OVDP 2009 FAQ 35 (5/30/11)

This blog will open a discussion of the IRS application of FAQ 35 of OVDP 2009. I received comments on this subject with respect to the other blog entries and thought it was time to devote a blog entry to the subject so that comments can be more easily located. The issue is nicely addressed in Charles P. Rettig and Kathryn Keneally, The Last, Best Chance to Disclose Foreign Financial Accounts and Assets—The 2011 Offshore Voluntary Disclosure Program and Beyond!, Journal of Tax Practice and Procedure 33, 43-44 (Feb.-March 2011)

In practice, FAQ 35 of the 2009 OVDP provided an opportunity to explain unique circumstances supporting an offshore penalty resolution different that as specified in the 2009 OVDP. Specifically,

Voluntary disclosure examiners do not have discretion to settle cases for amounts less than what is properly due and owing. These examiners will compare the 20 percent offshore penalty to the total penalties that would otherwise apply to a particular taxpayer. Under no circumstances will a taxpayer be required to pay a penalty greater than what he would otherwise be liable for under existing statutes. If the taxpayer disagrees with the IRS’s determination, as set forth in the closing agreement, the taxpayer may request that the case be referred for a standard examination of all relevant years and issues. At the conclusion of this examination, all applicable penalties, including information return penalties and FBAR penalties, will be imposed. If, after the standard examination is concluded the case is closed unagreed, the taxpayer will have recourse to Appeals.

John Doe Summonses & Statutes Of Limitations (5/27/11)

This week, a district court denied an IRS request for an order authorizing issuance of a John Doe Summons.  Readers will recall that Section 7609(f) permits the IRS to issue John Doe Summonses seeking tax related information and documents about unknown taxpayers. These taxpayers are unknown, so the IRS cannot give notice to the taxpayers who can then contest the summons. So, Congress required that a federal district judge approve the issuance of the summons.

The IRS sought the court order authorizing it to serve a John Doe summons to the California Board of Equalization for certain a certain discrete record set that would help the IRS identify persons making gift transfers to non-spouse related parties which, the IRS imagined, might have compliance issues with the gift tax. I won't get into the details of the focus of the IRS's interest, since the principal focus would be civil compliance initiatives. The judge refused to authorize the summons, finding that the IRS had not shown that the information and documents were not otherwise reasonably available. Further, although dismissing the motion for authorization without prejudice on the basis stated, the Court cautioned that, if the IRS were to repackage the motion, the court had some serious concerns about whether the IRS could otherwise qualify.  The opinion is here.

Tax Obstruction Crimes -- Section 7212 and Klein Conspiracy (5/26/11)

Today, I pick up a thought I threw out in a comment in my blog entry titled "Jury speaks in the Daugerdas Case -- Guilty! (5/24/11)" regarding the overlapping tax obstruction under Section 7212 and the Klein conspiracy crimes and convictions. Here are Judge Pauley's instructions on these crimes in Daugerdas. I present the tax obstruction charge first, although it was presented second in the charge to the jury:

Tax Obstruction Charge (Section 7212)

Counts 20 and 21: Corruptly Endeavoring to Obstruct and Impede the Functions of the IRS

Count 20 of the Indictment charges that, from in or about 1994 to in or about October 2005, defendants Guerin, Field, Brubaker, and Parse corruptly obstructed and impeded, and endeavored to obstruct and impede, the due administration of the Internal Revenue Laws.

Count 21 charges that, from in or about 1994 to in or about October 2005, defendant Daugerdas corruptly obstructed and impeded, and endeavored to obstruct and impede, the due administration of the Internal Revenue Laws.

Jury speaks in the Daugerdas Case -- Guilty! (5/24/11)

I have blogged previously on various aspects of the Daugerdas trial. See here. The jury has just spoken. Guilty. I link below to some of the early articles from the web. The pundits will speak and this is just a preliminary and limited report.  For more information, see the articles linked below.

Update 5/25/11 9:50 AM:
From the USAO SD NY Press Release (setting aside the puffing):

DAUGERDAS, 60, of Wilmette, Illinois; GUERIN, 50, of Elmhurst, Illinois; and FIELD, 53, of Naples, Florida were each convicted of conspiring to defraud the IRS and to evade taxes, and of corruptly endeavoring to obstruct and impede the internal revenue laws. The defendants were also convicted on multiple counts of tax evasion relating to the use of various tax shelters for specified clients, and of mail fraud. DAUGERDAS also was convicted of tax evasion based on his use of fraudulent tax shelters to eliminate or reduce his personal income tax liabilities between 1999 and 2001. PARSE 49, of Elmhurst, Illinois, was found guilty of mail fraud and obstructing internal revenue laws.

On the conspiracy charge, each defendant faces a maximum penalty of 5 years in prison; 3 years' supervised release; a fine of the greatest of $250,000 or twice the gross gain to the defendant or twice the gross loss to the IRS; and restitution. On the mail fraud charge, each defendant faces a maximum penalty of 20 years in prison. Each count of tax evasion carries a maximum penalty of 5 years in prison; 3 years' supervised release; a fine of the greatest of $250,000 or twice the gross gain to the defendant or twice the gross loss to the IRS; and costs of prosecution. Each defendant also faces a maximum penalty of 3 years in prison; 1 year supervised release; and a fine of the greatest of $250,000 or twice the gross gain to the defendant or twice the gross loss to the IRS on the charge of corruptly endeavoring to obstruct and impede internal revenue laws.

Another UBS Client is Sentenced - 1 Yr Home Detention (5/24/11)

Taxpayer: Harry Abrahamsen
Banks : UBS AG
Entities: Yes
Guilt: By Plea Agreement - FBAR violation (one count)
Incarceration (in months): 0
Home Detention: 1 year
Probation: 3 years (apparently including the home detention)
FBAR penalty: $300,000 +
Fine: ?
Court: D NJ
Judge: Denis Cavanaugh
Age at sentencing: 69

Articles:
USAO D NJ Press Release

His daughter, Lucille Abrahamsen Jackson, was sentenced yesterday.  See blog on her sentencing here.

Supreme Court to Decide Whether Tax Crimes Other Than Tax Evasion Are Aggravated Felonies Under Immigration Law (5/24/11)

On May 23, 2011, the Supreme Court granted certiorari in Kawashima v. Holder, 615 F.3d 1043 (9th Cir. 2010) about which I have previously blogged here. The question presented is:

Whether, in direct conflict with the Third Circuit, the Ninth Circuit erred in holding that Petitioners' convictions of filing, and aiding and abetting in filing, a false statement on a corporate tax return in violation of 26 U.S.C. §§ 7206(1) and (2) were aggravated felonies involving fraud and deceit under 8 U.S.C. § 1101(a)(43)(M)(i), and Petitioners were therefore removable.

The following discussion of the issue is from my Federal Tax Crimes book:

Immigration status may be affected by conviction of an “aggravated felony.” Conviction of an aggravated felony will require deportation. An aggravated felony is defined to include an offense that:

(i) involves fraud or deceit in which the loss to the victim or victims exceeds $10,000; or

(ii) is described in § 7201 of the Internal Revenue Code of 1986 (related to tax evasion) in which the revenue loss to the Government exceeds $10,000; . . . n1

Another UBS Client is Sentenced to Probation (5/23/11)

Taxpayer: Lucille Abrahamsen Jackson
Banks : UBS AG
Entities: Yes
Guilt: By Plea Agreement - Tax Perjury (one count)
Incarceration (in months): 0
Probation: 1 year
FBAR penalty: $379,688
Fine: ?
Court: D NJ
Judge: Denis Cavanaugh
Age at sentencing: ?

Articles:
USAO D NJ Press Release

To OVDI or Not to OVDI - That is the Question (Of Quiet Disclosures and Doing Nothing) (5/23/11)

We have had a lot of discussion in the threads of other topics discussing some of the rough edges in the OVDI 2011 initiative (and its predecessor OVDP 2009 initiative).  The alternatives to participating are (i) quiet disclosure for some number of years or (ii) do nothing.  In either event, the U.S. account owner and signatories will have to comply in the future (include the income and answer the FBAR question on the 1040s and file the FBARs).  The question is, with those alternatives, should a taxpayer OVDI or not?  While each specific case is dependent upon the unique facts involved, the question I would like readers to address in comments is the issues the taxpayer and the practitioner should address in making the decision whether to OVDI.  To start that discussion, I quote the following from Charles P. Rettig and Kathryn Keneally, The Last, Best Chance to Disclose Foreign Financial Accounts and Assets—The 2011 Offshore Voluntary Disclosure Program and Beyond!, Journal of Tax Practice and Procedure 33 (Feb.-March 2011):

There are many considerations before a taxpayer should determine whether to participate in the 2011 OVDI. Is the taxpayer a realistic candidate for a criminal prosecution referral by the IRS or prosecution by the Department of Justice? (If so, the determination to participate should be simple and quick). Can that prospect somehow be reduced or eliminated by filing amended or delinquent returns and FBARs in lieu of a direct participation in the OVDI? (and what would be the potentially applicable penalties upon a examination of such returns and FBARs?). Could the government carry the burden of demonstrating that the taxpayer “willfully” violated the FBAR filing requirements? Since the OVDI asserts an offshore penalty based on foreign financial accounts and asset valuations, would the actual offshore penalty determination somehow be less outside the OVDI if limited to financial accounts? Will the government pursue noncompliant taxpayers through the required judicial process following assessment of an FBAR penalty? n9 Might the FBAR related mitigation guidelines set forth in the Internal Revenue Manual (IRM) somehow benefit the taxpayer outside the framework of the 2011 OVDI? Do these mitigation guidelines have any continued viability? How will various of the FAQs under the 2011 OVDI be interpreted in specific taxpayer situations?

OVDI 2011 FAQ 52 5% In Lieu of Penalty Experience (5/20/11)

FAQ 52 of the 2011 OVDI provides a 5% in lieu of penalty under the following conditions:

1. Taxpayers who meet all four of the following conditions: (a) did not open or cause the account to be opened (unless the bank required that a new account be opened, rather than allowing a change in ownership of an existing account, upon the death of the owner of the account); (b) have exercised minimal, infrequent contact with the account, for example, to request the account balance, or update accountholder information such as a change in address, contact person, or email address; (c) have, except for a withdrawal closing the account and transferring the funds to an account in the United States not withdrawn more than $1,000 from the account in any year covered by the voluntary disclosure; and (d) can establish that all applicable U.S. taxes have been paid on funds deposited to the account (only account earnings have escaped U.S. taxation). For funds deposited before January 1, 1991, if no information is available to establish whether such funds were appropriately taxed, it will be presumed that they were.

2. Taxpayers who are foreign residents and who were unaware they were U.S. citizens.

New Policy on Comment Moderation (5/20/11)

Beginning yesterday, I have adopted a new policy on comment moderation.  I have always moderated comments on this blog to prevent inappropriate comments.  I have not moderated for relevancy of the comments to the blog entry involved.  The result is that the comments sometime veered into issues that were not relevant to the blog entry involved.  I have decided to restrict comments to comments that are relevant to the particular blog entry.  There are several reasons for this.  First, it is distracting to readers who usually read a blog entry and its comments because of the topic of the blog entry rather than off topic diversions of other readers. Second, as best I understand how the search feature works in this blog, it picks up only the blog entry itself and not the comments.  Thus, off topic comments will be orphaned unless appended to a relevant blog entry.  Third, and related, by appending comments to blog entries for which the comments are relevant, the comments can be most useful to all readers and are likely to draw more useful responding comment.

A Botched Foreign Account Quiet Disclosure Draws Criminal Charges (5/19/11)

The U.S. Attorney for Masschusetts filed an information against Michael F. Schiavo. The information is here. The gravamen of the misdeed recounted in the information is that Mr. Schaivo attempted a quiet disclosure for his foreign account but that, in that attempted quiet disclosure, he was less than truthful and complete. But, the information seems to say more than that. Readers can analyze the complete information at their leisure. I shall just cut and paste some of the key paragraphs that I think are relevant to professionals and students interested in this subject.

2. At all times material to this Information, HSBC Bank Bermuda Limited ("HSBC Bank Bermuda") (formerly The Bank of Bermuda, Ltd.) was a Bermuda bank headquartered in Hamilton, Bermuda. Beginning in at least in or about 2003 and continuing to at least 2008, Schiavo maintained an account at HSBC Bank Bermuda in which the balance ranged from approximately $65,000 to $150,000.

Be Careful When Using Pattern Jury Instructions -- a Tax Evasion Example (5/17/11)

In my Federal Tax Crimes book, I advise readers that pattern jury instructions for the Circuit in which a case is tried are a good beginning point for (i) understanding the elements of tax and tax related crimes and (ii) fashioning proposed instructions in a criminal tax case. However, I do caution that pattern jury instructions can be wrong or misfocused. Incident to grading examinations in the class on Tax Fraud class that I co-teach at the University of Houston Law School, I have just discovered an instance of that type of problem in the Fifth Circuit pattern jury instructions for tax evasion (which are quoted in my Federal Tax Crimes book and in the LEXIS-NEXIS Tax Crimes book). This particular error was mine (originating in an earlier version of my Federal Tax Crimes book and being uncritically brought forward), so this is my mea culpa or errata for these books; corrections will appear in the next editions. But here I will present the Fifth Circuit Pattern Instruction and also present a correct instruction from the patterned from Judge Pauley's charges to the jury in the ongoing Daugerdas case.

First the Fifth Circuit Pattern Instruction:

Fourth Circuit Speaks Again on Conscious Avoidance / Willful Blindness (5/12/11)

In United States v. Poole, 640 F.3d 114 (4th Cir. 2011), the court addressed the concept of "willful blindness," also called by similar names, such as conscious avoidance, deliberate ignorance, etc. For prior blogs on the concept, see here. I start with basic concept of willfulness.

Conviction of most tax crimes, including the Section 7206(1) aiding and assisting involved in Poole, requires that the Government prove that the defendant acted willfully. Willfulness in this context is the “voluntary, intentional violation of a known legal duty.” United States v. Pomponio, 429 U.S. 10, 13 (1976).  (This statement of willfulness is sometimes referred to as Cheek willfulness because the Supreme Court reiterated the standard in Cheek v. United States, 498 U.S. 192 (1991).  In Bryan v. United States, 524 U.S. 184 (1998), the Court said that this meaning of willfulness requires that the "Government prove that the defendant acted with knowledge that his conduct was unlawful” (quoting Ratzlaf v. United States, 510 U.S. 135, 137 (1994)). (Bryan also held "In certain cases involving willful violations of the tax laws, we have concluded that the jury must find that the defendant was aware of the specific provision of the tax code that he was charged with violating" (citing Cheek), but that formulation was probably overexuberance for the concept of willfulness; I'll just stick here with intentional violation of a known legal duty as the test.)

Court Blurs Analysis of the Fifth Amendment and Document Production (5/12/11)

In United States v. Nugyen (SD TX 5/5/11), the court considered the Government's petition to enforce IRS summonses. The individuals asserted blanket claims of Fifth Amendment privilege to answer questions and produce documents. In its analysis, the court somehow got off track with respect to the document production.

1. Since Hubbell and indeed its predecessor Fisher, there has been no Fifth Amendment privilege for the contents of documents. The documents were not produced under compulsion and hence any "testimony" in them is not subject to the privilege.  The Fifth Amendment privilege for compulsory production of documents arises from testimony inherent in the act of producing documents under compulsion. (This is often called the Act of Production doctrine.)  Testimony inherent in the act of production can include the existence and possession of the documents, the witnesses' mental acts of having to identify and cull documents identified in a generalized and overbroad summons, authenticity, etc.

Judge Pauley Continues to Impress - the Conscious Avoidance Instruction (5/13/11)

I have given Judge Pauley kudos in his distillation of the issues the jury should resolve in the context of tax evasion and the prosecutors' "various theories" to slam the defendants into the slammer even where the gravamen of the case -- tax evasion -- would not support their guilt.  I write again on his rejection of the proscutors' attempt to find another way to confuse the jury into a guilty verdict that might not be obtained with a clear focus on the defendants' criminal culpability in the Daugerdas case. 

The Government frequently trots out the conscious avoidance instruction (also known as the ostrich instruction, the deliberate ignorance instruction, and so forth) as yet another way the jury can find the defendant(s) guilty where the Government has not proved that the defendant(s) intentionally violated a known legal duty.   I have previously written on this subject here.  I quote judge Posner in those previous blogs for how the instruction can be misleading.  Here is what Judge Pauley had to say about it in the context of the Daugerdas case -- prosecution of tax shelter promoters with innocent taxpayers:

With respect to the conscious avoidance charge, this Court declines to give the jury such a charge. A conscious avoidance charge requires a factual predicate that "the evidence is such that a rational juror may reach the conclusion beyond a reasonable doubt that the defendant was aware of a high probability of the fact in dispute and consciously avoided confirming that fact." United States v. Ferranini, 219 F.3d 145 at 155 (2d Cir. 2000).

Blogger Server Downtime and Posts Lost (Hopefully Temporarily) (5/13/11)

Readers:

Blogger, the Blog provider, had downtime over the last 24 hours. You may have noticed that. It appears now to be up and running, except that the two latest blogs have not reappeared. Those blogs are:

5/12/2011 10:53 AM Court Blurs Analysis of the Fifth Amendment and Document Production
5/12/2011 12:16 PM Fourth Circuit Speaks Again on Conscious Avoidance / Willful Blindness

If these blogs do not reappear in the next day or so, I will repost them. I have earlier drafts of them that may not be as polished as the final that was posted and is now missing, so maybe I will find time to polish them the drafts. Please bear with me.

Thanks,

Jack Townsend

Even More on Principals, Accomplices, Causers and Pinkerton Conspirators - the Daugerdas Case (5/10/11)

I have previously written on derivative criminal liability for the enablers in the tax shelter game (lawyers, CPAs, financial wizards). See here. I have just today read the transcript for the instruction conference on 5/5/11 in the Daugerdas criminal case.  Daugerdas involved the same basic pattern as the Larson and Coplan cases (previously discussed here and here). That pattern is the prosecution of the enablers but not the taxpayers (or taxpayer advisors), with even a concession that for purposes of the submission to the jury the taxpayers are not guilty of the crime of evasion. In these cases, the prosecutors trot out several redundant or just not applicable theories of liability as if they were different than criminal liability for the underlying criminal offense of tax evasion.  They are not.

Judge Pauley, the trial judge in Daugerdas, gets it. My bullet point summary of the charging conference is: (i) the prosecutors may have abandoned 2(a) accomplice liability, (ii) Judge Pauley wants to conflate 2(b) causer liability directly into the substantive offense, and (iii) Judge Pauley is not enamored with Pinkerton liability. Judge Pauley defaults to the real issue -- either these defendants are guilty as direct principals of tax evasion or they are not guilty of tax evasion at all (regardless of what theory is used).

An Outlier Foreign Bank Account Sentencing (5/10/11)

I recount below the key objective facts in the most recent sentencing, but caution that this sentencing is outside the mainstream for the current initiative -- i.e., more or less ordinary high net worth U.S. tax cheats who have legal source income stashed in overseas banks. The defendant in this case, one Arthur Allen Ferdig, operated a Ponzi Scheme through Tradex. The plea agreement is for the tax offense only but appears animated chiefly by his nontax skullduggery.  The plea agreement describes the nature of his tax offense as:

NATURE OF THE OFFENSE

4. Defendant understands that for defendant to be guilty of attempting to evade and defeat income tax, in violation of Title United States Code, Section 7201, defendant must have willfully attempted to evade or defeat the assessment and payment of a tax due and owing with respect to income received by defendant during the year 2002 by, among other things, committing an affirmative act of evasion. Defendant admits that during the year 2002, defendant knowingly received income from Tradex, a business that defendant operated and failed to report that income. Defendant admits that his failure to report income resulted in a tax due and owing to the Internal Revenue Service. Defendant acted with the specific intent to violate the law. Defendant admits that defendant is, in fact, guilty of this offense as described in the first superseding information.

The Net Worth Method and Negating Nontaxable Sources (5/3/11)

I have just re-read United States v. Fox, 2010 U.S. App. LEXIS 21386 (2010), a nonprecedential decision. (I know, one should not re-read or cite nonprecedential cases; they should just lapse into oblivion.)  But I did.

In that case, the defendant was convicted of five counts of tax evasion. The Government used the net worth method of proof. The net worth method requires that the Government prove opening and closing net worth and then account for the difference in the intervening accounting periods. Unlike, in civil cases, though, this accounting does not need to be a precise exercise because, for tax evasion, all the Government need show is some -- perhaps some substantial -- tax evaded without any need for establishing a precise or even an estimated amount of the total tax evaded. And the Government must also show some likely source of taxable income or at least negate nontaxable income. Even though this is a nonprecedential decision, I wonder whether the readers think this is an odd paragraph (case citations omitted):