Zwerner Rises to Defense Against Multiple FBAR Penalties (9/28/13)

Readers will recall that, in an unexpected development, Treasury assessed and DOJ Tax sued to collect the 50% FBAR penalty against Carl Zwerner for four years.  Up to that point, based on the information publicly available (principally from offshore account plea convictions), Treasury had only assessed a single FBAR of 50% for the highest year.  Thus, it was of considerable interest -- and angst -- to taxpayers and practitioners that Treasury would assert 4 years of FBAR penalties.  I discuss this in my prior blog on the filing of the case.  U.S. Civil Suit for 4 Years of Willful Penalty of 50% Per Year (Federal Tax Crimes Blog 6/14/13), here.

Zwerner has filed his answer, here, which states his side of the story, albeit in summary fashion.

Some key points from the answer:

1.  At the key time  of his reputed voluntary disclosure in 2008, Zwerner was represented by "a tax attorney, Dennis Kleinfeld, of the then reputable law firm Rothstein Rosenfeldt & Adler, P.A. (“RRA”)."  Notice the words "then reputable."  See Wikipedia entry on Scott W. Rothstein here, and paragraph 5 of the compliant quoted below.  Mr. Kleinfield's current law firm bio is here.  I understand that Mr. Kleinfeld referred Zwerner to Mark Nurik who represented Zwerner before the IRS.

2.  Here is a key allegation in the answer (pp. 3 and 4):

4. On February 10, 2009, the RRA lawyers met with IRS Criminal Investigation Division (“CID”) to go over the voluntary disclosure. On February 17, 2009, IRS CID issued a letter stating that no criminal action would take place, but the identity of the client had not been disclosed at the February 10, 2009 meeting. Nurik then advised Zwerner that his voluntary disclosure had occurred and he should file the amended returns for tax years 2004 – 2006. As instructed by his lawyers in March 2009, Zwerner immediately filed the amended tax returns and the FBARs for 2004, 2005, and 2006, and paid the tax and interest owing. 

As narrated, Zwerner's prior tax counsel did not complete the voluntary disclosure by identifying Zwerner to CI and making a full disclousure.  Instead, he told Zwerner to do a quiet disclosure by filing amended returns.  The implication and allegation is that Zwerner had no reason to question whether his tax counsel was giving good advice and that Zwerner reasonably believed and took affirmative objective steps to implement a voluntary disclosure.

Lower Sentences For Offshore Tax Cheats - Role of 5K1 Departures (9/28/13)

Yesterday, I participated in a conference at Villanova University School of Law.  See Villanova Seminar on Selective Issues in Tax Administration (Federal Tax Crimes Blog 8/31/13), here.  I was on a panel on Tax Sentencing along with Kathy Keneally (DOJ Tax AAG), Caroline Ciraolo (practitioner), Peter Hardy (practitioner), Steve Chanenson (Law Prof at Villanova U), Scott Schumacher (Law Prof at University of Washington).

One of the issues we discussed is the lower sentences that seem to prevail in the offshore accounts sentencings over since offshore prosecutions became a priority for DOJ Tax.  For example, the U.S. Sentencing Commission reports that, in fye 2012, from a total of 608 sentencings where tax was the lead charge, the median sentence was 12 months and the average sentence was 17 months.  From the data I have compiled in my spreadsheet for offshore account prosecutions, I show median incarceration of 1.0 months and mean incarceration of 13.7 months.  (The mean figure is driven principally by a small set of outlier cases with high sentences.)  The differences are dramatic.

One cannot explain these taxpayer-favorable results in any theoretical way.  Offshore tax cheating is not intrinsically less culpable than onshore tax cheating.  So what explains the taxpayer favorable results for offshore cheating?

One of the participants at the panel said that 5K1 departures may explain some or much of the taxpayer-friendly results.  5K1 departures, here, are Guidelines sanctioned downward adjustments to the sentence level or sentence based on substantial cooperation with the Government.  It is true that, in the early phases of an initiative this large with multiple bank and enabler targets, the early pleaders (most taxpayers in the offshore initiative), the taxpayers have a lot to offer the Government in terms of prosecuting or threatening to prosecute offshore banks and their enablers.  But, the Government is surely less dependent on criminal targets given the sheer number of voluntary disclosures requiring that the participants name the offshore banks and their enablers and cooperate with Government investigations of those banks and enablers.

The thought was that, because of the phenomenon that is accelerating that information about the banks and enablers is increasingly available from other sources, the Government is going to offer fewer and fewer 5K1 departures.  The suggestion was that, if 5K1 departures account in material part for the taxpayer-friendly sentences, we can expect that sentences will begin to be less taxpayer friendly.

I am not convinced, however, that 5K1 departures really account for the phenomenon.

Jeremy Temken Guest Blog and Article on Sentencing Statistics in Tax Cases (9/27/13)

The Supreme Court's decision in Booker v. United States gave district judges increased discretion in sentencing defendants convicted in federal courts. Statistics recently released by the United States Sentencing Commission demonstrate that judges have been exercising that discretion and sentencing more defendants below the applicable Guidelines ranges. The trend is especially stark in criminal tax cases. In the fiscal year ending September 30, 2012, only 36.9 percent of defendants convicted of tax offenses were sentenced within the applicable Guidelines range, and the vast majority of sentences below the Guidelines were predicated on defense motions with the resulting sentences falling substantially below the Guidelines. While the majority of defendants convicted of tax offenses are now receiving below Guidelines sentences, both the percentage of defendants convicted of tax offenses receiving some jail time and the average period of incarceration imposed have increased in the post-Booker era.

In my recent New York Law Journal article, "The Promise of ‘Booker’ Revisited," I discuss these statistics, as well as data reflecting the IRS's shifting enforcement priorities in this era of limited resources. My article may be viewed here.

Jeremy Temken.

Jeremy's bio is here.

JAT Note:  First, thanks to Jeremy for his excellent article.  I highly recommend it to readers.  Second, this afternoon, I will be participating in a sentencing panel at Villanova University Law School on sentencing in tax cases.  I probably will separately blog on some interesting sentencing matters from the panel and will incorporate some of Jeremy's excellent discussion.  I highly recommend his article to readers.

I do want to quote in full a paragraph from the article that I think are particularly insightful (footnotes omitted):

One way to assess the impact of Booker on tax sentences, is to compare both rates and length of incarceration of the 605 defendants sentenced during fiscal 2012 in cases in which a tax violation was the primary offense charged with those of the 480 tax defendants sentenced during fiscal 2003, the last full year before the Supreme Court’s decision in Blakely v. Washington, which struck down Washington State’s guidelines regime and served as a precursor to Booker. On first blush, the resulting data suggests that tax defendants have not benefited from Booker: the percentage of tax defendants who received some period of incarceration rose from 56.7 percent in 2003 to 64.3 percent in 2012, while the percentage of tax defendants who received probationary sentences with no element of confinement dropped from 21.3 percent in 2003 to 19.5 percent in 2012. Moreover, the median sentence imposed on all defendants convicted of tax offenses increased from eight months in 2003 to 12 months in 2012, and the median sentence imposed on defendants who received some period of incarceration went from 12 months in prison in 2003 to 18 months in prison in 2012.

The key background is that the tax loss levels were lowered for tax crimes, meaning that it took less tax loss to achieve a higher base offense level that, under the Guidelines calculations, means that the offense level for the sentencing table was often higher in 2012 for the same amounts of tax loss.  Yet the sentences were not worse.  That means that the judges are less comfortable that the Guidelines calculations are well calibrated for tax offenses.  This is a large issue and was discussed briefly by Steve Chanensen yesterday at the Villanova Seminar on Selective Issues in Tax Administration (Federal Tax Crimes Blog 8/31/13), here.  He was particularly concerned with whether the fraud Guidelines work and noted the parallel to economic loss for the fraud Guidelines and the tax Guidelines.  Apparently, the Commission is studying whether the role of economic loss should be mitigate to some extent and other relevant factors of culpability given more prominence.  Maybe that will lead to a discussion of the tax Guidelines as the Commission continues its work.  But I think it may be hard to give tax loss such prominence as a driver in tax sentencing if economic loss is lessened for fraud sentencing.

Reader Question on Temporary Fund Deposit and IRS OVDI/P Penalty (9/25/13)

I recently posted on this blog a series of examples that I think highlight some perhaps unintended consequences in the inside (miscellaneous or in lieu of) penalty in OVDI/P, particularly as a result of interpretations that result in inequity.  See Elimination of Duplications and Short Term Deposits in Miscellaneous Penalty Base - FAQ 37 and Extrapolations (Federal Tax Crimes Blog 9/10/13), here.

A reader has asked that I posit a question to fellow readers who hopefully will offer some feedback either by way of comment or by emailing to me (jack@tjtaxlaw.com) and I will forward the email to the person making this request.  The question is:

Have you been able to exclude from the OVDI/P penalty base temporary funds parked in a foreign bank account?  By temporary, I mean that the funds are in the account only for a day or two and did not earn any interest.  The funds came from fully U.S. tax compliant sources and went to a fully U.S. tax compliant destination after the temporary stop in the noncompliant foreign account.

Readers who can and will answer that question, please do so in the ways indicated above.  If possible, the reader asking this question would prefer to be able to establish contact with the readers providing answers (via emailing me), but if the authors desire anonymity, they can still provide meaningful feedback by making comments to this blog.

Taxpayer Judicially Estopped from Refund For Taxes Admitted in Plea Agreement (9/25/13)

In Mirando v. United States, 2013 U.S. Dist. LEXIS 135659 (ND OH 2013), the taxpayer pled guilty to conspiracy and tax evasion.  The plea agreement stated that the parties:

agree and stipulate that the following facts would have been established beyond a reasonable doubt at a trial in this matter: . . . after Mirando's release from the custody of the Bureau of Prisons, the IRS assessed tax, interest and penalties for Mirando's taxes due for the 1995 and 1996 tax years as well as for unpaid liabilities for the 2000 and 2004 tax years. As of June 29, 2007, the total tax liability, including interest and penalties, amounted to $448,776.13.

The taxpayer paid and sued for refund.

As I note in the comments below, there was no basis in the normal judicial doctrines of res judicata and collateral estoppel to prevent the taxpayer from asserting that the tax was less than stipulated in the plea agreement.  And, apparently this plea agreement was not specific that it was intended to contractually bind the taxpayer to the amounts -- even as minimum amounts -- in any subsequent civil tax case.  So something else would have to apply if the taxpayer were going to be bound.

The Court applied judicial estoppel.  Here is the reasoning (footnotes omitted):

The Court finds judicial estoppel prevents Plaintiff Mirando from bringing his refund claim. First, Mirando's position that he is entitled to a refund for overpaid taxes for the years 1995, 1996, and 2000 is directly contrary to his plea agreement in his 2007 criminal case. Recall Mirando's 2007 plea agreement states that the parties: 

agree and stipulate that the following facts would have been established beyond a reasonable doubt at a trial in this matter: . . . after Mirando's release from the custody of the Bureau of Prisons, the IRS assessed tax, interest and penalties for Mirando's taxes due for the 1995 and 1996 tax years as well as for unpaid liabilities for the 2000 and 2004 tax years. As of June 29, 2007, the total tax liability, including interest and penalties, amounted to $448,776.13. 

Because Mirando initialed the page on which the total tax liability was determined and signed the entire document, Mirando specifically agreed he owed $448,776.13. Mirando cannot now dispute these figures and demand a refund from the IRS after the court accepted his plea agreement. 

Moreover if Mirando was allowed to proceed in this action, he would gain an unfair advantage. By pleading guilty to tax evasion and specifically agreeing to a total tax liability of $448,776.13, Mirando avoided the possibility of a longer sentence and the United States agreed not to prosecute Mirando's ex-wife or two children. After obtaining this benefit from the United States, Mirando cannot turn around and sue the United States for a refund. 

Plaintiff Mirando relies on United States v. Hammon [277 F. App'x 560 (6th Cir. 2008)] for its position that his refund claim is not barred by estoppel. In Hammon, the Sixth Circuit held that the defendant was not collaterally or judicially estopped from denying the accuracy of the government's assessments despite pleading guilty to tax evasion and agreeing to pay $2.39 million in restitution. However, the present case can be distinguished from Hammon. In Hammon, the plea agreement only stipulated that the defendant willfully attempted to evade taxes assessed by the government in "the amount of approximately $2.39 million." Since the plea agreement was ambiguous as to whether the defendant admitted that the $2.39 million assessment was correct, the defendant was not estopped from challenging the accuracy of the tax assessment. In contrast, Plaintiff Mirando specifically agreed in his 2007 plea agreement that "beyond a reasonable doubt ... [a]s of June 29, 2007, the total tax liability, including interest and penalties, amounted to $448,776.13." Consequently, Hammon is not controlling, and judicial estoppel prevents Mirando from bringing his refund claim.

AAG DOJ Tax comments on Leaver Lists (9/25/13)

A Tax Notes Today article reports on comments at an ABA Tax Section meeting.  Jaime Arora, ABA Meeting: U.S. Believes Swiss Bank Program Will Reveal Accounts in Other Jurisdictions, 2013 TNT 185-8 (9/14/13).  Key quotes from the article are:

Kathryn Keneally, assistant attorney general for the Justice Department Tax Division, said that banks will be required to provide information about transactions involving the accounts held by U.S. individuals, including transfers at the time an account was closed. "We see this as a way to follow the money for account holders who chose to move their money to other jurisdictions," Keneally said. "This will let us know where the money went and where to look next." 

This requirement also means that Swiss banks will be providing the United States with information about other banks that received transfers from the U.S. accounts, Keneally said. She said those banks should evaluate whether to come forward on their own or to bear the risk of having another bank tell the U.S. government what they have done.

Government Refusal to Grant Immunity Shifts Burden of Proof to IRS in Tax Court Case (9/24/13)

In an Order dated 9/17/13 in AD Investment 2000 Fund LLC v. Commissioner (Dkt Nos. Docket No. 9177-08, 9178-08), here, the Tax Court (Judge Halpern) shifted the burden of proof to the Commissioner because the Government declined to assure the Court that a witness -- allegedly the key witness -- would not be prosecuted.  The term for such assurance is immunity.

The background, highly summarized, is that one James Haber was a promoter of a tax shelter in which the taxpayer, an LLC treated as a partnership, participated.  I cannot say that I am familiar with the particular shelter involved, but I am familiar with Haber's tax shelter activity.  He was long a subject and perhaps a target of the major tax shelter probes and prosecutions in SD NY (those probes, some of which involved Haber shelters, included the KPMG, E&Y and Daugerdas / Jenkens probes beginning in the early to mid-2000s).  For some reason never known to me, Haber was never prosecuted despite the fact that he was at the center of shelters that were prosecuted against others.

The taxpayer in this case argued that Haber was at the center of the shelter and was the key witness.  "Petitioners represent, and respondent does not contradict, that the principal witness having knowledge of these issues is James Haber, the President of The Diversified Group Incorporated. Diversified is the Tax Matters Partner of AD Investment and AD Global.

The Tax Court sustained Haber's assertion of the Fifth Amendment privilege.  The taxpayer urged that it was not fair that the Government's continued threat of prosecution of Haber should prevent it from getting a fair trial based on truth and not failure to meet the normal burden of proof assigned to taxpayers in the Tax Court.

Petitioners represent, and respondent does not contradict, that, in the absence of Mr. Haber's testimony, petitioners will find it difficult or impossible to carry their burden of proof at trial. Petitioners describe Mr. Haber's role in the transactions at issue; they list facts that they will be difficult or impossible to prove without his testimony.

At the Court's suggestion, the IRS attorney asked USAO SDNY "whether the United States Attorney would be willing to grant Mr. Haber immunity in connection with his tax shelter activities."  USAO SDNY responded "that the United States Attorney would not do so 'and would not explain why.'"

The taxpayer urged that, in effect, the  IRS and the USAO for SDNY which refused to grant immunity were agencies of one Government and should not impair the search for truth and the Court's obligation to render justice by forcing on the taxpayer a burden that its own actions prevented it from meeting.

Schedule UTP and Criminal Penalties (9/21/13)

Lee Sheppard has an interesting article on privileges addressing issues in Wells Fargo & Company v. United States, 2013 U.S. Dist. LEXIS 78714 (D MN 2013).  See Lee A. Sheppard, The New Look of Privilege, 140 Tax Notes 1159 (Sept. 16, 2013).  Wells Fargo is a lengthy opinion with extensive analysis of privileges for Uncertain Tax Positions and tax accrual workpapers.  I do not link the opinion here or otherwise discuss it  because it is not relevant to the subject of this blog entry.

Addressing the Schedule UTP, Lee says in the article:

There is no penalty for failure to file a complete or accurate Schedule UTP. Indeed, there is no penalty for failure to file a complete return, as the IRS discovered during the offshore account imbroglio. There is a statutory penalty for failure to file a return at all (section 6651).

I want to address that statement, but first briefly describe the Schedule UTP.  See the IRS website for the Schedule UTP Form 1120, here.  The instructions provide:

Reporting Uncertain Tax Positions on Schedule UTP 

Tax positions to be reported.   

Schedule UTP requires the reporting of each U.S. federal income tax position taken by an applicable corporation on its U.S. federal income tax return for which two conditions are satisfied. 

1. The corporation has taken a tax position on its U.S. federal income tax return for the current tax year or for a prior tax year. 

2. Either the corporation or a related party has recorded a reserve with respect to that tax position for U.S. federal income tax in audited financial statements, or the corporation or related party did not record a reserve for that tax position because the corporation expects to litigate the position. 

A tax position for which a reserve was recorded (or for which no reserve was recorded because of an expectation to litigate) must be reported regardless of whether the audited financial statements are prepared based on U.S. generally accepted accounting principles (GAAP), International Financial Reporting Standards (IFRS), or other country-specific accounting standards, including a modified version of any of the above (for example, modified GAAP).

I want to question Lee's statement quote above.  As to a direct penalty for failure to file a complete or accurate Schedule UTP, this is the jurat for the Form 1120, corporate return:

Yet Another Bullshit Tax Shelter Goes Down; BB&T's Streak on Bullshit Tax Shelters Continues (9/21/13)

In Salem Financial, Inc. v. United States, 112 Fed. Cl. 543, 2013 U.S. Claims LEXIS 1372 (9/20/13), here, the court (Judge Wheeler) rejects yet another bullshit tax shelter wrapped in complexity but no substance.  This one's acronym is STARS ("Structured Trust Advantaged Repackaged Securities") "The acronym "STARS" 

is not particularly descriptive of the transaction at issue. There is no indication of a loan in the acronym and there are no "repackaged securities" in the transaction. The evidence suggests that the concept of STARS began as something different, and only grew to include a loan when marketed to banks in the United States..  

The beginning of the opinion sets the tone (bold face supplied by JAT):

The BB&T STARS transaction was in effect for nearly five years, from August 1, 2002 through April 5, 2007. The purpose of the STARS transaction was to generate large-scale foreign tax credits for a U.S. taxpayer, which could be used to enhance revenue and reduce taxes in the United States. The amount at issue in this case, including the potential assessment of taxpayer penalties, is $772,144,153.45. This amount is comprised of the following: disallowed foreign tax credits ($498,161,951); disallowed interest deductions ($74,551,947.40); the tax paid on "Bx" payments from Barclays to BB&T ($84,033,228.20); disallowed transaction cost deductions ($2,630,125.05); and penalties ($112,766,901.80). 

The complexities of the STARS transaction, including the concept of a Bx payment, will become apparent below. Stripped to its essence, however, STARS called for the U.S. taxpayer, in this case BB&T, to establish a trust containing approximately $6 billion in revenue-producing bank assets. The monthly revenue from the trust was then cycled through a U.K. trustee, an act that served as a basis for U.K. taxation. Although the revenue was immediately returned to BB&T's trust, the assessment of U.K. taxes generated U.K. tax credits that were shared 50/50 between Barclays and BB&T. A $1.5 billion loan from Barclays to BB&T also was part of the structured transaction, although the loan was not necessary to the objective of generating foreign tax credits. The Barclays monthly Bx payment to BB&T represented BB&T's share of the tax credits, and had the effect of reducing the interest cost of BB&T's loan. The main question presented is whether the STARS transaction had any purpose other than to generate tax savings, and if not, whether penalties should be assessed against BB&T.
The parties provided a STARS tax tutorial presentation to the Court on February 13, 2013 before the trial began. The Court held 21 days of trial in Washington, D.C. from March 4 through April 2, 2013. During the trial, the Court heard the testimony of 26 witnesses, of which thirteen were experts. The Court admitted deposition excerpts for eleven additional witnesses, principally from those persons who reside outside the United States or where the parties agreed that a deposition could substitute for relatively brief testimony. The Court received in evidence approximately 1,250 exhibits during the trial. The parties submitted post-trial findings of fact and memoranda of law on June 7, 2013, and post-trial reply briefs on July 3, 2013. The Court heard closing arguments on July 30, 2013.

Knowingly, Willfully and Materiality (9/20/13)

In United States v. Phillips, ___ F.3d ___, 2013 U.S. App. LEXIS 18430 (7th Cir. 2013) (en banc), here, the Seventh Circuit reversed convictions under "18 U.S.C. § 1014, which criminalizes 'knowingly mak[ing] any false statement ... for the purpose of influencing in any way the action of' any specified private and public entity that provides, or regulates the provision of, financial services; among the entities are federally insured banks."  The charged misconduct, as submitted to the jury, was lying on the loan application signed by one of the defendants and submitted to a lender which blatantly exploited so-called "liar's loans" -- stated income loans without regard to whether the income was correctly stated because the loans would then be packaged as securities, thus transferring the risk of default from the nominal lender to unwitting investors.  (This genre of loan was at the center of the financial crisis starting in 2008.)  There is no question that, on an objective level, the information in the loan application the signing defendant signed and submitted to the bank was incorrect.  The defendants wanted to show, however, that based on the information they received from the loan broker, the information requested used terms of art (e.g., the stated income of the applicant could include the income of other persons who will contribute to servicing the loan) and hence they (1) did not make false statements at all and certainly did not knowingly do so for the purpose influencing the loan.  The trial judge excluded the testimony.  The Seventh reversed in an opinion by Judge Posner.

I am going to essentially quote Judge Posner's reasoning in full.  I think it is helpful to focus on the tax crime discussion I include after the quote:

We take up the issue of influencing first, and then the issue of knowing falsehoods. Suppose you're an actress and you habitually subtract three years from your true age because you're worried about movie producers' discriminating against aging actresses. You're 40 but pretend to be 37. You know the bank doesn't care whether you're 40 or 37—you're wealthy and the bank is eager to have you as a customer—but you don't like your true age to appear on any document; a bank employee might read it and discover the lie and post his discovery on Facebook or Twitter, and within hours the whole world would be privy to your secret. You would have made a knowingly false statement on your bank application by listing your age as 37, and rather than just pinning the application to your wall you had submitted it to the bank. Under the district judge's interpretation of section 1014—an erroneous interpretation that warped the trial in this case—you would be guilty of a felony punishable by a prison sentence of up to 30 years and a maximum fine of up to $1,000,000. 

What is true is that if you make a knowingly false statement intending to influence a bank, it's no defense that you didn't succeed in influencing it or even that you couldn't have succeeded. Materiality is not an element of the offense punished by section 1014. United States v. Wells, 519 U.S. 482, 484, 117 S. Ct. 921, 137 L. Ed. 2d 107 (1997); United States v. Lane, 323 F.3d 568, 582-83 (7th Cir. 2003). But it is relevant. If the loan applicant doesn't think his falsehood would influence the bank it is unlikely that in making it he intended to influence the bank; as in our example of the actress, he would have had a different motive. As the Supreme Court explained in Wells, "a statement made 'for the purpose of influencing' a bank will not usually be about something a banker would regard as trivial, and 'it will be relatively rare that the Government will be able to prove that' a false statement 'was ... made with the subjective intent' of influencing a decision unless it could first prove that the statement has 'the natural tendency to influence the decision.' Hence the literal reading of the statute will not normally take the scope of § 1014 beyond the limit that a materiality requirement would impose." United States v. Wells, supra, 519 U.S. at 499 (emphasis added), quoting Kungys v. United States, 485 U.S. 759, 780-81, 108 S. Ct. 1537, 99 L. Ed. 2d 839 (1988).

IRS Loosens Up on U.S. Depositors in Israeli Banks (9/19/13)

Janet Novack, In Reversal, IRS Gives Amnesty To Owners Of Secret Israeli Bank Accounts (Forbes 9/19/13), here.

I just have time to post it for readers to review by going to the link.  I am going into my UH Law Tax Procedure Class and then from there to a book club.  I probably will have time to post something tomorrow.

Atypical Offshore Account Plea for Art Dealer (9/19/13)

I previously reported the charging and arrest of Glafira Rosales.  See links below.  The USAO SDNY has announced her plea agreement.  See press release here. (The press release has a link to the superseding indictment.)  Her case is an outlier case (outlier with respect to those involving only tax crimes including use of offshore banks to facilitate the tax crimes).  Far more extensive criminal activity was charged, with the tax and related FBAR crimes seemingly there for flavor.  Indeed, she pled to so many counts -- 9 in all, with several 20 year counts each -- that it is clear that the Guidelines sentencing range will likely not nearly reach the maximum 99 years permitted by the number of counts (and for that reason, the number of counts may be viewed as immaterial to sentencing; probably one 20-year count would have sufficed for the sentence she is likely to receive, with all other noncharged activity considered anyway as relevant conduct or grouped to produce the needed sentence, with a downward variance likely in any event).

Here are key excerpts of the press release (bold facing added by JAT):

Preet Bharara, the United States Attorney for the Southern District of New York, announced that art dealer GLAFIRA ROSALES pled guilty today in Manhattan federal court to participating in a scheme to sell more than 60 fake works of modern art to two New York art galleries. Her victims paid more than $80 million for the fake works. ROSALES also pled guilty to conspiracy to sell the fake works, conspiracy to commit money laundering, money laundering, and several tax crimes related to the fake art scheme.  

* * * * 

ROSALES was an art dealer who, starting in 1994 and continuing through 2009, sold more than 60 never-before-exhibited and previously unknown works of art (the “Works”) that she claimed were by the hand of some of the most famous artists of the twentieth century, such as Jackson Pollock, Mark Rothko, and Robert Motherwell. She sold the Works to two prominent Manhattan art galleries for approximately $33.2 million. The galleries, in turn, sold the Works to victims of ROSALES’s crime for more than $80 million. 

The Works were fakes created by a painter (the “Painter”) who resided in Queens, New York. ROSALES conspired with her long-time companion, identified as a co-conspirator (“CC-1”) in the superseding Indictment, to procure and sell the Works and to launder the proceeds of the fraud. CC-1 first met and befriended the Painter in Manhattan in the 1980s while the Painter was painting on the street. The Painter, who received formal art training at an art school in New York, created the Works for ROSALES and CC-1 at the Painter’s home in Queens. In some instances, the Painter signed the purported artist’s name to the Works, such as Jackson Pollock, but in other cases, CC-1 applied the false signatures. After ROSALES and CC-1 retrieved the Works from the Painter, CC-1 gave the Works the false patina of age by subjecting the Works to a number of different treatments. 

The provenance that ROSALES supplied for the Works was also false. In selling some of the Works, she purported to represent a particular client who was associated with Switzerland, had inherited the paintings and wanted to sell them, but also wished to remain anonymous (the “Purported Swiss Client”). For the remainder of the paintings, ROSALES purported to represent a Spanish collector (the “Purported Spanish Collector”). She further claimed that a portion of the price paid by the Manhattan galleries would be a commission to her for selling the paintings and that the remainder would be passed along to her clients. In truth and fact, the Purported Swiss Client never existed and the Purported Spanish Collector never actually owned any of the Works.

Whopping FBAR Penalty in Criminal Plea; Beanie Baby Creator Gets Beaned With No Free Pass (9/18/13)

It is reported that Ty Warner (Wikipedia entry here), the mega-wealthy Beanie Baby creator, will plead to tax evasion charges related to offshore bank activity.  The criminal information is here.  The USAO NDILpress release is here.  What caught my eye was his agreement to pay $53.5 million in FBAR penalties, which is the largest FBAR penalty that I am aware of. For an early news report, see Becky Yerak, Ty Warner to pay $53M to settle tax evasion charges (9/18/13), here.  The news report indicates that the amount is the standard 50% of high balance during the relevant time period, but does not state what the relevant time period is.  The only bank account mentioned in the report is $93.6 million, so that apparently is not the high balance for the 50% FBAR penalty.  The $93.6 million was the amount in the UBS account when it was transferred to ZKB..

The press release says, in part:

“The charge alleges that Warner went to great lengths to hide from his accountants and the IRS more than $3.1 million in foreign income generated in a secret Swiss account,” Gary Shapiro, U.S. attorney for the Northern District of Illinois, said in a statement. He failed to pay taxes of $885,300 for calendar year 2002, court documents said. 

“By omitting his UBS income, Warner falsely reported his total income in 2002 was $49.1 million,” according to the charge.

JAT Comment 1:  The Government did get a plea to evasion, a 5 year felony, rather than tax perjury, a 3 year felony, as it was offering earlier in the criminal prosecution side of the overall offshore bank initiative.  Readers will recall that the Government was offering a defendant a plea with one count of FBAR violation (5 years) or 1 count of tax perjury (3 years).  Of course, the courts are sentencing anywhere near the maximum, so it probably is irrelevant in terms of sentencing and, given Mr. Warner's age and wealth, an evasion plea as opposed to the other crimes is not likely to be particularly troubling to him.

JAT Comment 2:  The FBAR penalty is roughly 6 times the taxes evaded for the calendar year 2002 (but there there is the pesky relevant conduct evasion that will play out in sentencing, see below).  The amount evaded for 2002 is 1/6 of his income reported for that year.  The rich are different from you and me.  (Attr. Fitzgerald / Hemingway.)  So, he may have paid originally paid tax of perhaps 1/10 or 1/8 of the income reported.  (That is speculation; perhaps he paid more or less which is not speculation.)

JAT Comment 3:  But then his reported net worth is $2.6 billion, so in terms of real world punishment, well not much.  He is probably more concerned with the public embarrassment than the cost of his behavior.  It would appear that for real punishment of the mega-wealthy a penalty keyed to the net worth should apply (if higher than the normal FBAR penalty; then, depending upon the amount, there could be some real punishment rather than just a nuisance).  Of course, if he gets some serious incarceration period -- which is what the Guidelines will indicate -- then there may be some real punishment.  But, the courts have been notoriously lenient in sentencing, at least for persons not so wealthy as Warner (and is earlier colleague among the mega-rich, Olenicoff).

Relevant Conduct and Acceptance of Responsibility (9/18/13)

In some criminal tax cases, the Sentencing Guidelines calculations are simple.  The Base Offense Level is determined under the tax loss table.  S.G. § 2T1.1, here, and § 2T4.1, here.  If there are specific offense characteristics, under S.G. §2T1.1, they are applied (upward adjustments).  The only other adjustment is often the acceptance of responsibility adjustment in §  3E1.1, here, which is usually the incentive to plead rather than go to trial.  (Note that, because of the relevant conduct inclusion in the tax loss, it is often no incentive to get counts dropped via the plea agreement.)  Usually, in tax cases, the defendant will not be able to qualify for the § 5K1.1, here, downward adjustment for substantial assistance.  So, setting aside § 5K1.1, qualifying for the acceptance of responsibility adjustment is very important, otherwise the defendant might as well go to trial in which, even with low odds, he or she may still win.

In United States v. Workman, 2013 U.S. App. LEXIS 19053 (6th Cir. 2013), here, the defendant pled, securing in the plea agreement the prosecutors commitment to recommending acceptance of responsibility.and requesting a substantial assistance downward departure.  The Court granted the prosecutor's request for a 4 level downward departure, but denied the defendant the acceptance of responsibility downward departure.  The resulting Guideline offense level was 12 which, under the Sentencing Table, here, indicates a guidelines range of 10-16 months .  The Court then varied downward further (presumably under § 3553(a) / Booker) from the Guidelines range and sentenced the defendant to six months in prison.  The defendant objected to denial of acceptance of responsibility which, if he had achieved it, would seemingly have given him a pre-§ 5K1.1 downward departure offense level of 13 (3 level acceptance decrease), which in turn would have given him a post-assistance 4-level downward departure offense level of 9, with an indicated sentencing range of 4-10 months, but in Zone B rather than Zone C.  All of that is to say that the sentencing court gave this defendant a lot of breaks that probably substantially mitigated any effect of the denial of acceptance of responsibility, but still the acceptance of responsibility, if given, might have affected the sentence.

At any rate, focusing on the denial of acceptance of responsibility, what did the defendant do that screwed up that benefit of a plea?  Normally, the required statement of facts and plea allocution will assure that the defendant is accepting responsibility for the charged conduct to which he is pleading.  However, the problem that caused the judge to deny acceptance of responsibility, despite the recommendation of the prosecutor and the Probation Office, was the defendant's waffling on relevant conduct.  Relevant conduct is related criminal conduct outside the count(s) of conviction.  (Inclusion of relevant conduct in the tax loss why dropping counts often achieves no benefit in tax cases.)  The ground rules on the role of relevant conduct role in acceptance of responsibility were stated by the Court of Appeals as follows:

In determining whether a defendant has accepted responsibility, the district court may consider whether the defendant truthfully admits or does not falsely deny "any additional relevant conduct for which the defendant is accountable under § 1B1.3 (Relevant Conduct)." USSG § 3E1.1, comment. (n.1(A)). Although "a defendant is not required to volunteer, or affirmatively admit, relevant conduct beyond the offense of conviction in order to obtain a reduction . . . , a defendant who falsely denies, or frivolously contests, relevant conduct that the court determines to be true has acted in a manner inconsistent with acceptance of responsibility." Id. Because "[t]he sentencing judge is in a unique position to evaluate a defendant's acceptance of responsibility . . . , the determination of the sentencing judge is entitled to great deference on review." USSG § 3E1.1, comment. (n.5); see United States v. Webb, 335 F.3d 534, 538 (6th Cir. 2003).

Is the Spies Element for Evasion (i) Tax Deficiency or (ii) the Criminal Tax Number? (9/17/13)

In United States v. Ervin, 2013 U.S. App. LEXIS 7917 (11th Cir. 2013), here, an unreported per curiam decision, the court of appeals confirmed the defendant's convictions for (i) conspiracy to commit tax evasion (note that it was an offense conspiracy and not the ubiquitous defraud / Klein conspiracy and (ii) tax evasion.  In affirming, the court rejected the defendant's various arguments.  I address here only one -- that "his convictions for tax evasion were unsupported by the evidence and the law."  (Of course, logically, if his conviction for evasion fell, his convictions for conspiracy might also fall, but the court of appeals did not reach that point.)

On the  sufficiency issue, the Court of Appeals first noted the elements of tax evasion:  "(1) willfulness; (2) existence of a tax deficiency; and (3) an affirmative act constituting an evasion or attempted evasion of the tax."  I have highlighted the bone I want to pick.

The court then focused upon whether there was a "tax deficiency."  I think the Court of Appeals was sloppy in stating that element.  The issue is not whether there is a tax deficiency (although even the Supreme Court screws that up as well, see Boulware v. United States, 552 U.S. 421 (2008).  Rather, the issue is whether there is criminal tax due and owing, the actual element of the crime since Spies v. United States, 317 U.S. 492 (1943).  I have just written a draft article for the Villanova symposium here where I address the difference between a deficiency and the tax due and owing element for tax evasion.  The guts of the reasoning is that "tax deficiency" is a term of art that is used in the Code to describe the civil tax liability less taxes paid.  See Section 6211(a), here, stating the "the term 'deficiency' means  * * *."  All tax practitioners know what a deficiency is.  Fewer tax but all criminal tax practitioners know that the criminal number, which is the Spies tax due and owing element for evasion is not necessarily the deficiency; indeed the Spies tax due and owing element can be substantially less than the civil tax deficiency and even less than the tax loss number used for sentencing.  I offer two illustrations from the article:

The tax due that the Government will use to support a tax evasion prosecution is not necessarily the unpaid civil tax due.  To illustrate, assume that, for civil tax purposes, the taxpayer had $100,000 income that he or she failed to report.  Assume that the tax liability on that omitted income is $35,000.  The $100,000 omitted income consists of two items -- $50,000 of embezzlement income which the taxpayer knew was taxable and chose not to report and $50,000 of personal injury income which the Government is satisfied that the taxpayer thought or could have reasonably thought was excludable under § 104 but which for technical reasons is not properly excludable under that section.  In calculating the tax evaded as an element of tax evasion, the Government will compute the tax only on the $50,000 of embezzlement income and will not include the $50,000 of personal injury income.  So, let’s say the tax on $50,000 of embezzlement income is $17,500.  The criminal tax number for establishing tax due and owing in a criminal case is $17,500.  The Government must prove that number beyond a reasonable doubt.

And, I use a more detailed example to dig down into the subleties:

More on Harmless Error (9/17/13)

I recently blogged On Harmless Error (9/9/13), here, in which I linked to Professor Turley's blog titled   Ninth Circuit Reverses Federal Judge Who Ruled That False Statement Of Prosecutor In Closing Argument Was Harmless (Jonathan Turley Blog 9/9/13), here.  There is another nontax case I call to readers attention, United States v. Clay, 720 F.3d 1021 (8th Cir. 2013), here.  

The key parts of the Clay opinion itself  (pp. 1025-6, 1028-1029) (duplicate citations omitted):

For purposes of this analysis, we assume without deciding that the Government used perjured testimony and knew or should have known it was perjured. Clay argues that the district court misapplied the standard for assessing prejudice to the defendant from the use of false testimony. The Supreme Court has established that, for cases under direct review, "a conviction obtained by the knowing use of perjured testimony is fundamentally unfair, and must be set aside if there is any reasonable likelihood that the false testimony could have affected the judgment of the jury." United States v. Agurs, 427 U.S. 97, 103 1976) (footnote omitted). According to Clay, the district court incorrectly assessed "reasonable likelihood" in this case by examining the sufficiency of the evidence in light of the corrected testimony. Cf. Kyles v. Whitley, 514 U.S. 419, 435 (1995) (holding that prejudice for a general Brady withholding violation can be demonstrated "by showing that the favorable evidence could reasonably be taken to put the whole case in such a different light as to undermine confidence in the verdict," even if the evidence taken as a whole might still have  [*1026]  been sufficient to support a conviction). We agree with Clay that the Agurs standard for evaluating the materiality of the Government's knowing use of perjured testimony is less onerous to the defendant than a sufficiency of the evidence test, and less onerous even than the standard of materiality for a general Brady violation. See Rosencrantz v. Lafler, 568 F.3d 577, 587 (6th Cir. 2009) (observing that the materiality standard for false testimony is "lower," "more favorable to the defendant," and "hostile to the prosecution" as compared to the standard for a general Brady withholding violation (quoting Gilday v. Callahan, 59 F.3d 257, 267-68 (1st Cir. 1995))). 

The proper materiality standard, however, is only part of the equation. We also must consider whether harmless-error review is appropriate. On habeas review, as here, constitutional violations that are categorized as "trial error" generally are "amenable to harmless-error analysis." Brecht v. Abrahamson, 507 U.S. 619, 629 (1993). "Trial error 'occur[s] during the presentation of the case to the jury,' and . . . it 'may . . . be quantitatively assessed in the context of other evidence presented in order to determine [the effect it had on the trial].'" Id. (quoting Arizona v. Fulminante, 499 U.S. 279, 307-08 (1991)). In contrast to trial error, "'structural defects in the constitution of the trial mechanism' . . . —deprivation of the right to counsel, for example—require[] automatic reversal of the conviction because they infect the entire trial process." Id. at 629-30 (quoting Fulminante, 499 U.S. at 309) (footnote omitted).

Ninth Circuit Affirms Barry Bonds Conviction for Obstruction (9/14/13)

The Ninth Circuit yesterday affirmed the conviction of Barry Bonds, the ball player (Wikipedia here).   United States v. Bonds, 730 F.3d 890 (9th Cir. 2013), here.  Bonds was convicted of obstruction of justice under the "omnibus clause" of 18 USC, Section 1503, here.  Section 1503's omnibus clause is the "source" for the tax obstruction omnibus clause in Section 7212(a), here.  See John A. Townsend, Tax Obstruction Crimes: Is Making the IRS's Job Harder Enough, 9 Hous. Bus. & Tax. L.J. 255, 268-280 (2009), here.  Hence, I write on the Bonds' affirmance because the interpretations of Section 1503 will apply to tax obstruction under Section 7212(a).

The Ninth Circuit panel offers this introduction (footnote omitted):

Barry Bonds was a celebrity child who grew up in baseball locker rooms as he watched his father Bobby Bonds and his godfather, the legendary Willie Mays, compete in the Major Leagues. Barry Bonds was a phenomenal baseball player in his own right. Early in his career he won MVP awards and played in multiple All-Star games. Toward the end of his career, playing for the San Francisco Giants, his appearance showed strong indications of the use of steroids, some of which could have been administered by his trainer, Greg Anderson. Bonds's weight and hat size increased, along with the batting power that transformed him into one of the most feared hitters ever to play the game. From the late-1990s through the early-2000s, steroid use in baseball fueled an unprecedented explosion in offense, leading some commentators to refer to the period as the "Steroid Era."1 In 2002, the federal government, through the Criminal Investigation Division of the Internal Revenue Service, began investigating the distribution of steroids and other performance enhancing drugs ("PEDs"). The government's purported objective was to investigate whether the distributors of PEDs laundered the proceeds gained by selling those drugs. 

The government's investigation focused on the distribution of steroids by the Bay Area Laboratory Co-operative ("BALCO"), which was located in the San Francisco Bay Area. The government raided BALCO and obtained evidence suggesting that Anderson distributed BALCO manufactured steroids to Bonds and other professional athletes. The government convened a grand jury in the fall of 2003 to further investigate the sale of these drugs in order to determine whether the proceeds of the sales were being laundered. Bonds and other professional athletes were called to testify. Bonds testified under a grant of immunity and denied knowingly using steroids or any other PEDs provided by BALCO or Anderson. The government later charged Bonds with obstructing the grand jury's investigation. After a jury trial, Bonds was convicted of one count of obstruction of justice in violation of 18 U.S.C. § 1503. He now appeals. We affirm the conviction. 

* * * * 

On December 4, 2003, Bonds testified before the grand jury under a grant of immunity pursuant to 18 U.S.C. § 6002. The immunity order stated that "the testimony and other information compelled from BARRY BONDS pursuant to this order . . . may not be used against him in any criminal case, except a case for perjury, false declaration, or otherwise failing to comply with this order." 

The grand jury thereafter charged Bonds with several crimes, including obstruction arising from his testimony before the grand jury.  The jury convicted, "finding on the verdict form that Statement C was misleading or evasive."

G-20 Encouragement on the OECD Multilateral Convention on Mutual Assistance in Tax Matters (9/13/13)

I posted the following as a comment the other day:

There is a Multilateral Convention on Mutual Administrative Assistance in Tax Matters, sponsored by the OECD to which many of the developed nations, including the U.S., are parties. The following is a "cut and paste" of a general description from the OECD web site: 

The amended Convention facilitates international co-operation for a better operation of national tax laws, while respecting the fundamental rights of taxpayers. The amended Convention provides for all possible forms of administrative co-operation between states in the assessment and collection of taxes, in particular with a view to combating tax avoidance and evasion. This co-operation ranges from exchange of information, including automatic exchanges, to the recovery of foreign tax claims. 

See OECD website titled Exchange of information: Convention on Mutual Administrative Assistance in Tax Matters, here: 

For a linked brochure explaining the treaty, see here: 

For an information brief, see here: 

Finally, Reuters just recently reported that the Group of 20 is encouraging developing countries to join the convention wto which over 50 countries have already signed up. See G20 pledges to help developing countries tackle tax dodging (Reuters 9/6/13), here:

While I have not studied the amended convention in detail, I suspect that the opportunities to enlist other countries in the collection of U.S. taxes and resulting judgments will be significant. Now, of course, that does not address whether the FBAR penalty would be subject to this convention. I have not looked at that issue and, when I do, I will report my conclusions (but don't know when that will be).

It may be helpful to readers to see the G-20 document, here, to which I referred.  I cut and paste below the provisions that are relevant to this blog (emphasis supplied by JAT):

Swiss Bank Rahn & Bodmer Under DOJ Criminal Investigation (9/12/13)

Swiss Bank Rahn & Bodmer, here, has admitted that it has been advised that it is under DOJ criminal investigation and therefore is excluded from the recently announced settlement regime.  See UPDATE 1-Another Swiss private bank under U.S. tax investigators' spotlight (Reuters 9/11/13), here.  For a prior blog on the settlement, see DOJ Tax Announcement on U.S. Swiss Deal (8/29/13; Updated 8/30/13), here.

The bank was just notified recently of the investigation and according to the article:

However, Rahn said he did not believe his bank was being investigated as a result of data passed on by other banks as it had stopped accepting undeclared U.S. assets in 2008 and advised clients with such assets to make voluntary disclosures to the U.S. authorities.

Also

"It is difficult to evaluate whether being in the first group of banks is better for us or not," he said.

Any readers care to comment?

Also

It is the oldest bank remaining in the German-speaking part of Switzerland after St. Gallen-based Wegelin shut its doors earlier this year following an indictment and fine by U.S. authorities for conspiring to help U.S. clients evade taxes.

Elimination of Duplications and Short Term Deposits in Miscellaneous Penalty Base - FAQ 37 and Extrapolations (9/10/13)

2012 FAQ 37 provides (as I think it did in earlier FAQs):

37.
Q. If a taxpayer transferred funds from one unreported foreign account to another during the voluntary disclosure period, will he have to pay a 27.5 percent offshore penalty on both accounts?
A. No. If the taxpayer can establish that funds were transferred from one account to another, any duplication will be removed before calculating the 27.5 percent penalty. However, the burden will be on the taxpayer to establish the extent of the duplication.

Example 1:  Taxpayer has 2 foreign accounts that are income tax noncompliant - FAC1 at FB1 and FAC2 at FB1.  In 2009, the Taxpayer deposits $100,000 into FAC1 and, one day later pursuant to instructions at the bank upon the deposit, the bank transfers the $100,000 to FAC2 at the same bank, FB1.  FAC1 earns $-0- interest on the temporary deposit of $100,000 (the banks rules require that a deposit stay for 7 days before interest is earned) and FAC2 earns $5,000 interest on the longer-term deposit of $100,000.  (Note FAC1 is income tax noncompliant because of other deposits.)  According to FAQ 37, in calculating the OVDI/P miscellaneous / in lieu of penalty base (inside penalty without opt out, which I hereafter call the miscellaneous penalty), the "duplication" is eliminated.  The way I have done that in the past is to eliminate the duplication amount in FAC1, the temporary account, and include it in FAC2.  Either way, of course, since both accounts are noncompliant, the elimination of the duplication has the same effect on the aggregate penalty base for the year.  But it is logical to exclude it from FAC1 because there is no income tax noncompliance with respect to the $100,000.

Example 2:  Same Example except that FAC2 is at a different bank, FB2.   The result is the same.  Again, the bottom line effect on the penalty base for the year is the same whether the elimination of the duplication occurs in FAC1 or FAC2.

Example 3:  Same Example except FAC2 (the destination account) is income tax compliant.  In this case, there is no duplication.  Is the temporary deposit in FAC1 included in the miscellaneous penalty base?  Technically, this situation does not fit FAQ 37.

Example 4:  Same as Examples 1 and 2 except that, rather than transferring the temporary deposit in FAC1 to another account, it is transferred out of FAC1 to purchase noncompliant real estate that produces the same amount of income for the year -- i.e., $5,000 rental income (just as in the earlier examples FAC2 had produced $5,000 of interest income).  Reading Example 37 literally, it does not eliminate the duplication because the destination asset is real estate rather than an account.  Note in this regard that, for the miscellaneous penalty calculation, the real estate is included since it is noncompliant (just as noncompliant accounts are included).  The key difference between the two is that a transfer to another foreign account (an FBAR reportable asset) gets a penalty base reduction to eliminate the duplication whereas a transfer into real estate (a non-FBAR reportable asset) gets no penalty base reduction to eliminate the duplication.  (It is reported in a Linked-In practitioner discussion that the IRS is taking the position that double counting is required because the foreign real estate is not an account.)

On Harmless Error (9/9/13)

In federal criminal cases, including tax crimes cases, where error occurred at the trial level an appellate court will nevertheless affirm on the rubric that the error was harmless.  To get a sense of how often I have discussed harmless error in this blog, just search on "harmless error" -- the search is here.

Trials, particularly lengthy or complex trials, are error-laden.  The overwhelming number of the errors are in any practical sense harmless in the sense that they do not affect the outcome of the trials.  I tell students  that I have never seen a perfect trial -- or error free trial.  Mistakes are made by all -- the judge and counsel.  What we can realistically expect is that, at least in most cases (in criminal contexts, hopefully, the overwhelming majority of the cases), is fair trials and results the public can have confidence in.  I suppose that the harmless error drill is how appellate courts differentiate fair from unfair trials and results and avoiding the endless retrials (at least until there is an acquittal in a criminal case) if any error required reversal and retrial.  But, as readers surely suspect, the "harmless" conclusion is in the eye of the beholder.

Jonathan Turley has a good blog this morning on the harmless error issue.  Ninth Circuit Reverses Federal Judge Who Ruled That False Statement Of Prosecutor In Closing Argument Was Harmless (Jonathan Turley Blog 9/9/13), here.  I commend it to readers of this blog.  While in the case Professor Turley discusses, it does seem to me that the error was not harmless.  Still, others did see it differently which is why it reached the court of appeals in the first place.

The Ripple Effects of the IRS Offshore Account Initiative - Turks & Caicos (9/6/13)

This just hit my radar screen.  Hayden Boyce, CIBC FCIB Turks and Caicos Islands Named in IRS Investigation, (Turks & Caicos Sun 8/13/13), here.  The Wikipedia entry for the Turks & Caicos is here.  The players and observers in the field knew that T&C was a player in the offshore account evasion game.  But, maybe it would be considered too minor to devote significant enforcement resources.  Maybe not:

The article says:

A revenue agent from the United States of America’s Internal Revenue Service (IRS) says she has uncovered evidence that the CIBC FCIB branch in the Turks and Caicos Islands was one of many in the Caribbean used by wealthy American citizens to hide money. 

In documents filed in the United States District Court for the Northern District of California, San Francisco Division, Cheryl Kiger, said that during her investigation she interviewed a wealthy American taxpayer who controlled three different business accounts and one personal account at CIBC FCIB in the Turks and Caicos Islands. 

She stated: “Some of those deposits to those accounts represented income earned for advisory services provided to third parties. He failed to report this income on his US income tax returns until he made his voluntary disclosure in 2009.” 

Those interested should read the article.

The key point for present purposes is that it is one thing for a U.S. person to have an account in a foreign bank -- say in Switzerland, the Cayman Islands and other usual (and unusual) suspects -- it is another to weave a web of deception with nominal entities which are nothing more than fronts to hide tax evasion. I think the Government recognizes that because the overwhelming number of prosecutions involve such nominal -- OK, the word is sham - entities.

U.S. persons -- commonly called in my profession U.S. taxpayers (although, in this context, nontaxpayers) -- need to pay attention to these developments.  If nothing else, the civil statute of limitations for tax, penalties and interest for this conduct is forever.

I previously reported on the CIBC FCIB John Doe Summons.  See John Doe Summons Issued to Wells Fargo for Records of CIBC FirstCaribbean International Bank Correspondent Account (Federal Tax Crimes Blog 4/30/13), here.

Outlier Foreign Investment Conviction (9/5/13)

A former high ranking TVA official, Masoud Bajestani, pled to "single count of conspiracy to violate the International Emergency Economic Powers Act and two counts of filing false income tax returns."  Dave Flessner, Ex-TVA executive pleads guilty to sending money to Iran in violation of U.S. sanctions (timesfreepress 9/5/13), here.

I am treating this as an outlier case -- in the sense that it is outside the mainstream of the criminal cases under the current offshore account initiative.  The characteristics of the mainstream cases are criminal tax misconduct using offshore accounts which, in turn, caused the FBAR violation.   Here, the gravamen of the case is the transfer of money to Iran in violation of U.S. sanctions.

In the 2/4/13 original USAO EDTN press release of the arrest (here), the charges did not include tax charges.  As is not unusual, a number of charges were added after the arrest.  Ed Macrum, Government adds 7 charges against former TVA nuke official (Knoxvillebiz.com 2/7/13), here which said:

On Wednesday, a superseding indictment added seven counts to Bajestani's charges. Charges now involve conspiracy, violations of the economic sanctions, filing false tax returns and others. Penalties range from three to 20 years.

Still the tax charges seem to be an outlier to the major offenses.  I found no indication that foreign accounts were the issue, but I suspect that there had to be foreign accounts of some sort, perhaps in the name of a family member.  If anyone knows, please post a comment.

Invocation of Fifth Amendment in Noncustodial Setting May Not Be Used In Prosecution's Case in Chief (9/5/13)

Early In IRS criminal tax investigations, it is not uncommon for  the target (usually the taxpayer) to receive a surprise visit from two IRS CI special agents either at his home or his office with a request for an interview.  The IRS will read the target his modified Miranda warnings required for noncustodial interrogations.  (More robust Miranda warnings are required for custodial interrogations.)  The target is advised that he is not required to answer the questions and may consult a lawyer.

The question that has occupied courts' attention is what use the Government may make at trial of the target's conduct in that interrogation.  What if the target formally invokes his Fifth Amendment?  Can the Government use that at trial?  What if the target, without formally invoking his Fifth Amendment, asks to consult with a lawyer?  Can the Government use that response at trial.  What if the target simply refuses to answer the questions without asserting the Fifth Amendment or requesting to consult with a lawyer?

Guidance on these questions is offered by a recent Second Circuit opinion (Gerard Lynch, J.), United States v. Okatan, 728 F.3d 111 (2d Cir. 2013), here.  In that case, the opinion opens with the issue and the conclusion:

This opinion addresses Okatan's challenge to the government's use of evidence that Okatan asked to speak to a lawyer when a border patrol agent initiated an interview prior to his arrest. We conclude that use of this evidence in the government's case in chief violated Okatan's rights under the Fifth Amendment. Because we further conclude that the error was not harmless beyond a reasonable doubt, we VACATE the judgment of the district court and REMAND the case for further proceedings consistent with this opinion.

The facts, highly summarized, are:

The border patrol agent observed some unusual -- I guess, to him, suspicious -- activity by Okatan.  The agent then asked Okatan to explain the unusual activity.  Okatan gave a not implausible explanation, but one that, under the circumstances the border patrol agent apparently did not believe.  The border patrol agent warned Okatan that "lying to a federal officer is a criminal act" and then began to question Okatan.  "Okatan said that he wanted a lawyer. At that point, Boucher placed Okatan under arrest and transported him to the Champlain border patrol station."

Okatan was subsequently charged and tried for an immigration violation.  At trial, Okatan moved to suppress all statements to the border patrol agent.  The district court suppressed all statements after Okatan asked for a lawyer.  Then, during trial, the border patrol agent recounted the circumstances of the arrest, testifying specifically that Okatan had said that he wanted a lawyer.  Okatan's counsel objected and was overruled.  In closing argument, the prosecutor mentioned the request for a lawyer.  Okatan's counsel objected again and was overruled.

Update on U.S.-Swiss Bank Matters - Of Apologies, Wages of Sin, and Leavers (9/4/13)

I offer this morning two news reports I recommend to viewers needing the daily fix on Swiss developments.

The three articles are:

• Giles Broom, Swiss Bankers' Odier Sees U.S. Tax Spat Resolved by 2015 (Bloomberg 9/3/13), here.
• Patrick Temple-West and Kevin Drawbaugh, Offshore tax-dodger dragnet widens with U.S.-Swiss bank deal: lawyers (Reuters 9/3/13), here.
• Swiss banks apologize for assisting tax cheats (CNBC by Reuters 9/3/13), here.

In my comments, I refer to these articles in shorthand as Bloomberg, Reuters and CNBC, respectively.

The key points are

1.  As is often the case where someone has been caught with his hands in the cookie jar, there is an apology, sincere or not.  (Often the regret is at having gotten caught.)  At any rate. here is the mea culpa as articulated (CNBC article):

"It was not because we lacked skills and knowledge that we found ourselves in these unfortunate situations. It was because we acted wrongly and we displayed wrong conduct," Swiss bankers association chairman Patrick Odier told a news conference on Tuesday. 

"I regret this all the more because we have damaged the reputation of the entire Swiss financial center."

2.  The banker thinks that most Swiss banks subject to the regime can bear the cost, but that: (CNBC article): "There may be a few exceptions: banks which concentrated too much on these business activities may run into difficulties."  (See also the Bloomberg article.)

3.  The banker predicted that Swiss banks will reach final settlements by 2015, a 12-18 month process.

4.  The 14 banks not covered by the settlement regime because they are already under criminal prosecution may be able to settle their situations prior to 2015.  (Bloomberg article.)  JAT Note:  Of course, the expected cost of settlement will be greater.

5.  A key part of the settlement deal will to be to identify so-called "leavers" -- U.S. depositors who moved their funds to other banks to continue to hide them.  (Reuters article.)  I previously noted that the U.S. was keenly interested in leavers moving among Swiss banks as the U.S. focused on those with sufficient U.S. nexus to purse, in the hopes that some banks could protect them if they had no U.S. nexus.  The Reuters article indicates that the U.S. is now keenly interested in where the money went outside Switzerland.  With that data required under the settlement regime, the U.S. can target the more egregious offenders in other countries and bring the long arm of U.S. law (or power) to bear.

6.  With regard to these leavers, Scott Michel, here, a prominent player, said (Reuters article):  "Moving your money around to avoid disclosure is clear evidence of criminal intent." JAT Note:  Those players who are at high risk of being identified in the process should join the program (and, likely, not opt out).

7.  The Bloomberg article says that "Since 2009, the U.S. has prosecuted 68 account holders and more than 30 banking professionals for offshore tax crimes."  Actually, my list in the spreadsheet indicates 90 account holder charges (I call them taxpayer charges), but 7 of those were charged prior to 2009.  I think DOJ Tax may have propagated the number of 68, but I can't account yet for the difference between that number and my spreadsheet.  I will try to work on that sometime later this week and post an updated spreadsheet.

What Can Be Done If Tax Restitution Exceeds the Tax Due (9/2/13)

I previously expressed concern as to whether tax restitution ordered incident to sentencing could be fine-tuned in subsequent IRS administrative proceedings if it appeared to the amount of the tax restitution were too high.  See Tax Restitution and Doubt As to Amount (Federal Tax Crimes Blog 7/10/13), here. I was concerned that the new statute permitting immediate assessment of tax restitution and precluding contesting same would foreclose adjustments downward.  As a consequence, I urged, in imposing tax restitution the sentencing court should err on the side of caution to insure that the tax restitution amount is not too high.  In the case discussed, the IRS agent had indicated during the sentencing phase that adjustments might be made later in the civil phases.

In PMTA 2012-027 (10/22/12), here, reprinted at 2013 TNT 168-24, the author concluded:

A taxpayer cannot challenge the amount of court-ordered restitution at a CDP [Collection Due Process] hearing. A district court's final order cannot be modified by challenging the amount of ordered restitution at a CDP hearing. Also, I.R.C. § 6201(a)(4) prohibits collateral attacks on a restitution order in a subsequent legal and administrative proceeding under the Internal Revenue Code, of which a CDP hearing is an example. Furthermore, a challenge to the amount of restitution in a CDP hearing is prohibited under I.R.C. § 6330(c)(4) because the criminal tax case itself is considered a prior judicial hearing on that issue in which a taxpayer meaningfully participated.

I won't attempt now to dissect the reasoning of the author.  I just note that the conclusion is a major warning about dangers that may lurk in restitution proceedings.  I would hope that counsel -- both government and defense -- and the courts will be sensitive to the issue and do the work necessary to insure that tax restitution does not overstate the tax liability.

The IRS is not hurt by caution in the restitution amount at the sentencing proceeding because the IRS can assert any additional amounts due through the regular tax determination and assessment procedures.  The author of the PMTA thus reasons:

The Service's assessment of the amount of restitution ordered by a federal district court does not, however, prevent the Service from assessing civil penalties and tax liabilities on top of the criminally ordered restitution if the amount of restitution is less than the defendant's total tax liabilities for that same period. See Helvering v. Mitchell, 303 U.S. 391(1938) (holding that Congress may impose both a criminal and a civil sanction in respect to the same act or omission); Morse v. Commissioner, 419 F.3d 829, 833-35 (8th Cir. 2005) (holding that despite a federal criminal case against the same taxpayer resulting in a sentence the taxpayer pay a fine and make restitution to the Service, the doctrine of res judicata did not apply to preclude a civil fraud penalty assessment on a tax deficiency because criminal prosecution for filing false income tax returns did not involve same cause of action as civil tax deficiency case). Cf. United States v. Helmsley, 941 F.2d 71, 102 (2d Cir. 1991) ("It is true that the government may pursue a tax evader for unpaid taxes, penalties and interest in a civil proceeding. However, we believe it is self-evident that any amount paid as restitution for taxes owed must be deducted from any judgment entered for unpaid taxes in such a civil proceeding."). In other words, the restitution amount is a floor and not a ceiling with respect to the tax period at issue. n4 Although the amount of a restitution may not be the actual amount of the taxpayer's full tax liability for that tax period under Title 26, the Service will effectively treat the amount of restitution as the minimum tax liability for the relevant tax period by assessing it "as if such amount were such tax" for that period. Section 6201(a)(4)(A).
   n4 The tax or penalty liabilities determined by the Service in excess of the amount ordered as restitution are not an assessment of the restitution ordered by a federal district court. Accordingly, section 6201(a)(4)(C) does not prohibit a taxpayer from challenging in any judicial or administrative proceeding under the Code those tax or penalty determinations that are in excess of the amount ordered as restitution. For example, if a taxpayer is ordered to pay $100,000 in restitution for the tax period ending 20XX and the Service determines pursuant to a subsequent examination that the taxpayer has an additional unpaid tax liability of $20,000 and is subject to a section 6663 fraud penalty of $90,000 for that same period, section 6201(a)(4)(C) does not prohibit the taxpayer from challenging the $20,000 additional tax liability and the $90,000 fraud penalty, but does prohibit the taxpayer from challenging the $100,000 amount of restitution determined by the federal district court and assessed by the Service.

Inconsistent Verdicts While Tolerable Generally Must Not Be Invited (9/2/13)

Inconsistent verdicts are tolerated in the federal criminal system.  For example, if the defendant is charged with two crimes and guilt of the second crime requires or at least assumes guilt of the first, then acquittal of the first count will not require reversal of a guilty verdict on the second count.  But everyone recognizes that that tolerance for inconsistent verdicts needs to be narrowly prescribed, and in the context presented here, should not be encouraged.  In United States v. Moran-Toala, ___ F.3d ___, 2013 U.S. App. LEXIS 16605 (2d Cir. 2013), here, the Second Circuit held that, where the district court in its instructions to the jury in effect sanctioned inconsistent verdicts, the inconsistent guilty verdict must be reversed.

The situation in Moran-Toala may be summarized as follows:  The defendant was charged with narcotics conspiracy and with conspiracy to exceed authorized access to a government computer in furtherance of the narcotics conspiracy.  (Yes, the second is a crime, however oddly worded; for convenient reference I refer to this as the computer access conspiracy count)  The defendant was acquitted of the narcotics conspiracy count but found guilty of the computer access conspiracy count.  If that is all that occurred, there would be no reversible error because of the law, noted above, that consistency between and among verdicts is not required.

But, that is not all that occurred.  During its deliberations, the jury asked the judge whether consistency between the verdicts was required.  The judge answered that question no, although he struggled with the answer.  As you might suspect, the Government wanted a victory at all costs and thus wanted the no answer; the defendant wanted a win at all costs and, apparently suspecting that the question indicated the jury believed that the Government had overcharged the case, wanted a yes answer to the question.  At the Government's insistence, the Court answered the question no -- in essence telling the jury that it could render inconsistent verdicts.  That answer is, of course, the law.

On appeal, the defendant argued that the answer, while consistent with the law, invited the jury to render inconsistent verdicts and therefore should be reversed.  The Court agreed.  I will provide more on the Court's legal analysis below, but I think the predicate procedural posture is interesting. An inconsistent verdict of this nature might mean that, if the jury had known that it had to be consistent in its verdicts, it would have either convicted of both counts or acquitted of both counts.  If there is a reversal for retrial, the indicated solution might be to have another jury hear the evidence and render consistent verdicts (or at least, if it rendered inconsistent verdicts, the inconsistency would not be invited by the trial judge).  But, having been acquitted of the narcotics conspiracy count, the defendant could not be retried on that count by virtue of the Double Jeopardy guarantee.  Hence, if there is a retrial, it will be for the computer access conspiracy offense only.  (Of course, as sentencing afficionados will know, if the defendant on retrial is convicted of that offense, the acquitted offense can still be considered, but that is another discussion for another time.)

Now, let's look at the court's reasoning for reversing despite the clear law that inconsistent verdicts are not per se reversible.  The pertinent part of the opinion is not very long, so I just quote it: