Friday, August 16, 2013

Simon's Last Hurrah / Fizzle? (8/16/13)

I have posted before on the continuing saga of James Simon, "Certified Public Accountant, a professor of accounting, and an entrepreneur," who was convicted of "filing false income tax returns, failing to file reports of foreign bank accounts, mail fraud and financial aid fraud."  Yesterday, the Seventh Circuit rejected his appeal, thus affirming his convictions.  United States v. Simon, 727 F.3d 682 (7th Cir. 2013), here.  Simon was always the atypical case because of the "other crimes" involved and the egregious fact pattern.  So I am not sure what lessons it teaches except as a variation of the old saying, "Bulls make money, bears make money, pigs get slaughtered."

You get the flavor from the Seventh Circuit's summary:
For tax years 2003 through 2006, the Simon family received approximately $1.8 million from JAS Partners, Elekta, JS Elekta, Ichua and William R. Simon Farms, Inc., most of this recorded as loans in Simon's personal financial records. Simon and his family spent approximately $1.7 million during this same period of time. Yet Simon paid just $328 in income taxes for 2005, and claimed refunds for the other three years, at the same time pleading poverty to financial aid programs in order to gain need-based scholarships for his children at private schools. The government charged Simon with four counts of filing false tax returns, in violation of 26 U.S.C. § 7206(1) and 18 U.S.C. § 2; four counts of failing to file reports related to foreign bank accounts, in violation of 31 U.S.C. §§ 5314, 5322 and 18 U.S.C. § 2; eleven counts of mail fraud, in violation of 18 U.S.C. §§ 1341 and 2; and four counts of financial aid fraud, in violation of 20 U.S.C. § 1097 and 18 U.S.C. § 2.
The Seventh Circuit summarizes the issues Simon raises on appeal:
On appeal, Simon first contends that his convictions for failing to file reports of foreign bank accounts must be reversed because he filed the required documents within the time allotted by extensions granted by the IRS. He characterizes the issue as one of conflicting interpretations of the law by the Treasury Department and the Justice Department. He maintains that the courts should defer to the agency entrusted with implementing the statute at issue, in this case the Treasury Department, and that deferring to Treasury would require reversal of those counts. Second, Simon argues that evidentiary errors and jury instruction errors require reversal of his convictions for filing false tax returns. He complains that the court's rulings in limine prevented him from presenting a valid defense to the charges when he was not allowed to present certain evidence of his basis in JAS Partners. He also challenges the government's second theory underlying the false tax return counts: that the returns were false because Simon failed to check the "yes" box on Schedule B of his return in response to a question regarding whether he had signature authority over foreign bank accounts. If the conviction on the foreign bank reporting counts must be reversed, then the conviction on the false returns must also be reversed, he argues, because it was no more necessary to check the "yes" box revealing his signature authority over foreign accounts than it was to file reports for those accounts. Third, he maintains that the evidentiary errors he asserted on the false return counts led to an error in the jury instructions. Finally, Simon contends that if the false tax return counts are reversed, then he is also entitled to a new trial on the mail fraud and student loan fraud counts, because these convictions were dependent on the validity of the false tax return convictions.
FBAR Violations

The Seventh Circuit addressed the conviction as the failure of a signatory (rather than title or beneficial owner) to file the required FBAR.  Readers will recall that signatories are required to file the FBAR, but the IRS and DOJ rarely proceeds criminally or even civilly against the signatories, preferring to take out their angst on title and beneficial owners.  My recollection of this case is that there was some controversy as to whether Simon was a beneficial owner and had some obligation to file other than just as a signatory, but the Seventh Circuit approaches it as a signatory case.
Simon concedes that he did not file the required FBARs for each calendar year from 2005 through 2007 by June 30 of the next year in each instance.
Once that concession is made, Simon has admitted the crime, at least if he willfully failed to file.  But, his defense was that "the IRS issued guidance in 2009 and 2010 that granted retroactive extensions for filing FBARs for the 2008 and earlier calendar years."  The Seventh Circuit addresses the IRS's FAQs and notices in which the "extensions" were granted.    Basically the IRS's actions are familiar to readers of this blog:  (1) the earliest FAQ 9 said that taxpayers who reported all income and merely failed to file the FBAR should not join OVDP; and (2) the notices gave extensions to file to "U.S. persons having signature authority over, but no financial interest in, a foreign financial account[.]"

Bottom-line, the Court held that, properly read, the IRS pronouncements did not include Simon among the class of persons granted retroactive relief. Key elements of the court's reasoning (one footnote omitted):
First, through the Voluntary Disclosure Practice, taxpayers who failed to report all of their taxable income could come forward to belatedly report the income and resolve their tax liabilities while minimizing their chances of criminal prosecution. FAQs 3 & 4. But persons who were already under civil examination by the IRS were not eligible to participate in the Voluntary Disclosure Practice. FAQ 7. Second, persons who properly reported all of their income and paid all of their taxes but simply failed to timely file their FBARs could file their "delinquent" FBARs, along with a statement explaining why the FBARs were late. In that instance, the IRS stated it would "not impose a penalty for the failure to file the FBARs." FAQ 9. Simon agrees that he was not eligible for the Voluntary Disclosure Practice. He claims it did not apply to him because he reported all of his taxable income; the government asserts he was not eligible because the IRS had already initiated a civil examination. No matter the reason, the government and Simon agree that he was not eligible for a program that, at most, minimized his chances for criminal prosecution. 
Nor was Simon in the second group of taxpayers eligible for administrative relief. As we will discuss below, because he had not "properly reported all [his] taxable income," he was not eligible to avoid penalties (civil or criminal) for filing delinquent FBARs as described in the FAQs and the subsequent Notices that extended the filing dates further. See FAQ 9 ("Q9. I have properly reported all my taxable income but I only recently learned that I should have been filing FBARs ... A9. For taxpayers who reported and paid tax on all their taxable income for prior years but did not file FBARs, you should file the delinquent FBAR reports according to the instructions ... by September 29, 2009"); FAQ 43 ("Taxpayers who reported and paid tax on all their 2008 taxable income but only recently learned of their FBAR filing obligation and have insufficient time to gather the necessary information to complete the FBAR, should file the delinquent FBAR report according to the instructions ... by September 23, 2009"); Notice 2009-62; Notice 2010-23. FAQs 9 and 43, which extend the filing deadline to September 29, 2009, both refer to FBARs filed under the extended deadline as "delinquent" and both apply by their terms only to taxpayers who reported all of their income, paid all of their taxes and "only recently learned" that they should be filing FBARs. Notice 2009-62 specifically references FAQs 9 and 43, and expressly notes that the new filing extension to June 30, 2010 "supplements the filing extension to September 23, 2009, previously provided by the IRS on its public website." Notice 2010-62, in turn, notes that it is extending the relief provided in Notice 2009-62, extending the June 30, 2010 deadline to June 30, 2011. 
Thus, the extensions described in the Notices applied only to the persons described in FAQs 9 and 43, persons who had properly reported all of their income, paid their taxes, and "only recently" learned of their obligations to file FBARs. Moreover, the late-filed FBARs were considered "delinquent" even if filed by the extended deadlines, but the IRS would not impose penalties n9 for FBARs filed within these narrow parameters, so long as the affected taxpayers met the new deadlines and explained why the FBARs were late. As we will discuss below, at trial, the government proved that Simon had not "properly reported" all of his taxable income, and had not paid all of the taxes due, and he concedes that he never filed a statement explaining why his FBARs were late. Thus, as a factual matter, he was not eligible for any of the administrative relief described in the FAQs and the Notices. Indeed, by the time the IRS had decided to extend the FBAR deadlines for otherwise-complaint taxpayers, Simon was already under investigation by the IRS and was not even eligible for the Voluntary Disclosure Practice, a special program that minimized but did not eliminate the risk of criminal prosecution. So even if we assume that the IRS could grant "administrative relief" in a notice that would erase already-incurred criminal liability, it is clear in this instance that the IRS Notices did not extend that relief to taxpayers like Simon who had not reported all of their taxable income, had not paid all of their taxes and had not filed statements explaining why their FBARs were delinquent.
   n9 The IRS is empowered only to levy civil penalties, of course. Only the Justice Department may pursue criminal charges, and generally does so after the IRS has investigated a taxpayer and referred the case to the Justice Department. See 31 U.S.C. § 5321 (setting forth the power of the Secretary of the Treasury to impose civil fines for certain violations of the tax code); 31 U.S.C. § 5322 (setting forth criminal penalties for violations of the tax code); FAQ 4 ("The Voluntary Disclosure Practice is a longstanding practice of IRS Criminal Investigation of taking timely, accurate, and complete voluntary  [*24] disclosures into account in deciding whether to recommend to the Department of Justice that a taxpayer be criminally prosecuted. It enables noncompliant taxpayers to resolve their tax liabilities and minimize their chances of criminal prosecution. When a taxpayer truthfully, timely, and completely complies with all provisions of the voluntary disclosure practice, the IRS will not recommend criminal prosecution to the Department of Justice.").
The Government argued alternatively that Simon should lose because, even if arguably within the scope of the relief in the IRS pronouncements, the IRS had no authority to grant relief from criminal prosecution.  The Court declined to address that argument, saying:  "We need not address the thorny issue of whether an IRS Notice can retroactively wipe out criminal liability for an already completed crime."  Now, that would be a meaty issue to address.  Perhaps if I find time (doubtful), I will pull the Government brief to see what it said about that issue.

Tax Perjury Violations
Simon was charged with four counts of filing false tax returns, in violation of 26 U.S.C. § 7206(1).  The government sought to prove that the returns were false in two respects. First, Simon failed to indicate on Schedule B that he had access to foreign bank accounts. Second, he failed to report all of his income. On this second theory, Simon sought to introduce evidence that any money he received from JAS Partners and the other business entities was not taxable because it was loaned to him by those entities and he was obliged to repay it. If the funds could not be legally characterized as loans, he wished to argue in the alternative that the money he withdrew from JAS Partners did not exceed his basis in the partnership, and thus the funds were non-taxable partnership distributions.
I won't even try to discuss the Seventh Circuit's discussion of this issue.  I find it incredibly confusing.   Perhaps the key point Simon wanted was to establish that the income allegedly underreported was not income because it represented distributions from a partnership that was not in excess of his partnership interest basis.  The legal proposition that distributions that do not exceed basis are not taxable is solid.  But, as recounted by the Seventh Circuit, the trial level discussions of the issue were confused.  But, the Seventh Circuit concludes,
In reviewing the written and oral exchanges at trial surrounding this issue, it is apparent that the district court (against all odds, given the manner in which it was argued) also understood this general legal proposition but simply did not agree that the evidence Simon sought to introduce was relevant to demonstrating his adjusted basis in the partnership.
The Seventh Circuit then noted that, even if the taxpayer should have been able to present the evidence that the distributions were not taxable on this theory, he still had other income and, moreover, had falsely answered the schedule B foreign account question (which alone would be sufficient for a taxpayer perjury violation).

Finally, just a curiosity to me because of my interest in 18 USC 2 (aiding and abetting liability and causer liability), the indictment charged both tax perjury and 18 USC 2 liability.  My hunch is that 18 USC 2 liability is meaningless and that the prosecutors just unthinkingly threw that into the indictment.  If anyone knows why it was included in the indictment, I would appreciate them making a comment or, alternatively, emailing me.  (Fro my thoughts on 18 USC liability, see my article Theories of Criminal Liability for Tax Evasion (5/15/12), on SSRN here.

Rest of the opinion

The rest is a blur to me right now.  At least I don't perceive anything significant enough to attempt a drill-down so that I could make a meaningful presentation here.

JAT Conclusion

Simon is an atypical case, probably of no meaning outside the case.  I think I have spent more time and words on the case in this blog than will be beneficial to most readers (hopefully they have not gotten this far).  But, I have offered what I have to offer.

Prior Posts on the Simon Saga

  • More on the Simon Conviction (Federal Tax Crimes Blog 4/9/11), here.
  • Sentencing Simon (Preliminary and Final) (Federal Tax Crimes Blog 3/18/11), here.
  • Conviction in Foreign Account Plus Case (Federal Tax Crimes Blog 1/16/11), here.
  • Can Signatories Filing FBARs During the Administratively Extended FBAR Filing Period Be Prosecuted for Failure to File? (Federal Tax Crimes Blog 10/16/10), here.

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