Friday, October 26, 2012

An Outlier Offshore Account Tax Obstruction Plea (10/26/12)

I have just recently come across the plea agreement in United States v. Robert Edward Cone (SD TX Crim. No. H-11-617), here.  The plea was entered in February; sentencing is set for early next year.  The plea and my personal knowledge of the case (I represented a witness) indicate that, although a foreign account and the Schedule B foreign account question were involved, the case was an outlier to the Government's foreign account initiative.  Hence, I have put the case in spreadsheet with an indication that it is an atypical case.  First the key data and  then I provide a narrative explanation.

Defendant:  Robert Edward Cone
Banks:  Royal Bank of Canada Jersey Islands)
Entities:  Yes (Jomach Limited, a BVI entity)
High Balance:  ? [See below]
FBAR Penalty: ? [See below]
High Balance:  Unknown
Count of Plea:  Tax perjury, Section 7206(1) with 3 year max sentence
Tax Loss:  $282,691 (agreed as "relevant conduct" tax loss because it was a 2001 liability and the plea count of conviction was for 2006)
Restitution: $939,917 (contractual restitution for the year 2001, consisting of the tax, apparently the civil fraud penalty and tax on each).
5K1 Departure Possibility:  No
Court:  SD TX
Judge:  Ewing Werlein (Wikipedia entry here)

Mr. Cone received compensation of $1,000,000 in 2001 which he directed into a foreign trust which deposited the money into Royal Bank of Canada's Jersey Islands branch.  That bank account was held in the name of a BVI company.  The money was thereafter wired into the U.S. for Mr. Cones benefit, directly or indirectly.

Mr. Cone pleaded guilty to tax obstruction with respect to the 2006 year.   The obstruction to which he pled was failing to advise the return preparer about the foreign account and hence reporting a no answer to the Schedule B question.  The admission is:
( 6) Between on or about October 16, 2006 and October 23, 2006, Cone signed and filed with the Internal Revenue Service a federal income tax return in which he falsely stated that he did not at any time during 2005 have an interest in or a signature or other authority over a financial account in a foreign country when he had, in fact, caused two transfers in the approximate amount of $5,000 each to be made from the Jomach Account to an account in the United States during that year. In violation of Title 26, United States Code Section 7212(a).
The gravamen of the case was for the income earned and transferred offshore in 2001.  Apparently, 2006, the for which the plea was made, was an open year for the statute of limitations, but 2001 was not.  Hence, the tax obstruction plea for the conduct 2006.

The restitution is contractual restitution.  Normally, restitution cannot be ordered in Title 26 cases, but contractual restitution can be ordered.  Moreover, normally, restitution is only for the tax involved in the year of conviction, buts restitution was ordered for 2001 even though it was not a year of conviction.  Finally, generally, restitution does not include penalties.  But, of course, this is contractual restitution and, presumably can include any amount the parties agree upon.  It appears that this restitution would be subject to the new automatic assessment provisions discussed on an earlier blog, New Statute for Civil Effect of Restitution in Tax Cases (at Least Title 26 Crimes of Conviction (2/11/11), here.

ADDENDUM 11/1/12:  Because of an inquiry about relevant conduct in the plea agreement and at sentencing, I have posted a new blog entry on relevant conduct:  Relevant Conduct in Tax Cases (11/1/12), here.


  1. The opinion says the gravamen of the case was the unreported income. But the failure to check the appropriate box on Schedule B is mentioned. Would the Sched. B nondisclosure be considered less serious without eh bad facts of $1 million unreported income that flowed through a foreign entity?

  2. Probably. But the prosecution potential is based on a whole lot of facts the Government knows or imagines in the investigation phase. These are distilled into the plea agreement and the resulting PSR which is what the judge considers in imposing sentence.

    Jack Townsend

  3. I really like this blog. That's a long gap between the plea date, Feb 2012, and the sentencing date, early 2013. So we can assume that Mr. Cone has spent 2012 cooperating with government attorneys and that the government's assessment of his cooperation will factor into his sentence.

    May I suggest that you consider 2 additional data points in your case summaries? I think it would be useful to include the date of the indictment and the industry/sector in which the defendant worked.

    The date of the indictment, when considered in light of the date of the plea, can provide an indication of the degree to which the matter was contested by the defendant. We could then look back to see if there is a correlation between sentencing and the length of time that elapsed prior to entry of the plea. Indirectly, the time between indictment and plea can also hint at the defendants' legal expense burden, i.e., typically the longer the case drags on, the greater the expense.

    The industry/sector information would be interesting since it might indicate whether there are patterns to this type of tax crime. For example, several of the initial indictments were brought against people working in yacht construction. I realize that this information is not always readily available, but where it is, it would be good to include it.

  4. Jack

    do you have background on the case as to how a petty amount such as a transfer of $5K was detected by IRS after 5 years of submission of the 2006 return. It would be great to understand the process.

    And if i understand the issue correctly, the defendent agreed to pay the back taxes in spite of SOL running out due to the plea agreement as if he has not agreed, IRS could institute civil fraud and collect the same anyway. By agreeing to pay back taxes, is the defendent seeking leniency. But if that is the case, assuming that the income in 2006 was not as huge as the $1M that was not reported in 2001, the sentencing guidelines would suggest a smaller sentence anyway

  5. I represented a witness in the case but do not know how the IRS discovered the issue. We were involved in another aspect of the case.

    The civil tax statute of limitations was still open for the earlier year. The statute is unlimited in the case of fraud. Only the criminal statute of limitations was closed for that year. By agreeing to restitution, the amount can be assessed immediately under a relatively new statute without having to send a notice of deficiency. And, there is some thought that agreeing to and paying the restitution, a court will give some consideration not specifically called for by the Sentencing Guidelines. Locally, I have heard this called "super restitution" or something similar, but I am not sure exactly how that plays out in a sentencing judge's consideration of the sentence. It can't hurt though.

    As to the tax loss, the parties stipulated to the earlier year tax loss as relevant conduct for sentencing purposes. So the tax loss, if any, for the year will not drive sentencing. Sentencing can include tax losses for relevant conduct whether the relevant conduct years are closed by the criminal statute of limitations or even whether the defendant had been acquitted of the relevant conduct years. (The latter seems counterintuitive, but the jury may have convicted because guilt was not proved beyond a reasonable doubt, but the judge at sentencing can find that the defendant did in fact have a fraudulent tax loss and include that as a factor in sentencing; in this case, of course, the Mr. Cone was not charged for the closed year but he did stipulate to the tax loss as being relevant conduct.)

    Jack Townsend

  6. I have no inside info but would assume that it was not the two $5K transfers that triggered the investigation, but that the investigation was started for other reasons, and the bank transfers were found in the bank records.

  7. Appreciate your reply but there is confusion in my mind on certain aspects
    1. You mention that the criminal statute was closed but civil was open. If criminal statute was closed why would the person be sentenced.
    2. When you state that "parties stipulated to the earlier year tax loss as relevant conduct for sentencing" are you saying that the defendent agreed to this as part of the plea. If so, why would he do that when tax loss for open years would be smaller and lead to a smaller sentence anyway

    3. What is the definition of relevant conduct
    4. If a person is found guilty after SOL has elapsed can he be charged under the relevant conduct statute - would this not defeat the purpose of SOL.

  8. 1. 2006 was an open year for criminal purposes. The gravamen of the overall offense occurred in a year that was closed. But they could and did find some related offense in an open year. The sentencing will be for the open year but will be driven by the closed year. That is a feature of the guidelines.

    This illustrates one of the problems with tax crimes. The taxpayer can do things in later years that can either (1) refresh the statute of limitations that has been closed or would have closed except for the refreshing event or (2) the IRS can find some problem in an open year that, through the relevant conduct concept in the Sentencing Guidelines, can drive the sentence and, from that perspective, open up the statute.

    2. He agreed to the earlier tax loss because, I suspect, the Government required that he do so in order to get a plea. That is usual.

    3. Relevant conduct is uncharged criminal conduct related to or of similar type to the count of conviction. The relevant conduct can be from years outside the statute of limitations and from years for which the defendant was even acquitted of criminal conduct. I will post a new blog entry on relevant conduct in tax cases if you want to pursue it further.

    4. Each count of conviction must be for a year that was open when the indictment or other charging document was filed. Keep in mind that the general tax crimes statute of limitations is 6 years but any number of things can cause the statute to be suspended, so that the 6 years can cover a much longer period than 6 years. Indeed, as I have blogged before the Wartime Statute of Limitations Act may well have suspended the statute for tax crimes and other crimes against the United States.

    Jack Townsend

  9. Under the federal sentencing guidelines, the tax loss determines the sentencing. Would there be different sentences for failing a fraudulent return and failing to file FBAR or would both be covered under the same sentence based on tax loss.

    Also, if there is failure to file (which is a misdemeanor) but there is no tax due, does IRS usually bring about a case. It would not seem so considering that there is nothing to gain financially by putting resources by IRS.

  10. Your first paragraph raises an interesting question. I can't go into the legal possibilities without getting into esoterics of the law and the Sentencing Guidlines. However, the practical answer is that the better answer for those involved is to determine the Guidelines sentence under the tax Guidelines and that is that answer that has been given in the FBAR convictions to date. At least theoretically, if the tax Guidelines did not apply, the indicated sentence could be a lot worse.

    The answer to the question in the second paragraph is no. When the DOJ Tax fires a prosecution bullet, it wants jail time. If there is no tax due (considering also relevant conduct years), then there will be no jail time and no "message" to others in the community.

    Jack Townsend

  11. Does the relevant conduct doctrine extend to FBAR cases also for levying FBAR penalties. So, if there were undisclosed foreign accounts over $10K that required FBAR reporting 6 years ago (SOL has passed) and now there are undisclosed foreign accounts less than 10K which does not require fbar reporting, can the relevant conduct doctrine be applied to levy penalties for FBAR that occured 6 years ago and hence barred by SOL

    Given the tax loss was $300K, the violation zone is 18 and add a couple of points for sophisticated means etc, it still does not reach the 28 level which suggests 80+ months of incarceration. How does this math work

  12. As the Government and the Courts apply the Sentencing Guidelines, the path for FBAR sentencing is to work back to the tax Guideline Base Offense Level. So, whether there was a conviction for an FBAR count or for a tax count, it would work back to the tax BOL based on the income tax loss which would not be double counted. Now, perhaps a more subtle issue is whether, in the case of a FBAR count of conviction, the relevant conduct for other years would be included on the reference to the tax Guideline BOL calculation. I think it would but I have just not put any research into that. In other words, I think that the BOL would be the same under the FBAR count of conviction or under the tax count of conviction. I think that is the way it was presented to defendants offered the option of either pleading to an FBAR count or a tax count -- the Guidelines calculation would be the same in any event with the consequence that the sentence would likely be the same in any event. Since the tax Guidelines BOL would clearly include the tax relevant conduct from other years, I presume that the FBAR BOL (i.e., the tax by reference) would be the same. But that is not a definitive answer.

    Jack Townsend

  13. Maybe i was not clear in my question. I understand that the BOL will be used for sentencing that includes relevant conduct for i) either tax count or ii) fbar count for the TAX loss.

    My question is on the FBAR penalty - if an undisclosed foreign account had a balance of more than $10K more than 6 years ago, and during the last 6 years the balance was LESS than $10K thus not requiring FBAR compliance, but was not reported. Now, since the same account was continued forward, can the IRS claim relevant conduct to impose a 50% FBAR penalty (even though 6 years have elapsed for FBAR penalty) which is usually the case in FBAR cases.

    So if the SOL for FBAR has elapsed, can the IRS impose tax loss + FBAR penalty of 50% citing relevant conduct on part of FBAR even though SOL has elapsed but minor account balances less than 10K continued for last 6 years and were not disclosed.

  14. I think you are mixing the concepts. If there is no FBAR noncompliance in an open year (because foreign accounts are less than $10K) and the taxpayer is prosecuted for not reporting income from the foreign account (it is hard for me to imagine that there would be such a prosecution because the annual income on less than $10,000 would not be that great, but I will make the assumption). In that case, the Guidelines would permit relevant conduct tax loss from years beyond income tax criminal statute of limitations (6 years) to be considered. Since that tax loss is being considered under normal criminal tax relevant conduct, there is no reason to consider any potential FBAR violation that would then get back to the tax loss already being considered.

    Now, the FBAR penalty is a civil penalty, not a criminal penalty. So, an income tax conviction as assumed here would not justify an FBAR penalty in any year except as part of a plea bargain, the defendant agreed to pay the penalty. But I don't think the Government would insist upon a penalty that is closed for an FBAR penalty assessment.

    I still may be missing the point, but to the extent that I understood the point, I have tried to answer it.

    Keep restating your question if the answer does not address your point.

    Jack Townsend

  15. It does answer my question Jack. thanks a bunch.

    What i was trying to ascertain is that under the revelant conduct doctrine, IRS can claim back taxes for closed years, but it cannot levy FBAR penalty for closed years, if the FBAR penalty does not apply for open years (as balance less than 10K) on the same account under the same doctrine. Your response clarifies that it is not the case.

    you also mention an interesting point about prosecution not likely for balances less or around 10K. Other things being clean, what has been your experience as to the minimum threshold where prosecution is initiated - in your legal experience what is the minimum amount you have seen prosecution for both for foreign and domestic sources of income. Of course it depends on facts, but a back of the envelope estimate or range would be great.

  16. My personal experience has involved amounts well in excess of $25,000 per year for multiple years. Actually, though many years ago, I had one that dipped below that, but that was a fluke.

    I don't know that there is a floor. At one time many years ago, I believe that there was some form of confidential indication within the bowels of the IRS that at least $3,000 per year for multiple years would be required barring unusual circumstances. With inflation, if there is even such a number now, I presume that it would be perhaps in excess of $5,000 or even $10,000. But, there is always the caveat that unusual circumstances might trigger a prosecution for a lower amount. For example, some mass tax protestor movement appealing to smaller taxpayers might prompt the IRS and DOJ to prosecute to set an example that would be highly touted among that audience. Or, if the taxpayer did some particularly bad things -- outright lying to the agent or affirmatively obstructing an investigation, a smaller case might be prosecuted.

    Jack Townsend

  17. I am assuming that the numbers of $25K, $3K and $10K refer to tax and NOT income. I was able to dig up some old website.

    1. The litigation guideline memorandum from 1996 states that prosecution (subject to exceptions) only for tax amounts greater than $2,500 per year for atleast 3 years. These are based on 1996, so 17 years later i would think the amounts would be significantly higher say $10K atleast. Even if that amount is $5K it correlates with Nina Olsens comments that anyone below this threshold should not pay FBAR penalty.
    2. If anyone can share if they have the latest guidelines it would be great for everyone's benefit.
    3. One another blog here mentions that $5.5B was collected from 38K people which is $145K per person. if you look at the convictions sheet that Jack prepared, the average balance is $7.1 million suggesting an FBAR penalty of $3.5 million, plus tax, restitution etc. Multiply that by 100 cases in Jacks sheet, you are at 350 million, which suggests there are a lot of minnows and not a lot of whales that IRS has netted - this to me suggests that the program is a failure and a deliberate attempt to inflict pain on "small people" rather than a genuine attempt to stop tax evasion. Maybe US should move to residential or even better source based taxation (as followed in Singapore). Source based is where income from US is taxed in US, all other income is not taxed in US.

    4. Also, Jack you mentioned in one of the responses to someone that SOL may be tolled due to wartime provisions. Do these provision apply only to tax or to FBAR penalty also.


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