Wednesday, December 29, 2010

Another Set Back for the Remaining Daugerdas Defendants - Economic Substance is Sufficiently Malleable to Establish a Line a Citizen Could Know (12/29/10)

Judge Pauley, USDC SDNY, served up a loss for the Daugerdas defendants just before Christmas. The opinion in United States v. Daugerdas, 759 F. Supp. 2d 461 (SD NY 2010) is here. The defendants made the now standard argument in complex tax shelters, particularly those based on extrapolations of Helmer, that, given Helmer, the law was not sufficiently clear to establish a legal duty that the defendants could know. I have previously blogged on facets of this issue before. See here.

As occurs frequently, Judge Pauley conflates two distinct -- albeit related -- concepts. The threshold issue is whether the duty was knowable -- a legal inquiry that is separate from what the defendants might have known or intended. James and its progeny establish that the duty must be sufficiently clear that a citizen (not necessarily the actual defendant in the dock) could know the duty. Only if that question is answered in the affirmative is the Cheek issue reached -- did the defendant know the knowable legal duty? That is an issue for the jury to determine after trial so long as the prosecutors have enough evidence to survive a motion for acquittal.

Without citing James or its progeny, Judge Pauley does address the James threshold issue. Bottom line, he holds that the economic interest concept as a bar to claimed benefits and as interpreted by the courts (it is a judicial doctrine, after all) was sufficiently certain to give the hypothetical citizen a line that could be crossed (aka was knowable), leaving the issue for trial of whether these particular defendants knew the line they allegedly crossed. Could have known is not sufficient for a criminal conviction. The Government will have to prove that the did know. But that is another chapter.

Tuesday, December 28, 2010

False Statements (18 USC 1001) and Knowledge of Criminality (12/28/10)

18 USC Section 1001(a) criminalizes false statements to executive, legislative and judicial and is one of the chief weapons in the Government's arsenal for fighting tax crimes. 18 USC § 1001 requires, inter alia, that the false statement be made "knowingly and willfully." Willfully is a word of many nuances. Certainly, in the Title 26 tax crimes context, willfully means at a minimum knowing that the conduct is illegal. So, the question is which nuance applies to § 1001? Does the speaker commit the crime by making a knowingly false statement to a federal agent or must the speaker also know that making a knowingly false statement to a federal agent is a crime? The CTM says cryptically on this issue: “As used in Section 1001, the term "willful" simply means that the defendant did the forbidden act (e.g., made a false, fictitious, or fraudulent statement) deliberately and with knowledge.” CTM 24.08 (2008). With knowledge of what – the falsity or the falsity and its criminality? I think the CTM fairly read intends the former rather than the latter.

In a recent case (United States v. Moore, 612 F.3d 698 (D.C. Cir. 2010)), Judge Kavanaugh in a concurring opinion focused on this issue although siding with the majority because the defendant had not properly raised the issue at trial. The facts are that, incident to a drug investigation, the USPS intercepted a drug package addressed to "Karen White" and then, after substituting white powder for the drug, had a USPS employee deliver it to the address. At the address, the USPS employee delivered the package to the defendant, a male, upon his representation that he was Karen White's boyfriend and upon his signing the receipt with a false name. The defendant was thereafter first charged with drug crimes and the jury hung. He was tried a second time for the same charges but with a false statement charge added for his conduct in accepting the package. On the second trial, the jury hung again on the drug charges but convicted on the false statement charge. On appeal, Moore urged that the falsity was not "materially false" (another element in Section 1001). The panel unanimously handily rejected that argument. Speaking to the substantive issue of whether "knowingly and willfully" requires knowledge of criminality, Judge Kavanagh echoed the concerns of Judge Kozinski of the Ninth Circuit in dealing with the somewhat amorphous crime of the defraud conspiracy (the Klein conspiracy in tax context) and that is not surprising because, as Judge Kavanaugh cites, Judge Kozinski has addressed this concern in the context of 18 USC § 1001. I quote (pp. 703-704) (parallel citations omitted):
Proper application of statutory mens rea requirements and background mens rea principles can mitigate the risk of abuse and unfair lack of notice in prosecutions under § 1001 and other regulatory statutes. In § 1001 cases, that means proof that the defendant knew that making the false statement would be a crime. To be sure, "ignorance of law is no defense" is a hoary maxim. But it does not automatically apply to today's phalanx of federal regulatory crimes. See WAYNE R. LAFAVE, CRIMINAL LAW § 5.6, at 298-311 (5th ed.2010). For some regulatory offenses -- particularly statutes like § 1001 that proscribe only "willful" conduct -- the Supreme Court has recognized an ignorance-of-law or mistake-of-law defense, or has required affirmative proof of the defendant's knowledge that his or her conduct was unlawful. See Bryan v. United States, 524 U.S. 184 (1998); Ratzlaf v. United States, 510 U.S. 135, 141-49 (1994); Cheek v. United States, 498 U.S. 192, 199-201 (1991); Lambert v. California, 355 U.S. 225, 229-30 (1957); cf. Liparota v. United States, 471 U.S. 419 (1985); Dan M. Kahan, Ignorance of Law Is an Excuse -- But Only for the Virtuous, 96 MICH. L. REV. 127, 150 (1997) (noting that"courts permit mistake of law as a defense [] selectively across malum prohibitum crimes"). For criminal statutes prohibiting "willful" violators, those cases together require proof that the defendant was aware that the conduct was unlawful.

Friday, December 24, 2010

Rumors that Offshore Bank Inquiry Expands to Other Swiss Banks and even to Wall Street

Lynnley Browning of The New York Times today here passes on rumors -- presumably from a reliable unnamed source -- that

1. "federal authorities are looking at Wall Street banks that provide banking services to the regional companies, known as cantonal banks."

2. "the Wall Street banks might have been used by the regional banks to pool client money so that individual clients could not be identified by the United States authorities." The article does caution that "There is no indication that the Wall Street banks, which the two people declined to identify, have knowingly engaged in wrongdoing."

3. "The new investigation centers on Basler Kantonalbank, one of the larger regional companies, but includes other cantonal banks as well, the people briefed on the investigation said, declining to identify them." Readers will recall that Renzo Gadola worked with (not for, perhaps) Basler Kantonalbank. I blogged previously on his original charge here and on his guilty plea just two days ago here.

Thursday, December 23, 2010

Swiss Enabler for Offshore Accounts Pleads Guilty (12/23/10)

I reported last weekend on criminal charges against Renzo Gadola, a Swiss person, previously a UBS banker who served as an intermediary between U.S. depositors and at least one Swiss bank. The blog is here. The charges were presented by criminal information which often presages a plea agreement. The criminal information is here. Yesterday, Gadola pled guilty. The guilty plea and statement of facts are here and here. Just a few comments:

1. The guilty plea document itself is mostly standard fare. The plea is to the one conspiracy count charged in the criminal information. The parties' agreements as to the sentencing factors do strike me as unusual, so I will comment on them below.
2. The Statement of Facts appears to be a restatement, perhaps verbatim of most or all of the allegations in the criminal information. I summarized certain of the key allegations in my prior post.
The agreement does not give us the Base Offense Level or the tax loss which drives the Base Offense Level. The Base Offense Level, of course, is the starting point for Guidelines calculations. The agreement does, however, give information from which the starting point can be derived, so let's see what the agreement says. Paragraph 10 provides:

10 The United States and the defendant agree that, although not binding on the probation office or the Court, they will jointly recommend that the Court make the following findings and conclusions as to the sentence to be imposed:
   a. Adjusted Offense Level: 12 (U.S.S.G §§ 2Tl.l(b))(2), 2Tl.9)
   b. Abuse of Position of Trust or Use of Special Skill: 2 (U.S.S.G. §3B1.3)
   c. Total Offense Level: 14
The Guidelines and its earlier iterations require that the Base and Adjusted Offense Levels be determined for conspiracies either under first under § 2T1.9.  However, the § 2T1.1 calculation may apply if it (i) "most closely addresses the harm that would have resulted had the conspirators succeeded" in the Klein conspiracy and (ii) produces an Adjusted Offense Level in excess of 10. The agreement does not spell out exactly how the Adjusted Offense Level of 12 was reached, but it appears that number was likely reached by applying § 2T1.1 (a signal may be the reference to 2T1.1 in paragraph 10.a. of the Plea Agreement). So, focusing on § 2T1.1, an adjusted offense level of 12 would mean that the Base Offense Level was 10, because the use of foreign accounts would require a sophisticated means enhancement of 2 under § 2T1.1(b)(2). (Actually, that is not technically correct, for the Base Offense Level could have been less than 10 and § 2T1.1(b)(2) would increase the adjusted offense level to 12, but bear with me on the assumption that the Base Offense Level is 10.) Now, what is the tax loss under the tax table, § 2T4.1, that produces a level of 10? It is between $5,000 and $12,500. (If the Base Offense Level were less than that range, of course, so would the Base Offense Level be less than 10, but § 2T1.1(b)(2) would then kick up the Adjusted Offense Level to 12.) So, we can conclude that the tax loss assumed in the Adjusted Offense Level was $12,500 or less.

That number -- $12,500 -- is very low for the type of conspiracy alleged in the criminal information and repeated in the Statement of Facts. Even just considering the family mentioned in the conspiracy, an intended tax evasion of only $12,500 or less would hardly have justified the efforts alleged and admitted. Moreover, Gadola was doing it for other U.S. Swiss bank depositors and their achieved and intended tax evasion would far exceed that number and would -- at least should -- be considered as relevant conduct. So, what does this mean? It means that the prosecutors and Gadola's lawyer gerrymandered the Guideline's factors in order to produce a sentencing range that would induce Gadola to plead. At least that is how I read the tea leaves; others may read them differently, and if so I hope they will comment.

Of course, there is the standard disclaimer that the Probation Office and the Court are not bound by their agreements as to the Guideline factors.  (Plea Agreement paragraph 10.)

Now, looking at the agreed Total Offense Level of 14, the defendant will likely qualify for the acceptance of responsibility downward adjustment of 2 (3 only if above 16). (The prosecutors agreed to recommend the acceptance of responsibility adjustment in paragraph 6 of the Plea Agreement.) So the sentencing level for applying the Sentencing Table in Chapter 5, Part A contemplated by the Plea Agreement is 12 which is a Zone C range of 10-16 months, requiring some actual incarceration. The Government agreed to recommend sentencing at the low end of the range. (Plea Agreement paragraph 6.) But the parties have agreed that they may argue for variance (Plea Agreement paragraph 3), so, presuming that Gadola does not stub his toe in this process, his lawyer may be able to make serious variance arguments.  Still, one has to wonder whether courts will find the enablers are attractive for mercy as the depositors who they enabled.

Wednesday, December 22, 2010

Another Chapter Closes in the Tax Shelter Wars - Deutsche Bank Admits Crimes and Takes $553,633,153 Hit (11/22/10)

Yesterday, the USAO SDNY and Deutsche Bank ("DB") announced that had agreed to a nonprosecution agreement ("NPA") requiring, among other things, the following:

1. DB admits criminal wrongdoing.
2. A payment of $553,633,153, representing DB's total fees from its participation in tax shelter activity, the tax and interest the IRS was unable to collect from the taxpayers entering those shelters, and a civil penalty of over $149 million.
3. DB provided a detailed Statement of facts admitting its tax shelter shenanigans.
4. DB must implement and maintain an effective compliance and ethics program. Incident to this commitment, DB must install a government-appointed independent expert to oversee the program. The independent expert is Bart Schwartz of Guidepost Solutions.
5. The shelters involved, with the ubiquitous, sometimes tongue in cheek, acronyms included:
   a. BLIPS (involving KPMG)
   b. FLIP/OPIS (involving KPMG)
   c. Short Option Strategies (SOS) (involving Jenkens & Gilchrist (Daugerdas et al), KPMG,. E&Y and others.
   d. PICO and POPS (involving "various accounting firms and other entities)

Obviously, with this settlement and the predicate settlements with KPMG and Jenkens & Gilchrist the Government is signaling to those players and those tempted to play in these games with deep pockets and reputations that their pockets will be lighter and their reputations tarnished.

The documents related to the settlement are:
Nonprosecution Agreement (including Statement of Facts)
USAO SDNY Press Release
DB Press Release

Saturday, December 18, 2010

Another Swiss Bank Enabler is Charged with Tax / Klein Conspiracy

On December 15, 2010, another Swiss Bank enabler, one Renzo Gadola, was charged with a tax / Klein conspiracy to defeat the lawful functioning of the IRS by assisting United States clients evade U.S. taxes through the use of Swiss banks. The U.S. Attorney Press Release (containing a link to the criminal information is here).

At all relevant times, Gadola was a citizen and resident of Switzerland and a registered investments advisor with the U.S. SEC. He was employed as a private banker by UBS from 1995 through August 2008. In February 2009, he began working as an independent investment adviser under the business name of RG Investment Partner AG. For the matters alleged in the indictment, he partnered with an unindicted co-conspirator names in the indictment under the pseudonym SWISS BANKER, who is alleged to have been executive director UBS's North American business until 2003 and then an investment advisor in Switzerland after that. Gadola and SWISS BANKER assisted U.S. clients in establishing and maintaining undeclared accounts (i.e., accounts not declared to the U.S. in the tax returns or FBARs). Gadola and SWISS BANKER had numerous U.S. clients and met frequently with some of these clients in the U.S.

Saturday, December 11, 2010

Sentencing Case on Emphasis on Restitution Rather than Incarceration in Financial Crimes Cases (11/10/10)

In United States v. Ciccolini, 2010 U.S. Dist. LEXIS 120292 (N.D. OH 11/11/10), here, a sentencing opinion, the defendant pled guilty to two felony counts -- 1 each of structuring transactions and tax perjury (Section 7206(1)). The defendant, a 68 year old ordained priest, embezzled substantial monies from a residential drug and rehabilitation center. The following are some key points of the decision:

1. The counts were grouped under S.G. 3D1.4. The structuring count produced that highest offense level (22), so 4 levels were added for the tax count, producing an offense level of 26, The offense level of 26 produced a Guidelines sentencing range of 63 - 87 months incarceration.

2. In reaching the offense level of 26, the court rejected an acceptance of responsibility downward adjustment. Although Ciccolini pled guilty, he equivocated about his guilt and some elements (amounts involved, etc.).

3. The Court then moved to a consideration which it labeled "3553(a) Factors and Payment of Restitution." Under Booker and progeny, the Guidelines calculation of a sentencing range is only advisory. The court noted that the defendant had repaid the charity the $1,288,263 he admitted embezzling (although the court noted earlier in the opinion that he had embezzled substantially more) and that he had made substantial payments toward the tax liability. Nevertheless, the Court moved to a philosophical discussion of the interplay between sentencing and restitution in financial crime cases, reasoning:

Friday, December 10, 2010

IRS Considering Another Round of Voluntary Disclosure for Offshore Accounts

The IRS first round of voluntary disclosures for offshore financial accounts ended October 15, 2009  The IRS touts the results of that round as very successful.  Since the end of the program, additional taxpayers have made voluntary disclosures, basically under the same process but without any assurance of what the penalty regime would be.  Practitioners have been concerned that, without some certainty as to the penalty costs, many taxpayers with undisclosed foreign financial accounts will stay underground. 

According to this WSJ Article, Commissioner Shulman has indicated that the IRS is "seriously considering another special Voluntary Disclosure Program.  As expected, he said that the penalties would likely increase over the penalties available under the first program ending October 15, 2009.

There was no indication of what the treatment might be for those making a voluntary disclosure after October 15, 2009.  It seems to me that those coming in before the new program is announced should get a break as well -- perhaps the mid point between the penalties available under the first program and those available under the second.

Thursday, December 9, 2010

Another UBS Related Defendant is Charged for Offshore Accounts (12/9/10)

Caveat:  The Charges in the indictment discussed below was dismissed in 2012.  See my blog on the dismissal, Family Member Enabler Charge Dismissed re Offshore Accounts (5/24/12), here.

The Government has charged yet another UBS related person. The story in a nutshell is that Samuel Phineas Upham, who, I am told, is the son of Sybil Nancy Upham, previously indicted (although named in this' indictment as "Family Member A"), assisted Family Member A with respect to her accounts, held through entities, by actively engaging in the cover up of those accounts and the proceeds from the accounts, even after the hammer had fallen on UBS. I use Mr. Upham in this blog entry to distinguish him from his mother.  His mother's indictment is here.  Further, Mr. Upham assisted Family Member A in the preparation of false returns. The charges are: (1) the ubiquitous Klein conspiracy count (Count One) and (2) aiding and assisting, Section 7206(2) for three years (2005 - 2007) (Counts Two through Four). The indictment is here.

Just a few points that I noted in reviewing the indictment (some points are redundant in part to the summary in the above paragraph, and I note that these are just allegations in the complaint and have not yet been proved):

1. The co-conspirators named in Count One are (i) Family Member A and (ii) Swiss Financial Adviser A. Swiss Financial Adviser A's background and general role in the conspiracy are described in paragraph 6.b. of the indictment. My guess is that Swiss Financial Adviser A will not come into the U.S. voluntarily anytime soon.

2. The Conspiracy Count allegations elaborate efforts to cover up, even after the hammer had fallen on UBS.

3. Sham entities were used -- a Lichtenstein Foundation and a Hong Kong corporation.

Wednesday, December 1, 2010

Offshore Charges / Convictions Spreadsheet

I offer readers a spreadsheet (see links at right for the current version) where I have attempted to compile certain data regarding the Government's charges and convictions in the offshore account initiative.  I caveat the use of this spreadsheet in that the information is incomplete and perhaps even wrong in some of the particulars.  I request that my readers to email me at jack@tjtaxlaw.com to advise any additional information needed to make it more complete and accurate.  As I am advised or have my own updates, I will post new versions.  Also, I am adding some statistical analyses periodically as I refine the spreadsheet.

I recommend that users download the file rather than just open it from the web.  Downloading it and using it on your local computer is the best way to use all the features (particularly the sorting and database functions in the excel table on page 1 of the file and reviewing the statistics on page 2 of the file).

Thanks in advance for those of you who help me make this spreadsheet more accurate and complete.

Note to Readers - Back in Focus on this Blog

I apologize to my readers for my absence from new postings on this blog.  I have been distracted by a vacation to Europe (Tuscany and then Sicily), work and teaching, and a bout of the flu.

For today, I offer something that is a bit off topic but still, I think, notable.  I post Judge Allegra's decision in Principal Life Insurance Co. v. United States, 2010 U.S. Claims LEXIS 856 (2010).  I teach a class in Tax Procedure, and I think this opinion masterfully treats some seminal concepts in the area of Tax Procedure.  Hence I offer it for the readers consideration if they have an interest in this area of the law.

Now, I am off to San Francisco for the Annual ABA Criminal Tax Fraud Conference.  I hope that I will be able to squeeze in some postings at least by Saturday.

Wednesday, November 3, 2010

Another Foreign Bank -- in Israel -- Gets In Line

Bank Leumi, Israel's largest bank, "is asking its clients to declare that they are not U.S. persons or reveal their accounts to U.S. authorities."  See Reuters report here and Tax Justice Network blog here.  The report says taht other foreign banks are sending similar letters.  Scott Michel, a prominent U.S. practitioner in this area, is quoted as saying:  "Most [offshore] banks will have to do this sort of thing."

Sunday, October 31, 2010

Government Pursues FBAR Penalty in Civil Case (10/31/10)

In United States v. McBride (D. Utah No. 2:09-cv-378-DB-BCW), the Government seeks to enforce civil penalty for failure to file FBARs for 2000 and 2001. The amount sought is the maximum under prior law ($100,000 per year). The defendant participated in an offshore scam orchestrated by Merrill Scott and Associates ("Merrill Scott"). (For more on Merrill Scott, see here and here. Suffice it to say for present purposes that it involved offshore entities and offshore banks.

The Government has filed motion for summary judgment. The memorandum in support of the motion is here, the complaint is here and Dennis Brager's discussion of the case is here. The Government's motion appears strong (at least if it is a fair statement of both the summary judgment evidence and the case itself); the defendant appears destined to lose even if he survives a motion for summary judgment. (Cf the Williams case discussed here.)  I thought readers of this blog might be most interested in the Government's statement of the willfully standard for the maximum FBAR penalty which is now up to 50% of the highest amount in the account for each year. The Government argues that the willfully standard in the FBAR civil penalty is not the same as willfully standard in the criminal tax statutes (interpreted in Cheek to require the intentional violation of a known legal duty). Rather, the Government argues that a lesser standard applies in civil cases and argues, protectively, that even were the Cheek standard to apply, it is met here for purposes of summary judgment. Here is the Government's discussion (pp. 18-20 of the Memorandum).

Ninth Circuit Applies Perlman Rule for Collateral Appeal of Order Rejecting Attorney-Client Privilege for Former Attorneys of NonIndicted Party (10/31/10)

In United States v. Krane, 625 F.3d 568 (9th Cir. 2010), here, the Ninth Circuit upheld the continuing viability of the Perlman rule permitting collateral appeals of rejection of the attorney-client privilege in certain circumstances. Krane arose from a tax shelter prosecution of individuals who conducted their tax shelter activity through Quellos Group LLC. We have previously blogged about this indictment here and here, but suffice it to say now that they were the genre of shelters that led to other prominent prosecutions (e.g., KPMG related individuals and the Daugerdas related individuals). In Krane, the district court allowed the Government to issue a pretrial subpoena for the records of Skadden, Arps, Slate, Meagher & Flom LLP ("Skadden"), a prominent national law firm that had previously represented Quellos, which was not indicted. Quellos advised Skadden that it was asserting the attorney-client privilege. Skadden asserted the privilege. The Government moved to compel. Quellos intervened to sustain the privilege. The trial court rejected the assertion of privilege and ordered Skadden to comply. Quellos appealed the order and the district court stayed compliance with the subpoena pending appeal. The defendants pled guilty. The Government insisted that it needed compliance with the subpoena in order to prepare for sentencing and issued an identical trial subpoena for the sentencing hearing. "Thereafter, Quellos filed a "Notice of Further Proceedings and Suggestion of Mootness" before this court [the Ninth Circuit], which the government opposed." In a footnote, the court noted: "Despite having served the second subpoena on Skadden, the government has yet to file a motion with the district court seeking issuance of a pre-sentencing subpoena duces tecum."

The appeal presented two issues. The first was whether the compulsory order to Skadden Arps was appealable. The second was, if appealable, the pleas of the defendants mooted the need for the subpoenas. The answers to both questions was yes, so the appeal was dismissed, vacated and remanded with instructions.

Thursday, October 28, 2010

Other UBS Account Holders are Charged

The Boston Globe reports here that two other UBS account holders were charged in separate cases.  The individuals are Peter Schober and Gregory Rudolph.  According to the article, in each case, the charge is for a single count of failure to file the FBAR presumably for a single year (maximum sentence of 5 years).  The charging documents apparenlty assert that they avoided tax in the amounts of $77,871 and $25,507 respectively.  I will do a supplemental posting to this blog with more details when I get them.

USAO Press Release

Friday, October 22, 2010

Developments on the UBS / Swiss Front

There is a flurry of news this morning about UBS, probably the most egregious of Swiss banks in the business of enabling U.S. tax cheats:

1. The United States filed papers today to drop the criminal case. See the reports from USA Today here and Bloomberg here.

2. The Swiss bank regulator called on the Swiss banks to overhaul their services for wealthy foreigners to avoid the type of debacle with the U.S. tax authorities. See the WSJ report here. I suppose that what the Swiss banks will do is not to abandon the business, but become smarter at it. The Swiss banks make their money, not because they can better manage money and investments than other banks in the world but because, at least until recently, they were better at hiding it from prying eyes. It is unlikely that the Swiss will abandon such a lucrative market (there are still people willing to pay plenty to hide money, be they tax cheats, drug dealers, Middle East potentates raking off money from their citizens, or whatever). So, the Swiss bankers will just have to be smarter and move into deeper stealth mode. It remains to be seen whether the Swiss Government will be diligent in curbing those types of activities or will only do the superficial thing here.

3.  In a related development, the Swiss are reported to be close to some type of deal with the German Government regarding accounts owned by German taxpayers. See Reuters article here.

Wednesday, October 20, 2010

Another Tax Shelter Lawyer Bites the Dust

Erwin Mayer, a Paul Daugerdas partner and co-defendant in the tax shelter indictment in SD NY, has pled guilty. I have previously blogged on various aspects of the indictment in four parts: Part 1, Part 2, Part 3, and Part 4. Mayer pled to two counts -- conspiracy and tax evasion, both 5 year felonies exposing him to a maximum 10 year sentence.  He also agreed to forfeit money and property worth in excess of $10,000,000,.

The press release by USAO SDNY here summarizes the key admissions for guilts as follows:
During the guilty plea proceeding, MAYER acknowledged that he knew that the tax shelter transactions would be allowed by the IRS only if there was a reasonable possibility of a profit and if the clients were entering into the tax shelter transactions for genuine, non-tax business reasons. MAYER also acknowledged that the losses from the transactions would be allowed only if the clients were utilizing the entities involved in the tax shelters -- such as the partnerships and corporations-- for legitimate, non-tax business reasons and not simply to produce tax losses. MAYER admitted that the tax shelters had no reasonable possibility of resulting in a profit because among other reasons, the costs and fees for most of the transactions exceeded the potential profit, if any.
For some more nuance, see the WSJ Law Blog here.

Daugerdas and a fellow lawyer Donna Guerin remain standing defendants in the case, at least for now.  It is unlikely that the prosecutors will offer Daugerdas a deal -- at least one that would not put him away for a very long time.  But we'll see what happens on Guerin.

Saturday, October 16, 2010

Can Signatories Filing FBARs During the Administratively Extended FBAR Filing Period Be Prosecuted for Failure to File? (10/16/10)

Readers will recall that the IRS administratively granted U.S. persons with signatory only authority (i.e., no financial interest) relief provided they filed the FBARs first by June 30, 2010 and then by June 30, 2011. See Administrative Notice 2010-23, March 13, 2010; and Notice 2009-62, (August 31, 2009). The relief was specifically made retroactive. I think most practitioners viewed this as assurance that no untoward result would be forthcoming if the U.S. persons qualifying as signatories only filed by the extended date (now June 30, 2011).

In United States v. Simon, 2010 U.S. Dist. LEXIS 108079 (ND IN 2010), the defendant was indicted for various tax crimes, including failure to file FBAR reports for several years. As to the FBAR counts, the defendant urged that he was a signatory with no financial interest and thus, having filed delinquent FBARs within the extended filing period but before indictment, qualified for the relief, so that the indictments for the FBAR violations must be dismissed. The Government argued that he had a financial interest and thus did not qualify for the relief. In any event, the Government argued, even if he qualified for the signatory relief, the contemporaneous failure each year to file by the statute's due date (June 30 of the year following) was a crime, that crime could not be forgiven by administrative pronouncement, and thus the indictment must stand.

The court agreed. The following is its reasoning:

As the government sees it, Mr. Simon doesn't qualify for relief under the IRS notices because he had a financial interest, not just signature authority, in the foreign accounts. Even if he did qualify, the government argues, administrative relief can't change any criminal liability incurred before amendment of the regulation. The government further contends that the notices haven't become final regulations under the Administrative Procedures Act, and that Congress didn't expressly grant retroactive rule-making authority to the Treasury Department under Title 31. Mr. Simon's January 2010 filing of FBARs for 2005-2007, the government says, doesn't absolve him of criminal liability because under the regulations existing at the time the FBARs had to be filed by June 30 of the following year (June 30 of 2006, 2007, and 2008). The government also notes that Mr. Simon never filed an FBAR for 2003 or 2004.

In reply, Mr. Simon argues that he doesn't have a financial interest in Ichua, JS Elekta or Elekta, that 31 C.F.R. § 103.55 gives the Treasury Secretary authority to make exceptions to the reporting requirements, that the exceptions made by the administrative notices were expressly retroactive, and that he wasn't required to file a FBAR for 2004 because the account balance was less than $10,000. No documentation supports his factual assertions.

Whether Mr. Simon had a financial interest in a foreign account is a matter for resolution at trial, not on pretrial motions. The court agrees with the government, though, that if Mr. Simon committed a crime by failing to file an FBAR when the regulations required him to do so, a later regulatory amendment can't absolve him of criminal liability without retroactive modification of the underlying statute. See United States v. Hark, 320 U.S. 531, 64 S. Ct. 359, 88 L. Ed. 290 (1944); United States v. Uni Oil, Inc., 710 F.2d 1078, 1086 (5th Cir. 1983); City & County of Denver v. Bergland, 695 F.2d 465, 480 (10th Cir. 1982); United States v. Resnick, 455 F.2d 1127, 1134 (5th Cir. 1972); United States v. Masciandaro, 648 F. Supp. 2d 779, 784 (E.D. Va. 2009). The statute hasn't been changed.

Mr. Simon argues that the government is mistaken because none of these cases (or the several others the government cites) involved expressly retroactive regulations. Mr. Simon's description of the cited cases is accurate, but the court disagrees with Mr. Simon as to where that distinction leads. To agree with Mr. Simon that a regulation's self-declaration of retroactivity requires a different outcome would be to hold that an agency acquires the power to forgive crimes already committed by simply declaring its intent to exercise that power. The cited cases teach that even if an agency's regulations becomes intertwined in a crime's definition, it is Congress and not the agency that creates the crime, and only Congress can forgive the crime. See also United States v. U.S. Coin and Currency, 401 U.S. 715, 737-38, 91 S. Ct. 1041, 28 L. Ed. 2d 434 (1971); Allen v. Grand Central Aircraft Co., 347 U.S. 535, 553-555, 74 S. Ct. 745, 98 L. Ed. 933 (1954); United States v. Curtiss-Wright Export Corp., 299 U.S. 304, 332, 57 S. Ct. 216, 81 L. Ed. 255 (1936).
The court denies Mr. Simon's motion to dismiss counts 5 through 8 of the indictment.
I am concerned about this analysis. I think most practitioners working in the voluntary disclosure area have felt comforted by the Notices that the filings by the extended date of June 30, 2011 would solve any criminal problem for signatories. The Court says no; the Government can choose to prosecute despite the Notices.

Of course, there are potential defenses that one might invoke to perhaps prevent the Government from relying upon the FBARs thus elicited from U.S. persons with apparent assurance that all is and will be well.

Of course, the whole issue is really moot in the case if the defendant really had a financial interest rather than just a signatory interest (which appears likely reading between the lines). But, quite frankly, I am still concerned about the Court's holding that a signatory who files by the extended filing date can still be prosecuted.

Any thoughts from readers?

Government Discretion to Charge where Criminal Statutes Overlap (10/16/10)

In United States v. Jenkins, 2010 U.S. Dist. LEXIS 106847 (ED VA 2010), the defendant was charged with tax evasion (§  7201). The evasion related the taxpayer's liability for the Trust Fund Recovery Penalty (§ 6672). The acts of evasion alleged were that, in order to evade payment, he established a business in the name of a nominee and that, in submitting two an offers-in-compromise, he omitted assets and income. The taxpayer was charged for evasion, a five year felony, although he could have been charged under § 7206(5), a three year felony. Section 7206(5) deals specifically with false information submitted in connection with offers-in-compromise.

The taxpayer argued that the Government could not charge him under § 7201 because § 7206(5) was the more specific and thus is the exclusive charge that should / could be brought for the conduct alleged. Bottom-line, the court concluded that the conduct alleged could have been charged under either provision and that the Government had the choice as to which of the two to charge. The Court reasoned:

1. The two provisions are not coterminous because many actions that could violate § 7206(5) would not violate § 7201. In the course of this discussion, the Court noted in a footnote:
During oral argument, government counsel provided an illustrative example of the type of conduct that falls within the scope of § 7206(5), but is not covered by § 7201. A drug dealer may have an outstanding tax obligation and decide to submit an offer-in-compromise. On the Form 656, the drug dealer may falsely state that the "source of funds" is legitimate business activity, but otherwise fill out the forms accurately and correctly. Under those circumstances, the drug dealer could not be prosecuted for tax evasion under § 7201 because there is no affirmative act of evasion or an intent to evade the payment of taxes. Yet, the drug dealer could be prosecuted under § 7206(5) for lying about the "source of funds" because that statute punishes any person who falsifies any document relating to the financial condition of the taxpayer submitted in connection with an offer-in-compromise. See Tr. of 9/17/10 Hr'g at 47-48.
The example is a good one. The same example is often used to describe the difference between § 7201 and § 7206(1), tax perjury. If the drug-dealing taxpayer misdescribed his or her business on Schedule C but otherwise correctly reported his or her tax liability, that person could be charged with tax perjury but not tax evasion.

Thursday, October 14, 2010

Update on Fidelity International Advisor Currency Fund A (10/14/10)

I previously blogged three times on the Fidelity International Advisor Currency Fund A case. The principal blog is titled "Judge Finds Ambassador's Tax Shelter Transactions Bullshit (Actually Worse Than That)." The other two blogs with peripheral issues are here and here. The Judge amended his opinion on October 6, 2010 (see here). The amendments do not change the good judge's scathing attack on the behavior of the parties involved.  Rather, the amendments deal principally with the penalty aspect of the opinion. Bottom line, in this TEFRA case proceeding, the good judge attempts to box the ultimate taxpayer in on the penalties to the extent the good judge possibly can. I include the significant new or revised excerpts below, even at the risk of boring the readers with TEFRA-speak. For some this might be boring, but note the skill with which the good judge weaves the web from which there may be no escape:

IV. Conclusions of Law

* * * *

G. Accuracy-Related Penalties

* * * *
61a. A partner's "outside basis" is the partner's basis in his or her partnership interest, A partnership's "inside basis" is the partnership's basis in its own property.
61b. In general, a partner's outside basis in a partnership is not a partnership item. Jade Trading, LLC v. United States, 598 F.3d 1372, 1379-80 (Fed. Cir. 2010). The partnership's inside basis is, however, a partnership item. Stobie Creek Investments LLC v. United States, 608 F.3d 1366, 1380 (Fed. Cir. 2010).
61c. Adjustments made pursuant to an election under 26 U.S.C. § 754 are also partnership items. Id.
61 d. This Court lacks jurisdiction over the imposition of a penalty in this partnership-level to the [*429] extent the penalty relates solely to outside basis. Jade Trading, 598 F.3d at 1379-80; Petaluma Fx Partners, LLC v. Comm'r, 591 F.3d 649, 655, 389 U.S. App. D.C. 64 (D.C. Cir. 2010). However, the Court has jurisdiction over the imposition of penalties relating to misstatements of inside basis and other inaccuracies relating to partnership items.
61e. Because partnerships do not pay income taxes, the actual calculation and imposition of any penalty is determined at a partner-level proceeding. This Court nonetheless has jurisdiction to determine the "applicability" of such a penalty in this proceeding. 26 U.S.C. § 6226(f).

Tuesday, October 12, 2010

Cheek Good Faith - Must the Defendant Testify to Assert the Good Faith "Defense" (10/13/10)

One of the problems with asserting the so-called Cheek good faith “defense” at trial is that, as one court recently held, the defendant will have to testify to put the good faith defense in play. United States v. Kokenis, ___ F.Supp. 2d ___ (ND IL 2010). Actually, for clarity, the good faith issue is not a defense at all, but the evidence at trial does have to put the issue in play in order to obtain a special Cheek inspired instruction placing the burden of proof on the Government to disprove good faith (see here). While it is hard to imagine a credible assertion of the "defense" where the defendant did not testify, I am not sure that asserting the defense would require the defendant to testify in every case. If there is other evidence from which a reasonable jury could conclude that the defendant acted in good faith, the issue should be in play, the defendant should get the Cheek good faith instruction, and the Government must then prove lack of good faith. I am just not sure that there is no case in which the defendant would have to testify in order the put the issue in play.

The other parts of the short opinion suggest that the evidence at trial in fact negated good faith, anyway so that the court's articulation of a requirement that the defendant testify to put the issue in play appears academic. The following from a couple of the footnotes should give some flavor:

n1 What defense counsel's current motion avoids (quite understandably, in light of its damning nature) is all of the evidence of fraudulent and forged documents that overwhelmingly establish Kokenis' guilt on a number of material items of tax fraud for the years at issue. This Court knows of no authority that holds a taxpayer can hold a good faith belief that he or she is permitted to create bogus documents in an effort to transform what are unquestionably items of personal expenditure into faked business expenses that consequently understate reportable income.

n4 [Footnote by this Court] Once again, even that statement is conspicuously silent as to the undisputed evidence that incontrovertibly established Kokenis' fraudulent intent as to a substantial number of the items that he excluded from reportable income and that could not have been touched by some claimed good faith defense.
Any thoughts from the readers of the Blog?

Addendum 10/13/10 2:15 pm

See further discussion at the Gillette-Torvik Blog here.

Thursday, October 7, 2010

Practitioners Complain About U.S. Reliance on Thieves Who Steal from Thieves Who Assist U.S. Taxpayers Cheat on Taxes

Practitioners are all atwitter about the U.S. obtaining information -- presumably for consideration of some sort -- misappropriated from offshore banks and using that information to convict or impose serious civil penalties against persons who joined (conspired might be the right word) with the offshore banks to hide income from the IRS. Among the arguments against such use is that the U.S. is then conspiring with those bank information thieves which is perhaps itself a crime or at least reprehensible conduct even though the target of that activity are offshore bank thieves and their U.S. tax cheat depositors. Thinking by analogy, I suppose it is equally reprehensible if the U.S. were to pay drug cartel employees for information on how to convict drug traffickers or grab their bank accounts. But, the question is, whether that type of conduct is reprehensible or the price we pay for a more civilized society. This debate will not be settled here.

Sometimes the Guilty are Really Guilty, But Not These If You Believe Their Lawyer (Whom the Jury Did Not)

Yesterday, two defendants caught up in the foreign bank account initiative were convicted in the Southern District of Florida, which seems to be the center of the center of activity in this initiative. The Bloomberg report is here, and is reasonably comprehensive for a quick report of the conviction yesterday.

As narrated in the Bloomberg article, the defendants' lawyer proclaimed their innocence. (The article says that the lawyer was "their defense lawyer;" it is unclear to me how any judge would permit one lawyer to represent more than one defendant in a criminal trial.) Thus, it would seem, the defense presentation foreclosed any possibility of seeking a downward adjustment for acceptance of responsibility. As I note in my book:

In tax cases, this adjustment is generally achieved by a plea agreement and acceptance of responsibility sufficiently before the trial date that significant resources are avoided. The Application Note [to SG 3.1.1 provides (and cautions):

3. Entry of a plea of guilty prior to the commencement of trial combined with truthfully admitting the conduct comprising the offense of conviction, and truthfully admitting or not falsely denying any additional relevant conduct for which he is accountable under §1B1.3 (Relevant Conduct) (see Application Note 1(a)), will constitute significant evidence of acceptance of responsibility for the purposes of subsection (a). However, this evidence may be outweighed by conduct of the defendant that is inconsistent with such acceptance of responsibility. A defendant who enters a guilty plea is not entitled to an adjustment under this section as a matter of right.
By the same token, the Guidelines recognize the possibility that a defendant may qualify for this favorable acceptance of responsibility downward adjustment even though not pleading guilty. In “rare situations” a defendant may demonstrate acceptance of responsibility “even though he exercises his constitutional right to a trial,” as “where a defendant goes to trial to assert and preserve issues that do not relate to factual guilt.” [SG 3E1.1, cmt. Note 2.]

Tuesday, October 5, 2010

Practitioner Experience with No Answers to the FBAR Question on Form 1040 (10/5/10)

Daniel Gottfried posted an article titled Proving Willfulness in FBAR Reporting – Checking “No” Ain’t Apropos. The article is reprinted also in Tax Notes at Tax Notes, Sept. 27, 2010, p. 1394; 128 Tax Notes 1394 (Sept. 27, 2010) and in Tax Notes at 2010 TNT 188-14.

The article presents the results of a survey of practitioners who assist U.S. taxpayer clients in making voluntary disclosures of foreign bank accounts as they relate to the U.S. income and estate tax obligations and the FBAR filing requirements.

The article relies upon considerable anecdotal experience of the survey participants to conclude that answering no to the FBAR question on Schedule B of the 1040 (or failing to answer it) is not persuasive evidence that the taxpayer knew of his or her obligation to file the FBAR. The truly draconian FBAR penalties require that the taxpayer know of the legal duty to file the FBAR and intend to fail to file the FBAR. That standard is practically the same as the willfulness standard for the commonly charged tax crimes, although the burden of proof would be lesser in a civil penalty case than in a criminal case and, as a consequence, there may be some relaxation of the articulation of the standard.

The difficulty of making an FBAR civil penalty case is shown in the recent case of United States v. Williams, Civil Action No. 1:09-cv-437 (E.D. Va., Sept. 1, 2010), which I blogged here. Williams indicates that the Government will have to place on strong evidence for the taxpayer's specific knowledge of the obligation and intent to fail to file. Williams certainly suggests that an even stronger case would be required for the criminal FBAR penalty.

Saturday, September 25, 2010

State of the Offshore Voluntary Disclosure Initiative

Readers interested in the state of the IRS's Offshore Voluntary Disclosure Initiative (OVDI) may be interested in the following publication: Mark E. Matthews and Scott D. Michel, IRS’s Voluntary Disclosure Program for Offshore Accounts: A Critical Assessment After One Year, 181 DTR J-1 (9/21/10).   The article may be reviewed or downloaded here. The authors, both prominent practitioners in this area of the law, provide a good summary of the history of voluntary disclosure and the implementation of the current OVDI, with emphasis on the program through the first stage cutoff for taxpayers entering the program by 10/15/09.

Wednesday, September 22, 2010

Yet Another UBS Client Bites the Dust

On September 21, 2010, Jules Robbins, an 84 year old retired watch distributor, was sentenced to one year probation for hiding his Swiss accounts that held, at their peak, almost $42MM. From the USAO SDNY Press Release:

In 2000, ROBBINS used the services of a U.S.-educated Swiss attorney to set up a sham Hong Kong corporation which was listed as the holder of his account and to serve as the nominal head of the corporation. In fact, UBS internal documents specified that ROBBINS wanted to be "100% in charge" of investment decisions concerning his UBS accounts. ROBBINS also took numerous steps to conceal his interest in these accounts from the IRS, including having his Swiss attorney receive all of the correspondence relating to the account at his law firm in Switzerland. As of December 31, 2007, ROBBINS' UBS accounts collectively contained almost $42 million.

ROBBINS, 84, of Jericho, New York, pled guilty on April 15, 2010, to five counts of subscribing to false federal income tax returns. As part of his plea agreement with the Government, ROBBINS paid a civil FBAR penalty of $20,833,345, an amount equal to 50 percent of the highest value of his UBS accounts as of December 31 for the years in which he failed to file FBARs.
According to news reports, Robbins' attorney argued in support of a light sentence that Robbins, the octogenarian, was in fragile health and the FBAR penalty is 80% of his net worth (meaning that his remaining 20% would be about $5MM. From the Bloomberg report, Robbins apologized and "asked the judge for mercy, breaking down several times as he told Holwell of the 'shame, aggravation and sleepless nights during the past many months.'"

Saturday, September 18, 2010

The Triple Whammy from Breach of Trust Illegal Income -- Ouch, That Hurts

In United States v. Welch, 2010 U.S. App. LEXIS 19107 (5th Cir. 2010) (unpublished), the Court affirmed a relatively rare upward variance from the guidelines sentencing range in a tax case. The background (from an update in my book) is:

The Guidelines provide an upward adjustment if the defendant abused a position of public or private trust “in a manner that significantly facilitated the commission or concealment of the offense.” §3B1.3. A tax crime involving only the breach of the duty to the Government to report and/or pay tax does not invoke this upward adjustment, but if the tax crime involves or arises from some other conduct that does breach a position of public or private trust, then this upward adjustment may apply. For example, if the tax crime is failure to report embezzled income, this adjustment may apply as well as the two level adjustment §2T1.1(b)(1) for illegal income and then, even worse, a sentencing court may consider the nontax breach of trust conduct as a factor warranting an upward variance.

In Welch, the defendant was charged under Section 7206(1) (tax perjury) for failing to report embezzlement income of $622,000. In computing the Guidelines range, the sentencing court included an illegal source adjustment (S.G. §2T1.1(b)(1)) and a breach of trust adjustment under §3B1.3. The court then determined to vary upward from the thus enhanced Guidelines range because the defendant's embezzlement had not been prosecuted and thus, in the court's view, the Guidelines calculations even as thus enhanced did not adequately reflect the seriousness of the conduct.

The Fifth Circuit sustained as a proper application of the sentencing court's authority under Booker.  The Court said succinctly:
The district court was entitled to base its variance upon the embezzlement, even if that offense was already accounted for in the Guidelines calculation. United States v. Brantley, 537 F.3d 347, 350 (5th Cir. 2008); United States v. Williams, 517 F.3d 801, 810-11 (5th Cir. 2008) (holding that a district court may rely upon factors already incorporated by the Guidelines to support a non-Guidelines sentence).

Picky, Picky - Tax Perjury is Not Tax Evasion / Fraud

I write just to note that the Third Circuit made a mistake that I hope my students do not make. In United States v. Riley, ___ F.3d ___ (3d Cir. 2010), 2010 U.S. App. LEXIS 19310 (3d Cir. 2010) the defendant was convicted of three counts of tax perjury under Section 7206(1). It is elementary that tax perjury is not tax evasion (or tax fraud as it is sometimes called), which requires a key additional element of tax due and owing. In its opinion, the Third Circuit refers to the tax perjury counts of conviction as "tax fraud" and "tax evasion."

The error does not appear to have affected the opinion. The court reversed on the honest services conviction based on Skilling, but otherwise sustained the convictions.

Friday, September 17, 2010

Another UBS Client Bites the Dust - One Year Sentence (9/17/10)

Another UBS client was sentenced today in New York. According to this blog posting by Janet Novack of Forbes' Taxing Matters, Frederico Hernandez was sentenced to a year in prison. After I get more details, I may do another posting if there is something material to add or correct. In the meantime, I recommend you to Ms. Novack's blog post which is quite good for such quick reporting.

I do make the following points:

1. The report is that Mr. Hernandez got a one-year sentence.  Mr. Hernandez would have been better off to get a sentence of 1 year and 1 day because the good time credit (about 15%, although the calculation can be tricky) is not available for sentences of less than one year and one day. 18 USC 3624(b). The good time credit for a sentence of one year and one day is 47 days, making the defendant with good time serve only 319 days. A defendant with a one year sentence must serve 365 days with no good time credit.  What a difference a day makes..  The Judge (Denny Chin) surely knew of this difference and, apparently was not quite willing to go there for this defendant.

2. Hernandez and the Government agreed in the plea that the tax loss was $84,423. However, the Government apparently asserted at sentencing that the real tax loss was in excess of $500,000. I have not seen the plea agreement, so there is a nuance somewhere that I am missing on this. In any event, the Probation Office and the Court are not locked into the tax loss that the Government and the defendant agree upon in the plea agreement (dare I say conspire to smoke past the court; the devil made me say that). The higher tax loss would, of course drive up the base offense level and, as a result, the Guidelines sentencing range after all adjustments.  And, of course, with a higher Guidelines sentencing range, a sentencing judge will have to vary more than if the sentencing range were lower.

3. According to the article, the plea was for tax perjury (Section 7206(1)) for the years 2004-2008, during which period he reported $503,682 of AGI, whereas during the period his real AGI was $1.9 million. And, as alleged by the government, he had the same pattern of conduct in the years 2001 through 2003. With the higher amounts, the Guidelines range would have been 30 to 37 months. Question for students: assuming that the pattern of the conduct was the same in all years, what would have been the effect had he pleaded to a single count?

4. Even the year is the longest UBS depositor sentence to date. Was this guy worse than the earlier ones or did he just get in line later than they did? What does that portend for later comers?

5. The Government urged the Court to sentence to 18 to 24 months to send a message. The court obviously wanted to send a different message -- first to the defendant before the court and, perhaps only derivatively, to the universe of tax cheats and wannabe tax cheats.

Ms. Novack also has a prior blog on how courts are lenient in tax crimes and certain other federal crimes relative to the typical federal crimes prosecuted in the courts. That blog is here.

Addendum:  9/17 @ 5:40pm:  Readers might want to take a look at this, at least tangentially related, WSJ Law Blog titled Planning A Prison Stay? The Options Can Be Overwhelming.

Addendum #2 9/18 @ 9:15am:  I have corrected the federal good time credit calculation which was in error in an earlier version of the blog.  There has been some confusion over the years about precisely how it is calculated.  But, the BOP controls the process and calculates it to allow 47 days GTC for a 1 year and 1 day sentence.  For a discussion, see here.

Addendum #3 9/20/10 @ 10:15am.  See Bloomberg article here and USAO SDNY release here.

Thursday, September 16, 2010

Sixth Circuit on Klein Conspiracy and Tax Evasion

On September 15, 2010, the Sixth Circuit decide United States v. Damra, 621 F.3d 474 (6th Cir. 2010). The decision is long (51 pages) and addresses a number of issues. I deal here only with three of them that I think are in the mainstream for readers of this blog.

1. Klein Conspiracy - Is Willfulness An Element of the Crime?

Damra was convicted of a Klein conspiracy. Most readers will know that the federal conspiracy statute, 18 USC 371, defines two types of conspiracies -- an offense conspiracy and a conspiracy to defraud, known in the tax arena as a Klein conspiracy. If the offense underlying the offense conspiracy has a willfulness element, that element is imported as an element of the offense conspiracy. Specifically, a conspiracy to commit a tax crime having a willfulness element must meet the Cheek spin of intentional violation of a known legal duty. But, the Klein conspiracy has no reference point to import a willfulness element. So the question is what is the mens rea required in a Klein conspiracy?

Damra complained on appeal that the trial court did not instruct the jury that the Government must have proved that the defendant acted "willfully." Bottom line, the Sixth Circuit held that the instructions as given sufficiently conveyed the concept to the jury that the trial court did not commit reversible error. In the process of reaching that bottom line, the Sixth Circuit reiterated a prior holding willfulness is a required element of a Klein conspiracy, quoting an earlier case (United States v. Beverly, 369 F.3d 516, 532 (6th Cir. 2004) (citations omitted)) as follows (p. 498).

To establish a conspiracy, in violation of 18 U.S.C. § 371, the government must prove beyond a reasonable doubt that there was "an agreement between two or more persons to act together in committing an offense, and an overt act in furtherance of the conspiracy." This requirement has been broken down into a four-part test, which requires the government to prove that: "1) the conspiracy described in the indictment "was wilfully [sic] formed, and was existing at or about the time alleged; 2) the accused willfully [sic] became a member of the conspiracy; 3) one of the conspirators thereafter knowingly committed at least one overt act charged in the indictment at or about the time and place alleged; and 4) that overt act was knowingly done in furtherance of some object or purpose of the conspiracy as charged."
Notwithstanding that holding, the Sixth Circuit's pattern jury instructions defined the crime in terms of "knowingly and voluntarily" participating in the conspiracy rather than willfully doing so. In effect, Court held that these terms are sufficient to convey the willfulness concept, concluding (p. 500):

As the district court's instructions tracked our pattern instructions, as we have repeatedly approved of the "knowingly and voluntarily" formulation of the second element of conspiracy to defraud the government under 18 U.S.C. § 371, and as "willful" is in fact defined in part as "voluntary," we find that the district court did not omit the willfulness element of § 371 conspiracy when it instructed the jury, and so did not commit plain error in issuing its instructions as to Count 1.
JAT Comment: I think the Court did not crisply address or resolve the issue. The issue is whether, if indeed willfulness, at least in the Cheek sense, is an element of the Klein conspiracy, the words "intentionally and voluntarily" cover the same ground adequately to inform the jury. I don't believe that the Government believes that it does. I address that notion in my article, See John A. Townsend, Is Making the IRS's Job Harder Enough?, 9 Hous. & Bus. Tax L.J. 260 (2009). As I note in that article, the Government has taken the position that the Klein conspiracy is free of the Cheek willfulness spin that the defendant intend to violate a known legal duty but simply has to intend to join the conspiracy to defraud (defraud encompassing acts that are not necessarily illegal). And, if you parse the language of Beverly quoted above, the use of the word willfully does not seem to address the Cheek willfulness requirement in the sense of an intentional violation of a known legal duty. Indeed, in a later footnote (footnote 7), the Sixth Circuit says: ""The intent element of § 371 does not require the government to prove that the conspirators were aware of the criminality of their objective . . . ." United States v. Khalife, 106 F.3d 1300, 1303 (6th Cir. 1997) (quoting United States v. Collins, 78 F.3d 1021, 1038 (6th Cir. 1996))."

2. Tax Evasion - Separate Good Faith Instruction?

The defendant argued that the trial court erred in failing to give a good faith instruction on the tax evasion charge. Bottom line, the Court said that the standard Cheek willfulness instructions adequately covered the ground. The Court reasoned (p. 502):

As the Supreme Court has held, where a trial judge "adequately instructed the jury on willfulness" in a case concerning whether the defendants had filed fraudulent tax returns,"[a]n additional instruction on good faith was unnecessary." United States v. Pomponio, 429 U.S. 10, 13 (1976). Willfulness, the Court explained, "in this context simply means a voluntary, intentional violation of a known legal duty." Id. The clear implication of Pomponio is that where a district court presiding over a criminal tax-evasion case issues an instruction defining willfulness in this fashion, the good-faith requirement is effectively bundled into the willfulness instruction. Here, the district court instructed the jury that in order to sustain its burden of proof as to Count 2, "the government must prove beyond a reasonable doubt that defendant acted willfully. To act willfully means to act voluntarily and deliberately, and intending to violate a known legal duty." (Trial Tr. at 816-17.) By matching the language approved of in Pomponio, the district court effectively and correctly instructed the jury as to this element. As we have explicitly held, moreover, a jury's conclusion that a defendant acted "willfully" in this manner "would necessarily negate any possibility" that the defendant acted in good faith. United States v. Tarwater, 308 F.3d 494, 510 (6th Cir. 2002); see also United States v. Ervasti, 201 F.3d 1029, 1041 (8th Cir. 2000) (holding that the district court did not abuse its discretion in refusing the defendant's request for a good-faith instruction where the court instructed the jury that "[a]n act is done willfully if it is done voluntarily and intentionally with the purpose of violating a known legal duty.").
3. Klein Conspiracy or Offense Conspiracy?

The defendant raised the Minarik defense. United States v. Minarik, 875 F.2d 1186 (6th Cir. 1989). The gravamen of the defense is that the Government cannot dress up what is in reality a tax offense conspiracy as a Klein conspiracy. I am sure all of us know that given the breadth of the defraud object for the Klein conspiracy, any tax offense conspiracy is also a Klein conspiracy. (As noted above, the Government imagines a lesser burden of proof for the Klein conspiracy, so it may be sorely tempted in weaker cases to charge a Klein conspiracy rather than an offense conspiracy.) The Sixth Circuit continued its retreat from Minarik, thus essentially limiting it to the Minarik facts.

As we have concluded in other cases in which defendants have made this argument, "[b]ecause the unique circumstances found in Minarik do not apply here, we decline to depart from the general rule that the defraud and offense clauses are not mutually exclusive." See United States v. Tipton, 269 F. App'x 551, 556 (6th Cir. 2008). Accordingly, we find that Damra could appropriately be charged under § 371's "defraud" clause, and that therefore Count 1 does not fail to allege an offense pursuant to 18 U.S.C. § 317.
As a result, the Government has broad latitude as to how to charge a tax conspiracy. Indeed, the Government will often charge both the offense conspiracy and Klein conspiracy in a single count -- the ubiquitous Count One -- and urge that the failure to prove the offense conspiracy can still permit conviction of the Klein conspiracy.

Wednesday, September 15, 2010

Sentencing Tax Loss, Unfiled Returns and Deductions (9/15/10)

I write today about two recent cases, one which held that, for civil tax purposes, a taxpayer who fails to file is not entitled to claim his or her itemized deductions in a civil tax proceeding and the other applying the same rule in a criminal case at sentencing in calculating the tax loss. See Jahn v. Commissioner, 2010 U.S. App. LEXIS 17525 (3d Cir. 2010) (unpublished opinion, here); and United States v. Kellar, 2010 U.S. App. LEXIS 19129 (5th Cir. 2010) (unpublished opinion, here), respectively. I made some revisions to my book and include the following revised section on calculating the tax loss in an failure to file case (footnotes omitted).

Consider the application of this rule [permitting estimates of the tax loss for the tax loss calculation] where the tax offense is failure to file rather a fraudulent return omitting income or misstating claimed deductions or credits. If the defendant originally filed a fraudulent return without claiming otherwise available deductions or credits, I suppose that some sense of fairness could support denying the deductions or credits since the tax loss the defendant intended was not affected by the unclaimed deductions. But, if the defendant filed no return, is he or she to be further punished in the sentencing phase by rigid estimates simply because he or she did not claim the deductions? I can certainly make a distinction between the two circumstances.

Friday, September 10, 2010

Third Circuit Decision in Stadtmauer - Willful Blindness (Conscious Avoidance) (9/10/10)

The Third Circuit issued a very interesting opinion yesterday in a tax crimes case. The opinion is United States v. Stadtmauer, 620 F.3d 238 (3rd Cir. 2010), here. The opinion is 88 pages long and covers several important issues. I plan to discuss the issues in separate blogs, but first I start the Court's introduction to the opinion:
Following a two-month jury trial in the District Court for the District of New Jersey, Richard Stadtmauer was convicted of one count of conspiracy to defraud the United States (in violation of 18 U.S.C. § 371), and nine counts of willfully aiding in the filing of materially false or fraudulent tax returns (in violation of 26 U.S.C. § 7206(2)). On appeal, Stadtmauer raises many challenges to these convictions. We deal principally with the issue Stadtmauer raises last: whether the District Court erred in giving a willful blindness instruction in this case, including whether the Supreme Court's decision in Cheek v. United States, 498 U.S. 192 (1991), forecloses the possibility that willful blindness may satisfy the legal knowledge component of the "willfulness" element of criminal tax offenses. We join our sister circuit courts in concluding that Cheek does not prohibit a willful blindness instruction that applies to a defendant's knowledge of relevant tax law. We reject also Stadtmauer's other claims of error, and thus affirm.

Thursday, September 2, 2010

Government Fails to Prove Willfulness in FBAR Civil Case (9/2/10)

In Williams v. United States (EDVA Civil Action No. 1:09-cv-437, decision dated 9/1/10), the court declined to find willfulness.

The opinion is relatively short, so I won't rehash the opinion. Some significant facts from the case are:

1. "Between 1993 and 2000 Williams deposited more than $7,000,000 in assets in the accounts, earning more than $800,000 in income over that period."

2. During the year in issue (2000, for which the FBAR was due 6/30/01), the Swiss were focusing on the accounts perhaps at the request of the U.S., the Swiss interviewed Williams about the accounts, the Swiss froze the accounts at the request of the U.S. and the U.S. was aware of the accounts (it is not stated whether that request was a tax driven request or some other law enforcement imperative request.) (The timing of some of these events were disputed by the Government, but the district judge would have none of that.)

3. On his 2000 1040, Williams failed to include the income from the accounts and, on Schedule B, failed to check the FBAR question.

4. Williams failed to file the FBAR by June 30, 2001.

5. Williams' lawyers and accountants had advised him of the requirement to file the FBAR.

Wednesday, September 1, 2010

Court Addresses Attorney-Client Privilege in Suit Against Tax Shelter Promoters

In Green v. Beer, 2010 U.S. Dist. LEXIS 87484 (SDNY 8/24/10) (involving a taxpayer suit against tax shelter promoters, Judge Kimba Wood addressed objections a magistrate's determination of discovery issues involving the attorney-client privilege. The issues resolved by Judge Wood are.

1. Waiver by Disclosure to Third Parties.

The general rule is that disclosure to third parties waives the privilege. That took care of the plaintiff's disclosures to financial advisers that the defendants wanted to see (I suppose, to address whether plaintiffs really relied on defendants). However, one set of disclosures fit an exception -- a disclosure to an agent assisting in the flow of communications between the attorney and the client. The circumstance was:

In contrast, Daniel Green, the son of the Green Plaintiffs, received email communications from counsel, which he then provided to his parents. He explained in his affidavit that his technical assistance was necessary for his parents to timely receive the email communications from counsel:
My parents are not proficient in the use [of] electronic mail and, due to the time-sensitive nature of these communications, it was necessary for these communications to be delivered to my email address to ensure a timely receipt. My parents regularly rely on me to send and receive emails for them.
Important to the Court's resolution of the issue was the New York Statute on the issue which provides (Section 4548 of the New York Civil Practice Law and Rules):

No communication . . . shall lose its privileged character for the sole reason that it is communicated by electronic means or because persons necessary for the delivery or facilitation of such electronic communication may have access to the content of the communication.
Perhaps some readers have focused on this type of issue in a federal proceeding, and most particularly a tax case. Would the New York statutory wrinkle on the attorney client privilege be relevant? Federal issue cases in federal courts (specifically federal tax cases) look to the general common law attorney client privilege without local state embellishments. See FRE 501; see also Rule 502 (providing limitations on when disclosure constitutes waiver of the privilege). Ultimately, Judge Wood held that the privilege had not been waived because, as a matter of fact under the circumstances, the defendant was an important agent to assist in communications, citing inter alia, Kovel (United States v. Kovel, 296 F.2d 918, 921 (2d Cir. 1961)) and Adlman (United States v. Adlman, 68 F.3d. 1495, 1499 (2d Cir. 1995))

2.  Waiver By Asserting Reliance on Defendants.

a.  At the Inception.  Even as to communications made to the attorney otherwise within the scope of the privilege, courts have held that a party may waive the privilege by affirmatively claiming reliance on the lawyer in defense of a claim against that party-client. This is often seen in tax criminal and civil tax cases where, as a defense to a criminal or civil penalty, the client as a party asserts that he or she relied upon his or her lawyer and therefore should not be subject to the penalty. In the tax cases of which I am aware, this claim operates as a waiver of the attorney-client privilege. In Green, however, the plaintiffs were not affirmatively alleging reliance on their lawyers present at the creation. Rather, they were asserting that they relied upon the defendants (the tax shelter promoters/enablers). I suppose that is an implied representation that they were not relying upon their lawyers.  The defendants wanted to test the plaintiffs claim by seeing what plaintiffs told their lawyers, what advice they received and whether, therefore, they really relied upon the defendants as they claim. The magistrate judge held that the plaintiffs had not waived the privilege, and the district court sustained the magistrate's holding. The district court did acknowledge that there are conflicting holdings within the district, but "To the extent that there is a split in the case law, however, the magistrate judge's order cannot be considered clearly erroneous or contrary to law." (see fn. 3.) (I just wonder whether Is this the right context to be applying the clearly erroneous or contrary to law standard.)

b. In Settling with the IRS.  The magistrate found any attorney-client communications related to the settlement with the IRS irrelevant to the issues presented.  In a short holding, the district court affirmed.

Tuesday, August 31, 2010

Ninth Circuit Reverses Conviction for Failure to Grant Continuance For Last Visit with Dying Son

I write briefly on yesterday's Ninth Circuit decision United States v. Kloehn, 640 F.3d 1123 (9th Cir. 2010). In the case, the defendant was convicted of tax evasion and aiding and abetting. The defendant was the sole defense witness. The key event occurred on the evening of the fifth day of his testimony. The defendant's son suffered a massive seizure and was expected to die in a few days. Kloehn's attorney "requested a two-day continuance to allow Kloehn to see Kevin once more before his death." The prosecutor opposed, saying that the defendant could finish his testimony first and then go see his son. The trial court denied the requested extension. The defendant finished up and then was excused from attendance for the balance of the trial. The Ninth Circuit reversed.

There was a dissent. Basically, the dissent was that, in context, it was just not as bad as the majority perceived and presented in the majority opinion. The dissent concludes its analysis with this:

Insofar as the merits and the "whole record" weigh in this calculation, Gagnon, 470 U.S. at 527, Kloehn was charged with a transparent scam which anyone with an IQ over room temperature would have seen as illegal. The expenses he claimed were spurious, and the tax free laundering back to him was a smoking gun plus a bullet hole in his defense.

Bottom line? Where's the beef? Where's the prejudice? Where's the damage?

New Sixth Circuit Failure to Pay Over Case

In United States v. Blanchard, ___ F.3d ___ (6th Cir. 2010), the defendant was "convicted of fifteen counts of Failure to Account for and Pay Over Withholding and FICA Taxes, in violation of 26 U.S.C. § 7202, and three counts of Making and Causing the Making of a False Claim for a Tax Refund, in violation of 18 U.S.C. § 287." The decision in the case is useful because it covers a lot of the key issues presented in failure to pay over cases which seem to be coming more frequently in recent years

1. Statute of Limitations. The Court holds that the statute of limitations under § 6531 is 6 years. The defendant's argument was that "pay" in the 6 year statute (§ 6531(4)) was a different concept than "pay over" which is the concept in § 7202 and thus that the default tax crimes statute of limitations of 3 years applied. The defendant argued that, not only was it a different concept, but analysis of the 1954 Code predecessor -- the 1939 Code -- supported this reading of § 6531(4). The Court rejected the argument, consistent with the mainstream (but not unanimous) holdings. The Sixth Circuit provides a good discussion of the cases on the subject.

2. Admission of Evidence of Discretionary Expenditures. The Court held that the evidence of defendant's discretionary expenditures was relevant to his willfulness and thus was properly admitted at trial.

3. Ability to Pay is Not An Element. Following the Ninth Circuit's holding in Easterday (discussed here), the Court rejects the argument that the Government must prove ability to pay as an element of the offense. The essence of the holding is that a defendant cannot immunize himself or herself from criminal tax charges by avoiding having the resources to pay -- such as by spending the money otherwise available to pay.

4. Failure to Instruct on the Defendant's Theory of the Case. Failure to properly instruct on a defendant's theory of defense is viewed as reversible error (at least if not harmless), as we noted in discussing Kottwitz. But, unlike Kottwitz, the Sixth Circuit finds no reversible error because the other instructions covered the gravamen of the defense. So, let's see. The defendant's claim was that he relied upon his accountant / return preparer. There was sufficient evidence that he did so, at least sufficient to support the requested instruction on the defense. The Sixth Circuit held that there was no reversible error because the defense was subsumed in the willfulness and good faith instructions the trial court did properly give to the jury. In other words, if the jury understood those instructions, it would have known that the defendant would have a defense if he indeed relied upon the accountant / return preparer. This notion, of course, relies upon the legal construct that juries understand jury instructions as given and are able to extend the concepts beyond the instructions. Finally, the Court does state as its final sentence that there was "no error here." I read the analysis as being a no reversible error opinion. I think that in a case with the proper evidentiary predicate for a reliance defense, the defendant is entitled to the instruction and the general willfulness and good faith instructions will not cover the ground. Hence, I think the Court's concluding sentence is unfortunate.

5. The Net Wage Entitlement to Credit for Withheld Taxes. In reporting his personal income tax liability, the defendant claimed a credit for the tax he was supposed to cause his "employer" to withhold and pay over but did not; based on this notion, the defendant claimed that he could not be guilty under 18 USC § 287 (false claims) for claiming those credits. The general scheme for withholding is that, upon payment of net wages, the employee gets the credit for taxes withheld whether or not the withholding agent (the employer) ever pays over those withheld (or deemed withheld) amounts to the IRS. Of course, that is the general scheme. This general scheme was not designed to benefit the person who is responsible for the failure to pay over in the first instance. Interestingly, in this regard, the Sixth Circuit relied (or at least found persuasive) an unpublished decision affirming a § 7201 conviction in a similar circumstance. The defense is just a bit too cute.

6. Amount of Restitution for Tax Crimes. The Court reversed the imposition of restitution related to the tax crimes (as opposed to the Title 18 crimes). Restitution is just not available for tax crimes except as a condition for some benefit (such as condition of probation) conferred on the defendant.

Monday, August 30, 2010

State of IRS Criminal Investigations

I previously blogged here the TIGTA annual state of the universe on IRS's Criminal Investigation Function (that report is here). I supplement with some bullet points of interest (all relating to FY 2009 unless otherwise indicated:

1. CI spent , stated as a percentage,of "52.4 percent of its time on legal source tax and 72 percent on total tax investigations, both at a 10-year high." Those familiar with how statistics lie (or at least are misleading, should have some questions) may be able to question the desired conclusion from these statistics.

2. "[T]he number of legal source tax investigation initiations increased by 13.3 percent and the number of tax-related initiations increased by 14.4 percent. In addition, the percentage of all initiations that were legal source tax and tax-related increased by 1.3 and 2.5 percentage points, respectively. "

3. I found this statistic interesting because I now represent someone who should not have been investigated in the first place (fairly typical of my clients).  In this case, the IRS listened to an informant with misinformation and was unable to assess the credibility of the informant.  Here is the statistic: "the FY 2009 average of 413 days to discontinue a legal or illegal source investigation exceeded the 386 day average in FY 2008 by 7 percent." Draw your own conclusions as to the bare numbers of days the IRS' futzes around with bull shit investigation (OK, that's too harsh). But at least some of those being investigated should not have been in the first instance and it seems to me a bit harsh for subject them to an IRS criminal investigation for 413 days is just about 412 days too many. (OK, I will compromise at, say, 206 days too many). That period (whatever it is) is a period of unnecessary anxiety and costs that are, well, let's just say unfair.

4. "The number of subjects convicted of legal source tax crimes increased 2 percent from FY 2008 and has increased 17.5 percent since FY 2004."

5. "The overall publicity rate for prosecutions in FY 2009 was 81.9 percent." "Research suggests that higher levels of criminal sentences lead to greater tax compliance." And, just what research would that be? TIGTA does not identify the research.

6. CI "did not meet the long-term goal noted above or its revised conviction goal for FY 2009 of 2,135, reporting that it received only 2,105 convictions." And, here is what it says about that (footnotes omitted):

Despite not meeting some of its goals, the Division exceeded its FY 2009 goal of 4,000 by initiating 4,121 subject investigations. The FY 2009 initiations represent a 9.9 percent increase over the FY 2008 total of 3,749. In addition, the number of subject investigations open in inventory increased 7.7 percent over the FY 2008 total of 3,691 investigations. According to the FY 2009 Business Performance Review (BPR) document, the Division plans to complete 3,900 investigations and obtain 2,135 convictions in FY 2010. Division management expects that the 9.9 percent increase in initiations it experienced this fiscal year will provide for a future increase in completions and resulting convictions. Since the Division reported that it takes, on an average, less than 1 year (341 days) to refer a case for prosecution, n18 we believe the anticipated increase in initiations will likely result in an increase in completions and may allow the Division to meets it completion goals next fiscal year.

7. And here's the discussion of fraud referrals.
. The number of fraud referrals received by the Division decreased for a second consecutive year. The Division reported receiving 505 fraud referrals in FY 2009, a 13.4 percent decrease from the 583 received in FY 2008, and a 19.2 percent decrease from the FY 2005 high of 625. n25 Since fraud referrals remain a viable and important source of legal source tax investigations, we are concerned that the number of fraud referrals received has trended downward since FY 2005. During a February 2010 meeting, the Chief, Criminal Investigation, advised that this trend may change in the future since the operating divisions now have a performance commitment relating to fraud referrals.
What exactly is the "performance commitment related to fraud referrals?"

Saturday, August 28, 2010

Kottwitz -- a Long Rambling Tax Opinion Covering Most of the Major Tax Crimes (8/28/10)

I write about the Eleventh Circuit's recent decision in United States v. Kottwitz, 614 F.3d  1241 (11th Cir. 2010), here., opinion revised and expanded on accountant reliance jury instruction, 627 F.3d 1383 (11th Cir. 2010).  The decision is per curiam so we don't know which judge or which judge's clerks took the laboring oar for the opinion. Judge Birch does dissent, so the other two who formed the majority are Circuit Judge Edmondson and assigned District Judge Terrell Hodges, although I suppose Judge Birch could have written the majority opinion and dissented the part inserted at the insistence of the other two. The per curiam opens with a summary:
Defendants Theresa L. Kottwitz ["Kottwitz"], Gerard Marchelletta, Sr. ["Senior"], and Gerard Marchelletta, Jr. ["Junior"] appeal their convictions and sentences for tax fraud-related charges. We find the evidence sufficient to support the jury's verdict regarding their conspiracy convictions and that the general good faith jury instruction that was provided by the district court fully encompassed Kottwitz and the Marchellettas' theory of defense on this charge. We find, however, that the district court erred in refusing to give Kottwitz's and the Marchellettas' requested special instruction to the jury on their good faith reliance on their accountant's advice. Because the evidence was sufficient for a properly instructed jury to convict on the charges of filing materially false personal income tax returns for 2000 as to Junior and Senior and for evading taxes as to Senior, we vacate and remand for retrial in light of the jury instruction error. Because the evidence was insufficient for a properly instructed jury to convict on the charge of aiding and assisting in the filing of a materially false corporate tax return for 2001, we reverse the convictions of Kottwitz, Junior, and Senior and remand with directions to enter a judgment of acquittal on this count.
1. Conspiracy.

The Per Curiam opinion affirms the sufficiency of the evidence on the conspiracy issue. The analysis is rambling, replete with unfocused glittering generalities and string points and quotations, followed by a a summary conclusion that, well, the evidence was sufficient to present to the jury. For flavor, consider the following:

Friday, August 27, 2010

Larson, Pfaff, Ruble Convictions In KPMG Tax Shelters Case Affirmed (8/27/10)

The Second Circuit issued a Summary Order today affirming the convictions of Larson, Pfaff and Ruble the remnants of the larger KPMG criminal tax prosecution previously gutted in United States v. Stein, 541 F.3d 130 (2d Cir. 2008)(dismissal of 13 defendants because prosecutors improperly forced KPMG to stop paying their attorneys fees). The summary order for the affirmance of the convictions (I call this the Substantive Order) is here and the companion decision regarding Pfaff's bail (I call this the Bail Order), a precedential full opinion, is here.

At the outset, I am surprised, given the public interest in the convictions, that the Court relegated its substantive disposition to a Summary Order. Moreover, the case was the Government's first major initiative in the abusive tax shelter context and there are other similar tax shelter prosecutions and investigations in the pipe line that could be informed by some of the issues presented in the case.  The Second Circuit's Internal Operating Procedure Rule 32.1.1 says: