while we might be able to let 10 or even 100 tax evaders go free rather than convict one innocent person of tax evasion, would we want the same odds to apply to persons accused of terror? You see where I am going, since we are never going to have a standard requiring certainty – whatever that is – we are necessarily going to have a standard that allows the innocent to be convicted. So, what do we give jurors – the usual guilt or innocent finders in criminal cases – to help them keep the risk of conviction of innocent persons to an acceptable level? We give them an elusive “one-size fits all” instruction on the meaning of beyond a reasonable doubt to which I now turn.

Upjohn Warnings in Entity Investigations (10/14/09)

In United States v. Ruehle, 583 F.3d 600 (9th Cir. 2009), a nontax criminal case, the Ninth Circuit rejected a corporate officer's claim that his interview by attorneys representing the corporation in an internal investigation and representing Ruehle in related civil litigation. There was a dispute between Ruehle and the attorneys as to whether the attorneys had given the so-called Upjohn or "corporate Miranda" warning. See Upjohn Co. v. United States, 449 U.S. 383 (1981). The attorneys, not surprisingly, claimed that they had given the warning. Ruehle testified he could not recall that they did. The district court "seems to have disbelieved the Irell lawyers who took no notes nor memorialized their conversation on this issue in writing, and it apparently credited Ruehle's testimony that no such warnings were given." (See n.3.)

The Court of Appeals held, however, that Ruehle's assertion of attorney-client privilege to the communications failed. The court repeated its version of the standard attorney-client privilege definition as follows:

(1) Where legal advice of any kind is sought (2) from a professional legal adviser in his capacity as such, (3) the communications relating to that purpose, (4) made in confidence (5) by the client, (6) are at his instance permanently protected (7) from disclosure by himself or by the legal adviser, (8) unless the protection be waived.

The party asserting the privilege must prove the existence of each element. Here, Ruehle failed to meed the fourth element -- that the communication be made in confidence. Ruehle understood that the fruits of the investigation would be made available to the accountants.

The salient point from a privilege perspective is that Ruehle readily admits his understanding that all factual information would be communicated to third parties, which undermines his claim of confidentiality to support invoking the privilege. Ruehle's subjective shock and surprise about the subsequent usage of the information he knew would be disclosed to third-party auditors--e.g., information subsequently shared with securities regulators and the Justice Department now used to support a criminal investigation and his prosecution--is frankly of no consequence here.

These issues of course arise in entity investigations arising from tax cases. Upjohn itself was a tax case, and the issue has arisen in other tax cases (e.g., the KPMG prosecution).

Economic Substance in Tax Crimes (10/14/09)

In American Boat LLC v. United States, ___ F.3d ___ (7th Cir. 2009), here, the Seventh Circuit affirmed a district court's holding that a taxpayer in a Son of Boss transaction was not liable for civil penalties for claiming the tax shelter on his return (I need not differentiate the civil penalties for present purposes). The essence of the relief granted was that the taxpayer had reasonable cause because of the tax lawyer's involvement and opinion (essentially like the other opinions for Son of Boss). The shelter was Jenkens & Gilchrist shelter of the type for which the lawyers promoting it have been indicted. (See discussion of indictment here.)

Echoing the mantra in the Nixon Watergate debacle, the Court said that "Again, the focus is on what Jump [the taxpayer] knew or should have known at the time he obtained the opinion letter." Focusing on the issuer of the opinion in a criminal context, it seems to me that the issue is the same -- to paraphrase, the focus is on what the lawyer knew or should have known at the time he issued the opinion letter. I don't think my paraphrasing is particularly insightful, but I do think it is helpful to state the truism from time to time, for I think it will help focus on the issue I raised in my earlier blog yesterday (see here). Keep in mind that the lawyer is guilty of a tax crime only if he knew the law (i.e., the crime was both knowable and he knew it) and he intended to violate the law.

Uncertainty in the Law and Willfulness (10/13/09)

In an article in today's New York Times here, Adam Liptak discusses Justice Scalia's dissent from denial of certiorari in Sorich v. United States, 129 S.Ct. 1308 (2009). Justice Scalia's lament is that the "honest services" crime does not provide an intelligible standard for criminal conduct. This theme is presented in the tax cases from James forward requiring a knowable law for tax crimes. Since the tax law requires willfulness, defined as the intentional violation of a known legal duty, then the legal standard must be knowable so that the defendant -- any defendant, even the hypothetical reasonable defendant -- charged with the crime must be able to ascertain the legal standard in order to intend to violate the standard.

Mr. Liptak notes with respect to "honest services" that "If you can make sense of that phrase, you have achieved something that has so far eluded the nation’s appeals courts." As a result, it is fair to say that citizens cannot ascertain the legal standard with any certainty and, correspondingly, judges and juries cannot predictably hold them to that uncertain standard. This phenomenon, Justice Scalia notes, violates fundamental constitutional principles, and gives the prosecutors too much unchecked power to pick and choose their defendants in a wide swath of conduct. Liptak notes:

Lee Sheppard on UBS, Swiss Evasion and Money Laundering

Lee Sheppard has an article in Tax Notes Today titled Dear Former Tax Evasion Services Customer, 125 Tax Notes 174 (Oct. 12, 2009) and 2009 TNT 195-3 (10/13/09). After she gets off on Roman Polanski, some of her key and pungent comments are:

1. Swiss bankers are feeling a bit like Polanski these days, afraid to travel anywhere U.S. prosecutors might get them. Like Polanski, Swiss bankers just want to be left alone.

2. Among the names that the Swiss have already turned over and are in the IRS line of fire

appears to contain at least one household name. Speculation about the criteria for selection, which are still secret, ran to factors like account size and attempts to conceal ownership through phony entities. Fame, apparently, is also a selection factor.

3. "Swiss banks' customers were wined and dined, literally, and doted on by bankers, but are now being tossed aside." (JAT Note: Sound reminiscent of the KPMG fiasco?)

4. In addressing whether Swiss banks other than UBS are in the line of fire, she comments: "Weren't all the Swiss banks basically selling tax evasion services?"

5. Ms. Sheppared then turns to money laundering. Of course, the Government has not charged money laundering in the offshore bank cases (yet), but Ms. Sheppard notes that they might. She cites the Yusuf case (United States v. Yusuf, 536 F.3d 178 (3d Cir. 2008), cert denied 129 S. Ct. 2764 (2009)) I previously discussed here which uses mail fraud in a state tax setting as the predicate act for money laundering. As practitioners and students know, almost every instance of tax evasion involves some potential act of mail or wire fraud, both predicate crimes for money laundering. Her discussion of this issue follows:

The argument that prevailed in Yusuf is a stretch. It is not clear that this money laundering argument had been cleared with the Tax Division of the Justice Department. Justice is generally reluctant to stretch the money laundering rules to cover tax evasion, given the long-standing reluctance of Congress to make tax evasion a predicate offense to money laundering. So it is not as though Justice would bootstrap tax charges into money laundering using the Yusuf argument.

That long-standing congressional reluctance will change if Senate Finance Committee ranking minority member Chuck Grassley, R-Iowa, has anything to say about it. Grassley has told MoneyLaundering.com that he and Sen. Patrick J. Leahy, D-Vt., plan to reintroduce the rejected provision of S. 386, the Fraud Enforcement and Recovery Act of 2009, that would make tax evasion a predicate act to money laundering (MoneyLaundering.com, Sept. 29, 2009). (For the bill, see Doc 2009-3092 [PDF] or 2009 TNT 28-25 .)

Transferring funds with the intent to engage in conduct constituting a violation of the criminal tax fraud statutes (section 7201 or section 7206) would become a crime. Hence a taxpayer would be guilty of money laundering if a bank helped him make a transfer of funds to assist tax evasion.

If a prosecutor had evidence of intent to evade tax, then that transfer would suffice to charge the taxpayer with money laundering. There would be no need to wait for a customer to file a tax return. There would be no arguments about what constituted the proceeds of the crime. Moreover, the bank that made the transfer could potentially be charged with aiding and abetting money laundering.

Get in Line Brother #26 - Another Plea to Encourage the Reticent and Risky

The Government posted another notch in its publicity belt yesterday which it went public with the squeeze it put on another hapless UBS depositor and thereby, it hopes, to squeeze the masses to come forward. The DOJ Tax announcement of the plea is here. I have received a copy of the plea agreement but have not yet posted it on the web. I may do that later or, hopefully, when someone else does, I will link to it. I offer here just a few brief comments on the plea agreement in the Cittadini plea. I will probably add to this and refine or revise it (particularly if errors are called to my attention).

1. The Plea Count. Cittadani pled to violation of 26 U.S.C. § 7206(1), often referred to as tax perjury. This means, in effect, that Cittadani admitted that he will told a material lie on the tax return with respect to his reporting and nonreporting regarding the UBS account.

2. Origin of the Account. The seed monies for the accounts was originally received from his family in Argentina and deposited in the UBS account in 1991.

3. Use of Entities to Disguise. In 2001, he created a Hong Kong Corporation to avoid QI requirements, with advice and assistance of Hansruedi Schumaker. The HK corp named Swiss lawyers A.M.R. and Matthias Walter Rickenbach as First Directors.

4. Enablers.

a. Identities. Identifies other Swiss enablers by name where they are already indicted (Shoemaker and Rickenbach) and by initials where not indicted (yet).

b. U.S. Activity. Meetings with one of the enablers were held in the U.S.

5. Relevant Conduct. It is unclear when the UBS account was closed or whether, if closed, the funds went into another offshore account or elsewhere offshore in order to hide from the IRS. The agreement is just silent, perhaps in order to channel the sentencing (i.e., as noted below, the agreement stipulates that the tax loss relevant to sentencing is limited to the years 2001 through 2003). The trend in these cases is certainly to cut off the opening date for relevant conduct consideration, but the truth really is that years prior to that opening cutoff date is relevant conduct. And, of course, a sweeter deal can be achieved if there is an ending date cutoff as there is here. The Government wants pleas and will get its pound of flesh (as well as the perceived needed publicity) by offering goodies to coax out pleas with enough there to permit a significant sentence if that is the sentencing judge's wish. (I should note, however, that he agrees to a single 50% penalty for the FBAR violations for the years 2001 through 2008, certainly suggesting that there was relevant conduct in years after 2003.)

6. Sentencing Factors.

a. Tax Loss (including all relevant conduct): "the tax loss associated with the accounts at UBS that were disclosed to the Government pursuant to the Deferred Prosecution Agreement with UBS, and of which the defendant was the beneficial owner for the tax years 2001 through 2003.” See my comments above.

b. Sophisticated means. A no-brainer.

c. Acceptance of responsibility. A no-brainer.

7. Cooperation.

a. 5K1. Requires cooperation with a possibility of 5K1

b. No Deception. The plea contains this apparently targeted paragraph:

Defendant understands that the United States will tolerate no deception from him. If, in the estimation of the United States Attorney or the United States Department of Justice Tax Division, information or testimony provided from the date of the Plea Agreement proves to be untruthful or incomplete in any way, regardless of whether the untruthfulness helps or hurts the United States' case, the United States may consider that Defendant has breached this Plea Agreement.

c. Use of Information During Cooperation. Not a strange paragraph, but apparently a concern:

d. The parties agree that information provided by Defendant in connection with this Plea Agreement shall not be used to determine Defendant's sentence, except to the extent permitted by USSG § IB1.8.

USSG 1B1.8 provides that information divulged pursuant to plea cooperation agreements contains the usual suspects designed to make the cooperation more effective, but also contains the following exceptions permitting the Government to disclosure: "(5) in determining whether, or to what extent, a downward departure from the guidelines is warranted pursuant to a government motion under §5K1.1 (Substantial Assistance to Authorities)."

d. Cooperation and Rule 6(e). The agreement does not contain an express waiver of Rule 6(e) as seen in other plea agreements but does contain the following:

The defendant further agrees that any evidence, including statements and documents, provided to the United States by the defendant pursuant to a Proffer Agreement, without any limitations, can be utilized by the United States in its civil examination, determination, assessment, and collection of income taxes related to his income tax returns and any related corporate/entity tax returns, or any other civil proceeding.

It is unclear precisely when the proffer(s) occurred, but if they occurrred pre-indictment, I think they have the Rule 6(e) problem that, I am sure, they would prefer to avoid. (I have previously commented on this here.) Certainly, the IRS can get that evidence from him, assuming they formulate the right requests and asks the right questions (based on information independent of the grand jury investigation), but I think it is highly suspect for the "United States" to turn over that information so imbued with the grand jury investigation which was the only investigation DOJ can conduct in a tax case.

Reports of Switzerland Conversion Experience are an Exaggeration

I have previously here invoked the famous quote of Samuel Clements' dba Mark Twain for claims that are more smoke than substance. I invoke it again to address the notion that Switzerland has seen the light and will join the civilized world -- at least that portion of it that the OECD here influences (which in the tax world is substantial) -- to give more transparency with respect to taxes of other countries. Joann M. Wiener has an interesting and excellent article here titled "Switzerland, No Longer a Tax Haven?" She addresses how Switzerland with a stroke of a pen can give the appearance but not the reality of legitimacy to its continuing, profit driven, need to enable tax evaders. Switzerland has demonstrated over and over that it will protect its premium franchise in the tax haven business, so that it can continue -- perhaps not at the same level -- to enable taxpayers in other countries evade taxes for a fee that includes a healthy share of the taxes evaded for its enablement services.