Wednesday, November 27, 2013

Daugerdas Retrial Jury Instructions - Part 07 Tax Evasion Instructions Part 3 Economic Substance (11/27/13; 11/29/13)

I address in this blog the relationship to the defendants served as enablers and the taxpayers whose taxes were allegedly evaded.  In the prior cases, as I recall it, the Government conceded that the taxpayers themselves were innocent.  That would mean that the enabler defendants could not have aided and abetted the taxpayers' tax evasion.  It is not clear to me that the Government made that concession in this Daugerdas retrial.  So, I suppose, the jury could have applied an aiding and abetting construct to say that the enabler defendants aided and abetted some or all guilty taxpayers, but I think on the instructions given which did not develop the aiding and abetting concept, they would have had to find the defendants directly guilty of the crime of tax evasion which they could do because tax evasion can apply to enablers directly without the help of derivative liability provisions.

But, I want to focus on the taxpayers because it was their taxes that had to be evaded in all events for the crime of tax evasion as charged in Daugerdas.  What would it require for their taxes to have been evaded via the tax shelters promoted by the enabler defendants?  In the Tax Due and Owing instruction, Judge Pauley explained that the critical issue as to whether there was a tax due and owing was whether the shelters lacked economic substance.  (I have previously written on what I perceive as major difficulties in presenting the concept of economic substance to juries; they can be reviewed via the "Economic Substance" link.)  One uncertainty is whether the two component tests commonly applied to determine economic substance are in the disjunctive or the conjunctive.  That uncertainty has existed for a long time.  So, Judge Pauley asked the jury to apply the test in the conjunctive -- the most defendant-friendly application of the economic substance test.

Judge Pauley explained in explaining Tax Due and Owing:
The Government claims that the reason the taxpayers * * * * owed more taxes than they reported is that the losses they claimed on their tax returns as a result of the Short Sale, SOS, Swap, or HOMER tax shelters were not allowable. The Government contends that these losses were not allowable because they stemmed from transactions that lacked “economic substance.” 
A transaction that lacks economic substance cannot enter into tax computations. Any deduction claimed for a tax loss allegedly sustained in such a transaction is not properly claimed on a tax return. 
In order to establish that a transaction lacks economic substance, the Government must prove, beyond a reasonable doubt, two components. 
The first component is that the relevant taxpayer had no genuine business purpose for engaging in the transaction in question apart from the creation of the tax deduction.  
The second component is that there was no reasonable possibility that the transaction would result in a profit.

Daugerdas Retrial Jury Instructions - Part 07 Tax Evasion Instructions Part 3 Tax Evaded (11/25/13)

I address here what I now call the evaded element for the crime of tax evasion.  There has been loose jargon that has crept into this element.  I have used loose jargon, but I have recently seen the error of my ways.  

The key concept is that the taxpayer have evaded tax for the crime of tax evasion.  Simply because a taxpayer underpaid some or all of his tax liability, does not mean that he evaded some or all of his tax liability.  The Supreme Court and other courts, however, have described this element as a "tax deficiency" which is a tax term of art that normally means simply tax underpaid.  See Section 6211(a), here.

In his instruction, Judge Pauley describes this element as "tax due and owing."  Judge Pauley explains it to the jury as follows (again excluding the portion relevant only to Daugerdas' personal evasion):
First Element: Tax Due and Owing 
In order to establish the first element of tax evasion, the Government must prove beyond a reasonable doubt that the relevant taxpayer or the defendant Paul Daugerdas owed a substantial federal income tax for the tax year at issue.
This particular quote does not use the term tax due and owing, but rather just requires that there be a substantial federal income tax due.  Perhaps, though, the requirement of proof beyond a reasonable doubt captures the concept I want to discuss here.

There are more extensive instructions on tax due and owing and may be reviewed on a prior blog.  Daugerdas Retrial Jury Instructions - Part 06 Tax Evasion Instructions Part 1 Tax Evasion and Conspiracy to Commit Tax Evasion (Federal Tax Crimes Blog 11/25/13), here.

In the past, I have typically used the "tax due and owing" formulation of the element.  However, in preparing an article on sentencing, I concluded that perhaps the better concept would be "tax evaded."  Here is an except from the latest draft of that article which arises from the Villanova Symposium in which I recently participated (footnotes omitted):
E. Tax Liability Concepts in the Criminal Tax Universe. 
I stated earlier that tax evaded is the centerpiece of the sentencing in criminal tax cases and, hence, is at the forefront from the earliest steps in the criminal investigation and enforcement process where practitioners must anticipate and, if possible, shape what will happen at sentencing.  I will first state generally the varying concepts of tax liability as they play out in the criminal tax context and specifically at sentencing.  As with most financial crimes, the key determinant in the advisory Sentencing Guideline calculations is the financial loss to the victim.  For taxes, the victim is the IRS, and the tax loss is the measure of the financial loss that is considered. 
1. Civil Tax Liability / Tax Deficiency. 
A taxpayer may think of his tax liability as what he offers to the IRS.  In the case of a filed return, the return is the taxpayer’s offer.  In the case of an unfiled return, the taxpayer’s offer is nothing (except to the extent of prepayments such as withholding or estimated taxes).  In either case, the IRS may disagree and think the taxpayer owes more than he offered.  That is the context for IRS investigations into liability that may include both audits and criminal investigations. 
The taxpayer will have a civil tax liability which is imposed on the original due date of the return.  That liability is determined before application of payments.  To the extent that the liability exceeds the payments made or deemed as of the due date of the return, the taxpayer has an unpaid civil tax liability, often referred to in a civil context as a deficiency.  Taxpayers who fully pay their civil tax liability will usually not be at risk of criminal prosecution because of the phenomenon noted above that punishment is determined by evasion of the unpaid tax.  At least usually, in the tax crimes universe, if there is no tax underpaid, there is no crime – or at least no crime that the Government will have the incentive to prosecute. 

Daugerdas Retrial Jury Instructions - Part 07 Tax Evasion Instructions Part 2 Tax Evasion and Conspiracy to Commit Tax Evasion - Derivative Liabilities (11/25/13)

As I have previously blogged, where a defendant can be directly liable through his own conduct for the substantive crime (tax evasion under Section 7201, here), the derivative liabilities in this type of case are irrelevant and confusing.  The derivative liabilities are under 18 USC Section 2, here --  aiding and abetting under Section 2(a) and causer liability under Section 2(b) -- and under the Pinkerton concept for co-conspirators' crimes.  See particularly, Even More on Principals, Accomplices, Causers and Pinkerton Conspirators - the Daugerdas Case (Federal Tax Crimes Blog 5/10/11), here; for more extensive discussion of that concept, see John A. Townsend, Theories of Criminal Liability for Tax Evasion (May 15, 2012), here.  As I note in both pieces, at the first trial, because defendants' alleged conduct, if found by the jury, made them directly liable for the substantive crime of tax evasion, Judge Pauley was skeptical as to what these derivative liability provisions added to the jury's understanding of the case and thus either did not mention them or merged them into the direct substantive liability.  I was thus curious as to what Judge Pauley would say on this round.

I start with a key general observation about the derivative liabilities.  They function solely to make a person who is otherwise not a principal guilty of the substantive crime as a deemed principal of the substantive crime. Stated otherwise, the sole function of Section 2 is to create deemed principal status for defendants who are not otherwise direct principals in the substantive crime under general principles of principal status.  See particularly my article.  Section 2 serves no other purpose than that.  Similarly, while not invoking the deemed principal construct of Section 2, Pinkerton serves the same function of making a person who does not commit the substantive crime guilty for the crime committed by a co-conspirator -- effectively a deemed principal status similar to aiding and abetting.

This is critically important because, where a defendant's conduct could make him directly liable for the substantive crime, deemed principal status under these derivative liability concepts is irrelevant and instructing the jury on it is likely to be more confusing than helpful.  In the trilogy of major tax shelter cases in SDNY, the conduct alleged would have made the defendants directly guilty of the crime of tax evasion.  That is to say that enablers other than the taxpayer can be directly guilty of the crime, regardless of whether or not the taxpayers were guilty of the crime.

Aiding and Abetting under Section 2(a).

Judge Pauley's only instruction mentioning aiding and abetting either by name or theory is the following from the very general introduction to the substantive charges (p. 28)::
Counts 2 through 11 charge the Defendants with aiding and abetting the evasion 18 of income tax obligations of various clients who engaged in tax shelter transactions.
Then, when drilling down on the specific instructions about the tax evasion charge, Judge Pauley does not mention the words aiding and abetting or the concepts those words incorporate.  I am not sure the general instruction would have given the jury the notion that it could convict by finding that the defendants were not guilty of the substantive crime but could be guilty as principals by aiding and abetting the taxpayers in the taxpayers' evasion or other defendants who were directly guilty of the substantive crime in the taxpayers' evasion.  So, as presented, except for this fleeting reference to aiding and abetting, I think the instructions as presented required the jury to find the defendants directly guilty of the crime of tax evasion (and not as deemed principals under 18 USC Section 2(a), aiding and abetting).

Tuesday, November 26, 2013

Government May Enforce Restitution Despite the Defendant Taxpayers Installment Agreement with the IRS (11/26/13)

In United States v. Fisher, 2013 U.S. Dist. LEXIS 165473 (D. Mich. 11/21/2013), the Court held that, despite the taxpayer having reached an installment plan with the IRS regarding his unpaid taxes, DOJ could pursue restitution for those taxes independent of the IRS.  DOJ sought to garnish two retirement accounts with an aggregate value of $164,217.  Per the Court, "On September 30, 2013, Fisher moved to quash or modify these garnishments arguing that the garnishments violate his restitution agreement with the IRS, and that the garnishments are unfair and impose undue financial hardship on his family."

I include the full discussion from the case in order to alert practitioners that the restitution obligation is separate from the tax obligation which the restitution obligation is designed to pay.  That seems a bit circular but it is the case.  I include the following, constituting the bulk of the opinion (caption omitted):
Following his conviction for conspiracy to defraud the United States, 18 U.S.C. § 371, the court ordered Defendant Edward Fisher to pay $10,000,000 in restitution to the Internal Revenue Service ("IRS"). Fisher has repaid approximately $6,012.44 of this obligation, and under his current financial circumstances, has agreed to pay the IRS $100 a month. On September 5, 2013, the government applied for and received writs of garnishment for funds in Fisher's retirement accounts at Virtus Partners, Inc., and Dodge & Cox. Together, these accounts hold approximately $164,217. On September 30, 2013, Fisher moved to quash or modify these garnishments arguing that the garnishments violate his restitution agreement with the IRS, and that the garnishments are unfair and impose undue financial hardship on his family. 
18 U.S.C. § 3612(c) vests the Attorney General with responsibility for collecting unpaid restitution and fines. This authority is broad: the government may use any of the "practices and procedures for the enforcement of a civil judgment under Federal law or State law." Id. at § 3613(a). This broad authority is circumscribed by the exceptions listed in 26 U.S.C. § 6334(a)(1)–(8), (10), and (12). 18 U.S.C. § 3613(a)(1). Notably, none of the listed exemptions include retirement accounts. Although Fisher argues that allowing the government to garnish retirement accounts discourages individuals from saving for retirement, this type of policy argument is better left to Congress. 
Fisher also argues that the garnishments violate his payment agreement with the IRS. However, as the government explains, a payment schedule does not serve as a bar to further collection efforts by the government. United States v. Bancroft, No. 1:09-cr-101-02, 2010 WL 4536785, at *2 (W.D. Mich. Nov. 2, 2010) ("The government is free to pursue any authorized means of securing a restitution obligation, and it is clear that writs of garnishment are authorized by federal law.") (Bell, J.); United States v. Miller, 588 F. Supp. 2d 789, 797 (W.D. Mich. 2008) (holding that a periodic payment provision in a criminal judgment does not insulate a defendant from other collection efforts, including garnishment) (Lawson, J.). 
Lastly, Fisher argues that it would be inequitable to allow the government to garnish his retirement accounts because it would impose undue financial hardship on his family and saddle him with extreme tax liabilities. The government avers that Fisher has already liquidated two other retirement accounts that he possessed, and used the proceeds of these accounts to pay personal debt rather than his restitution obligation. At oral argument, Fisher concedes the point. The court certainly endorses the general proposition that people should save for retirement, but finds no basis presented here on which to grant the relief defendant seeks. Accordingly, 
IT IS ORDERED that Fisher's "Motion to Quash or to Modify Garnishments" [Dkt. # 13] is DENIED. 
/s/ Robert H. Cleland
Dated: November 21, 2013
18 USC Section 3621, titled Collection of unpaid fine or restitution, is here.

Monday, November 25, 2013

Daugerdas Retrial Jury Instructions - Part 06 Tax Evasion Instructions Part 1 Tax Evasion and Conspiracy to Commit Tax Evasion (11/25/13)

I provide here the instructions relevant to the Tax Evasion and the object element of the conspiracy to commit tax evasion.  The relevant instructions are quite long, so in this blog, I will just present the instructions.  In later blogs I will discuss key components in these instructions.

I will bold-face certain items, without further explanation in this blog, that I hope you will think about as you read the instructions.  I will probably discuss most of the bold-faced instructions in later blogs.  Keep in mind that the text headings are bold-face simply to show that they are headings.  The bold-face to which I particularly draw attention will be in the body of the text.  That bold-facing is mine and not Judge Pauley's.

I start with the discussion of the second object of the conspiracy, tax evasion.  The court gave this instruction before instructing as to what tax evasion was.  I think the court did that simply because the order of presentation in the indictment was with conspiracy as the first count.

Also, readers should be aware of that two types of tax evasion were charged.  First, there was tax evasion with respect to unindicted taxpayers, the notion being that the defendants allegedly conspired to commit and themselves did commit, under various derivative liability theories (that I will discuss in a later blog).  Second, there was Daugerdas' personal tax evasion with respect to his own returns.  In the following discussion, I omit the instructions relevant to this second type of evasion, since it is garden-variety (although he used exotic aggressive tax shelters of his own crafting).  I am much more interested in the first type of evasion -- evasion on the returns of unindicted and perhaps even nonculpable -- at least not criminally culpable -- taxpayers.  So, in order to make the instructions more readable as to the first type of tax evasion, I am omitting all references to Daugerdas' person alleged evasion.  I show those omissions with ellipses -- * * *.
Second Object: Tax Evasion  
The second object of the alleged conspiracy is the attempted evasion of income taxes of Jenkens & Gilchrist clients who participated in the Short Sale, SOS, Swaps, and HOMER tax shelters. To prove the second object of the conspiracy, the Government must prove beyond a reasonable doubt that the defendant you are considering and one or more co-conspirators unlawfully, willfully and knowingly agreed to commit the crime of tax evasion with respect to the clients who participated in the tax shelters. The elements of tax evasion are:  
First, that a substantial tax was due and owing to the United States by the relevant taxpayer client;  
Second, that the defendant you are considering committed, or caused to be committed, one or more affirmative acts of evasion described in the Indictment; and  
Third, that the defendant you are considering acted willfully and knowingly in attempting to evade the taxes owed by the taxpayer client.  
I will discuss the elements of tax evasion in more detail later in my charge, when I discuss Counts 2 through 11 * * * of the Indictment, which charge substantive counts of tax evasion. The law that I am going to explain in connection with those substantive counts should be applied by you when you are considering whether either of the defendants conspired to commit the tax evasion object of the conspiracy. 
I now offer the relevant instructions on the substantive crime of evasion:

Saturday, November 23, 2013

Fourth Circuit Approves Statistical Sampling Technique for Sentencing Tax Loss (11/23/13)

In United States v. Ukwu, 2013 U.S. App. LEXIS 23513 (4th Cir. 2013), here, the Fourth Circuit affirmed a tax loss calculation based on what it viewed as a proper statistical inference from a sample of the population.  I want to address that issue in this blog.

The cases where this type of statistical inference is drawn as to the tax loss usually appear in tax return preparer prosecutions.  In these cases, the IRS discovers a pattern of errors in some number of returns prepared by the target of the investigation.  It will do some level of investigation and determine that some percentage of the errors -- usually a very high percentage -- represent the preparer's fraud. The IRS will then project that percentage over the universe of returns prepared by the preparer to determine, by statistical inference, the tax loss.  This type of inference is usually not presented in the trial to determine guilt or innocence because a more exacting standard of proof than mere inference is required but rather is presented at sentencing to determine the relevant conduct (which can include noncharged years or returns, acquitted years or returns, etc.).  From a statistical perspective, the initial inquiry is whether the sample size is adequate.  See generally the Wikipedia entry on Sampling (Statistics), here.  Let's say, for example, that the preparer prepared 1,000 returns, that the IRS audited 10 and that 9 out of 10 claimed fraudulent deductions or credits resulting in average underpaid tax of $1,000.  Can a fair inference be drawn that 90% of the remaining unaudited 990 returns not only contained fraudulent deductions but that their average amount of fraudulent deductions was $1,00?  What if the number audited were 100, with similar percentages and amounts?  What if the number audited were 200?  300? Would it be important that the taxpayers audited were randomly drawn?  And what does randomly drawn mean?

I can't write a book on statistics, but there are any number of scholarly books and articles on the subject.  One popular book is Nate Silver, The Signal and the Noise (2012), here.  I will mention Silver again below, although I can't resist saying that Silver was the "gold standard" in projecting the outcome of the 2012 presidential elections.  See Nate Silver's Wikipedia entry here.  I mention also Charles Whelan, Naked Statistics: Stripping the Dread from the Data (2012), here.

Let's see what the Fourth Circuit did in its statistical exegesis in Ukwu.  I note at the outset that  opinion is an unpublished per curiam opinion.  I won't go into a rant about unpublished opinions, not to mention unattributed per curiam opinions.  I have done that elsewhere and, besides, nobody is or should be interested in my opinions on such opinions.  I do say that it is some type of "junior" opinion deemed to be of less significance than published opinions in terms of adding to the law.  (Perhaps this could be compared to the difference between Memorandum and Regular Tax Court Opinions.)  Let's get right to to opinion:

The Court gave us the key background (but not the details) as follows:
After Mr. Ukwu's jury conviction, the government estimated how much money Mr. Ukwu took from federal and state coffers. It concluded that Mr. Ukwu's criminal behavior created tax losses of $2.1 million, which corresponds to a base offense level of 22 under § 2T4.1 of the United States Sentencing Guidelines Manual. 
On appeal, Mr. Ukwu takes issue with the $2.1 million estimate, arguing that a preponderance of the evidence shows that his ill-gotten gains amounted to less than $1 million. Specifically, he argues that the district court's method of estimating the tax shortfall was unsound because it used a small, flawed sample of tax returns to make inferences about another 1000 returns that he prepared. Based in part on its estimate, the district court sentenced Mr. Ukwu to 51 months in prison. Mr. Ukwu filed a timely appeal.

Friday, November 22, 2013

Daugerdas Retrial Jury Instructions - Part 06 Conspiracy Instructions Part 2 - Defraud / Klein Conspiracy (11/16/13; revised 11/23/13)

Judge Pauley gives standard instructions on the elements of the crime of conspiracy - to summarize:
First: that an agreement existed between two or more persons to accomplish at least one of the unlawful objectives charged in the Indictment;  
Second: that the defendant you are considering knowingly and willfully became a member of, and joined in, the conspiracy; and  
Third: that a member of the conspiracy, not necessarily the defendant whom you are considering, knowingly committed at least one overt act in furtherance of the conspiracy
The Court then explains the elements, again in fairly standard instructions.  The Court then moves to the objects of the conspiracy.  I address in this blog the defraud / Klein conspiracy object.  The defraud conspiracy in a tax setting is commonly referred to as a Klein conspiracy.  See United States v. Klein, 247 F.2d 908 (2d Cir. 1957), here.  Here are Judge Pauley's instructions on the Klein conspiracy (I have added the bold face in the text (as opposed to the caption) to make a point that I shall discuss below):
First Object: To Defraud the United States and its agency, the IRS 
The first object of the conspiracy is to defraud the United States by impeding, impairing, defeating and obstructing the lawful functions of the Internal Revenue Service in the ascertainment, evaluation, assessment and collection of income taxes. To prove the first object of the conspiracy, the Government must prove beyond a reasonable doubt that the defendant you are considering and one or more co-conspirators unlawfully, willfully and knowingly agreed to defraud the United States by fraud, deceit or other dishonest means.
I instruct you that the Internal Revenue Service is an agency of the United States Government which is responsible for the collection of tax revenue. The term “conspiracy to defraud the United States” therefore means that the defendants and other co-conspirators are accused of conspiring to impede, impair, defeat, and obstruct the IRS’s lawful functions of ascertaining and collecting tax revenue owed to the United States. It is not necessary that the United States suffer a financial loss from the conspiracy. Indeed, even if the taxpayer’s ultimate legal position on some issue (such as a tax shelter loss) is correct, and he owes no additional taxes, that is not a defense to the crime charged. One cannot use deception and dishonest means—such as making false statements to the IRS—to impede, impair, obstruct, or defeat the 8 IRS, even to protect a legitimate tax position.  
A conspiracy to impede the functions of the IRS by fraud or dishonest means may include, by way of example, such things as agreements to destroy documentation of income, to destroy records, to transfer money or take other action in an attempt to conceal ownership of income or property, to create false documentation, to attempt to influence witnesses, or to engage in any other fraudulent or deceptive conduct that would have the effect of impairing the ability of the IRS to collect tax revenue. Such conduct can also include falsifying the date of a transaction for tax purposes. In this regard, I instruct you that the income tax laws are administered on the basis of an annual accounting system which prohibits the reopening of a prior year’s tax return to take account of events occurring in later years. By citing such examples, of course, I am not suggesting that these are the only actions that could impede the IRS by fraudulent or dishonest means. Nor am I expressing any view as to whether conduct similar to the examples I have mentioned took place here.  
Moreover, it is critical for you to recognize that not all conduct that impedes the lawful functions of a Government agency is illegal. To be unlawful, the conduct must entail fraud, deceit, or other dishonest means. It is not illegal simply to make the IRS’s job harder. Only an agreement to engage in conduct that tends to impede the IRS and that also involves fraudulent, deceitful, or dishonest means, constitutes an illegal agreement to defraud the United States.

Wednesday, November 20, 2013

Fourth Circuit Reverses Tax Obstruction Conviction Because of Bad Instruction and Affirms Denial of Good Faith Instruction for False Claim Conviction (11/20/13)

In United States v. Jaensch, 2013 U.S. App. LEXIS 22977 (4th Cir. 2013), here, an unpublished decision, the Fourth reversed a conviction for tax obstruction, Section 7212, here, because of an erroneous instruction that did not adequately present the specific intent required for the crime.

The facts are of the tax protestor type -- failing to file returns based on tax protestor notions.  The defendant did file a return for one year -- extending his protest -- by claiming a refund of $774,052.  The IRS rejected the claim and notified him that he was required to file a return in 30 days to avoid a civil penalty.  The defendant then filed a return reporting $113 taxable income and, obviously, no tax due.

He was convicted for "one count of corruptly endeavoring to impede the due administration of the tax laws under 18 U.S.C. § 7212(a), ("Count 1"), one count of filing a false claim for a refund under 18 U.S.C. § 287, ("Count 2"), and four counts of willful failure to file a tax return under 26 U.S.C. § 7203, ("Counts 3-6")."   He appealed on several grounds.  Here are the parts of the opinion I find interesting:

Tax Obstruction / Section 7212

As noted, the court reversed this conviction because of a defect in the instructions.  Here is the Court's discussion:
In this case, the district court's instruction on Count 1 misled the jury as to the controlling law and we cannot say that the error was harmless. To prove a violation of § 7212(a), "the government must prove that the defendant: 1) corruptly; 2) endeavored; 3) to obstruct or impede the administration of the Internal Revenue Code." United States v. Wilson, 118 F.3d 228, 234 (4th Cir. 1997). To act corruptly is to act "with the intent to secure an unlawful benefit either for oneself or for another." Id.\ 
The district court's instructions do not properly explain the Government's burden to the jury. Violation of § 7212(a) is a crime of specific intent. A defendant must not only endeavor to impede due administration but must do so with the specific intent to secure an unlawful benefit. See Wilson, 118 F.3d at 234. Although the district court correctly defined "due administration," "obstruct or impede," and "corruptly," it instructed the jury that it could convict Jaensch by finding that he committed acts listed in the indictment without finding that he committed those acts with the requisite intent to secure an unlawful benefit. 
The jury instructions state, in relevant part, that: 
If the jury concludes that the government did prove beyond a reasonable doubt that one, the defendant employed at least one act set forth in Section 1-M through U of the indictment and that the defendant did commit an act identified in Section 1-V through Y of the indictment, and two, that the defendant acted knowingly and intentionally, then the jury must find the government [sic] guilty of the offenses in Count 1 of the indictment. 
J.A. 608.

Tuesday, November 19, 2013

Early Court Appellate Court Decision on New Sentencing Guideline Provision Regarding Unclaimed Deductions (11/19/13)

In United Sates v. Fawaz, 2013 U.S. App. LEXIS 23135 (6th Cir. 2013), here, the Sixth Circuit addressed the new Sentencing Guidelines provision, effective November 1, 2013, here, regarding unclaimed deductions.  See Further on U.S. Sentencing Commission Proposal for Unclaimed Credits, Deductions and Exemptions (Federal Tax Crimes Blog 8/10/13), here.  The new provision is in SG 2.T.1, Application Note 3, here, as follows :
3.      Unclaimed Credits, Deductions, and Exemptions.—In determining the tax loss, the court should account for the standard deduction and personal and dependent exemptions to which the defendant was entitled. In addition, the court should account for any unclaimed credit, deduction, or exemption that is needed to ensure a reasonable estimate of the tax loss, but only to the extent that (A) the credit, deduction, or exemption was related to the tax offense and could have been claimed at the time the tax offense was committed; (B) the credit, deduction, or exemption is reasonably and practicably ascertainable; and (C) the defendant presents information to support the credit, deduction, or exemption sufficiently in advance of sentencing to provide an adequate opportunity to evaluate whether it has sufficient indicia of reliability to support its probable accuracy (see §6A1.3 (Resolution of Disputed Factors) (Policy Statement)).
However, the court shall not account for payments to third parties made in a manner that encouraged or facilitated a separate violation of law (e.g., "under the table" payments to employees or expenses incurred to obstruct justice). 
The burden is on the defendant to establish any such credit, deduction, or exemption by a preponderance of the evidence. See §6A1.3, comment.
In summary, under the new Application Note, in order for a defendant to use unclaimed deductions to offset the income component of tax evasion, the unclaimed deductions must be related to the income in issue.  In Fawaz, the Court addressed the issue but remanded the issue for further consideration.  The Court said:
Sentencing Guidelines 
Sentencing Guideline § 2T1.9 applies to violations of § 371. The base offense level is the greater of the offense level as determined by § 2T1.1 or § 2T1.4, or offense level 10. U.S.S.G. § 2T1.9(a). Guideline § 2T1.1 calculates the base offense level through specified monetary ranges in Guideline § 2T4.1. U.S.S.G. § 2T1.1(a). For the purposes of Guideline § 2T1.1, "[i]f the offense involved tax evasion or a fraudulent or false return, statement, or other document, the tax loss is the total amount of loss that was the object of the offense (i.e., the loss that would have resulted had the offense been successfully completed)." U.S.S.G. § 2T1.1(c)(1). "If the offense involved filing a tax return in which gross income was underreported, the tax loss shall be treated as equal to 28% of the unreported gross income . . . unless a more accurate determination of the tax loss can be made." U.S.S.G. § 2T1.1(c)(1)(n.(A)). 
At the sentencing hearing, Safiedine and Fawaz objected to the probation officer's conclusion that JSC underreported its income by $1,020,000 n4 and estimation of the tax loss as $285,600 pursuant to the 28% default tax rate included in Guideline § 2T1.1(c)(1)(n.(A)). The probation officer's conclusions led to her recommendation that the court determine the appropriate base offense level was 18. At the sentencing hearing, Fawaz and Safiedine presented expert testimony from Michael Washenko, a private forensic accountant who previously worked 34 years for the IRS, in part assisting in investigations similar to the investigation of Safiedine and Fawaz. Washenko testified that the government did not actually incur a tax loss as a result of the underreported income and sales price of the Joy Road station; rather, Washenko testified Safiedine actually overpaid his taxes because he did not claim business expense deductions related to the payments Safiedine made in signing the Sunoco checks over to third parties.
   n4This total includes $175,000 from the sale of the Joy Road station and $845,000 from unreported Sunoco upfront consideration payments.

Sunday, November 17, 2013

Watch the Refund Statute of Limitations on OVDP Payments Related to Income Tax (11/16/13)

The 2012 OVDP FAQ 25, here, requires that the full package include various documents (amended returns for the 8-year period, etc.).  Contemporaneously (or before) the taxpayer should send the following to a separate address (from  the 2012 OVDP FAQ):
A check payable to the Department of Treasury in the total amount of tax, interest, accuracy-related penalty, and, if applicable, the failure to file and failure to pay penalties, for the voluntary disclosure period must be sent along with information identifying the taxpayer name, taxpayer identification number, and years to which the payment relates to the following address.
If the taxpayer does not opt out of the OVDP penalty structure, there are no glitches in this payment system that I am aware of.  If the taxpayer opts out, however, and the IRS has posted the remittances as payments to years that, by the time of the resolution of the opt out, are closed for refund claims, the IRS takes the position that it cannot refund any tax, penalty or interest overpaid -- either overpaid with the original return or the payment under FAQ 35.

The reason for this position is that Section 6511(a) and (b), here, preclude the refund.  Readers can read the statute itself at the link.  The following is my explanation of the two statutes of limitations on refunds from the current draft of  my Federal Tax Procedure Book (footnotes omitted):
First, there is a statute of limitations for filing the claim for refund.  A claim for refund must be filed within three years from the date the return was filed or two years from the date the tax was paid, whichever is later, and, if no return is filed, within two years from the date of payment.  § 6511(a).  Read literally, this means that a taxpayer can file a return 40 years late and qualify under this first rule. I hope readers will instinctively say something must be missing here, for statutes of limitations do not normally allowing such lengthy lapses before the claim must be pursued.  The answer to that concern is in the second rule to which I now turn. 
Second, there is a statute of limitations on the amount of tax that can be refunded if the claim is timely under the first rule.  The IRS may only refund the amount of tax paid within three years  plus the period of any extension and, if the foregoing rule does not apply, then it may only refund the tax paid within two years of the date of the claim.  § 6511(b)(2).  This is called the “lookback” rule. 
The key for OVDP purposes is the second rule relating to possible refunds on the opt out arising from the FAQ 35 payments.  Taxpayers and practitioners should be alert to protect the refund statute of limitations for those payments and must act within the two year period from the date of payment.

Saturday, November 16, 2013

DOJ Tax Memo Clarifying Points of Swiss Bank Initiative (11/16/13)

DOJ Tax has issued comments on its Swiss bank initiative.  See Memo of 11/5/13, here.  Excerpts I think may most interest readers are (highlighting provided by JAT):
Choosing a category. Each eligible Swiss bank should carefully analyze whether it is a category 2, 3 or 4 bank. While it may appear more desirable for a bank to attempt to position itself as a category 3 or 4 bank to receive a non-target letter, no non-target letter will be issued to any bank as to which the Department has information of criminal culpability. If the Department learns of criminal conduct by the bank after a non-target letter has been issued, the bank is not protected from prosecution for that conduct. If the bank has hidden or misrepresented its activities to obtain a non-target letter, it is exposed to increased criminal liability.
Changing from Category 3 to 2 (or 2 to 3).The Program provides that changes from category 3 to category 2 will be approved by the Tax Division only in extraordinary circumstances, and subject to the limitations set out in the Program. (Program III.C.) If a bank has submitted a letter of intent under category 2 of the Program and belatedly determines that it should have applied under category 3, a bank may withdraw its letter of intent. If the bank later submits a timely letter of intent under category 3, it should expect to be asked to describe why it initially believed that it may have committed tax-related or monetary transaction offenses as described in the Program. 
* * * 
Penalty calculation -- permitted reductions. The Program allows for the reduction of penalties with respect to three categories of U.S. related accounts. The first category -- accounts that are not undeclared -- is intended to address issues concerning lines of business that by their nature did not facilitate the evasion of U.S. taxes and reporting requirements. For example, a corporate account that was declared but had U.S. signatories who did not file FBARs is included in the definition of U.S. related accounts under the Program, but may be excluded for the penalty calculation. The second category -- accounts that were disclosed by the bank to the Internal Revenue Service -- refers only to accounts that were timely disclosed, not accounts that are disclosed under FATCA, as part of the Program, pursuant to treaty requests, as a result of other law enforcement efforts, or similar forms of later disclosure. The third category -- accounts as to which the bank notified its account holders of an announced offshore voluntary disclosure program and can establish that its account holder made a voluntary disclosure under that program -- includes only those accounts that were reported subsequent to notification by the bank. All forms of voluntary disclosure acceptable to the IRS will meet the voluntary disclosure standard of the Program, including the OVDI/OVDP procedures, the Streamlined Filing Compliance Program, and FBAR compliance under FAQs 9 and 17 of the respective IRS programs. The burden to show the application of penalty reductions rests with the bank. (Program II.H.)

Liechtenstein Will / May End Its More Blatant Forms of Tax Cheating (11/16/13)

So speaketh this report from Reuters.  Tom Bergin, Liechtenstein to end bank secrecy (Reuters 11/14/13), here.  Here are the excepts.
Liechtenstein, whose banks have been accused by the United States and other countries of facilitating tax evasion, said on Thursday it would end its practice of helping foreigners hide money from their tax authorities. 
The move highlights how Liechtenstein has moved more quickly than neighboring Switzerland, possibly the world's most important offshore financial center, in reacting to international pressure for greater transparency. 
* * * *  
The government of the tiny country of 36,000 inhabitants said in a statement that it would sign up to the Multilateral Convention on Mutual Administrative Assistance in Tax Matters, an international forum that allows tax authorities to ask their counterparts in other countries for information on taxpayers. 
The Alpine nation said it would also join up to a system of automatic information exchange being developed by the Organisation for Economic Co-operation and Development (OECD), which is expected to come into force in late 2015 or early 2016. 
Under automatic information exchange, if an individual opens a bank account in a foreign country, that country will automatically inform the tax authority in the individual's country of origin. 
Tax advisers say the automatic exchange of information will make the most common forms of tax evasion difficult, if not impossible, in those countries that agree to it.

Daugerdas Retrial Jury Instructions - Part 06 Conspiracy Instructions Part 1 (11/16/13)

I begin today the first of several blog entries on Judge Pauley's conspiracy instructions.  The complete set of the instructions is here.

Judge Pauly instructs the jury on the general concept of Conspiracy as follows:
Count 1: Conspiracy  
As mentioned earlier, Count 1 of the Indictment charges both Defendants, Paul Daugerdas and Denis Field, with a conspiracy that had three objectives: First, to defraud the United States and the Internal Revenue Service by obstructing the IRS’s ascertainment and collection of income taxes. Second, to attempt to evade income taxes allegedly owed by various tax shelter clients. And third, to defraud the IRS by committing wire and mail fraud.  
A conspiracy is a kind of criminal partnership—an agreement of two or more persons to join together to accomplish some unlawful purpose. It is an entirely separate and different offense from the substantive crime which may be the objective of the conspiracy. Indeed, you may find a defendant guilty of the crime of conspiracy, even if you find that the substantive crime which was the object of the conspiracy was never actually committed. Of course, if a defendant participates in a conspiracy and the crime or crimes which were the object of the conspiracy were committed, the defendant may be guilty of both the conspiracy and the substantive crime. The point simply is that the crime or crimes that were the objective of the conspiracy need not have been actually committed for a conspiracy to exist. 
JAT Comments:

Friday, November 15, 2013

Daugerdas Retrial Jury Instructions - Part 05 General Criminal Tax Instructions (11/14/13)

Judge Pauley's general criminal tax law instruction is:
General Instructions on Criminal Tax Law 
I will now turn to the charges in this case. The charges all relate to the federal tax laws and to the defendants’ design, marketing and implementation of the tax shelters that you have heard about at trial.  
I instruct you first that the income tax laws are constitutional and valid and everyone has a legal obligation to pay income taxes. However, as I told you at the outset, a taxpayer is entitled to arrange his or her affairs in any lawful manner to minimize the payment of taxes. One of the ways that people minimize the payment of taxes is through a tax shelter. The term “tax shelter” simply refers to a series of financial and related transactions that offer substantial tax savings as one of its main benefits. Some tax shelters are legal; others are not. It all depends on the facts about the individual taxpayer and the tax shelter involved. It is perfectly proper for a taxpayer to file his or her returns based on an aggressive or debatable tax position. If that position turns out to be incorrect, the taxpayer may be required to pay certain penalties. But this case is not about the actual collection of any income taxes that may be due to the United States or penalties imposed on any of the tax shelter clients. This is a criminal case.  
The Government brings this case to enforce laws that make it a crime to attempt to defeat or evade the payment of income taxes or to conspire to commit tax evasion or other related crimes. In a little while, I will instruct you in detail on the elements of a criminal violation of the tax laws. Overall, what you should keep in mind is that a person cannot be guilty of violating the federal tax laws if he believed that his conduct was lawful, even if it turns out that he was wrong about the law. 
JAT Comment:  The following key points are made:

  1. Taxpayer can arrange his affairs to pay the minimum tax.
  2. Tax shelters are defined as "simply" referring "to a series of financial and related transactions that offer substantial tax savings as one of its main benefits."
  3. The jury is told that some tax shelters are legal, some are not -- with the distinction being dependent "on the facts about the individual taxpayer and the tax shelter involved."
  4. The Court says that it will instruct as to the "criminal violation of the tax laws," which is presumably how the jury will distinguish between a legal tax shelter and an illegal tax shelter.
  5. The Court ends with the short-form Cheek instruction.  The Court does have a Cheek "good faith" defense instruction later, after instructing about the crimes charged.  I will present a separate blog on that instruction.
The full set of jury instructions is linked here.

Daugerdas Retrial Jury Instructions - Part 04 Cooperating and Immunized Witness Testimony (11/14/13)

In a complex trial, particularly involving conspiracy charges, some of the parties who allegedly acted in concert to achieve an illegal end may have an incentive to cooperate with the prosecutors by testifying against others, an incentive that may make them biased in their recitation of the facts or, even, may make them lie (although this would be incredibly stupid for a cooperating witness to do).  The incentive for the cooperation might be an understanding, formal or otherwise, not to prosecute or a plea deal or possibility that cooperation might achieve an S.G. downward departure or a Booker variance for the cooperatinig witness.

In recognition of this phenomenon defendants will want some type of instruction to the jury to carefully consider the motives of the cooperating and immunized witnesses.  Here is the one that Judge Pauley gave in the Daugerdas retrial where cooperating witnesses testified as to their own culpability and the defendants':.
Testimony of Cooperating Witnesses  
You have heard from witnesses who testified that they were actually involved in planning and carrying out certain of the crimes charged in the Indictment. The law allows the use of cooperating witness testimony. Indeed, it is the law in federal courts that such testimony may be enough in itself for conviction, if the jury believes that the testimony establishes guilt beyond a reasonable doubt. 
However, because of the interest a cooperating witness may have in testifying, his or her testimony should be scrutinized with special care and caution. The fact that a witness is a cooperator can be considered by you as bearing upon his or her credibility. Like the testimony of any other witness, cooperating witness testimony should be given such weight as it deserves in light of the facts and circumstances before you. If you find that a witness testified falsely in one part, you still may accept his or her testimony in other parts, or may disregard all of it.  
You should ask yourselves whether a cooperating witness would benefit more by lying, or by telling the truth. Did the witness believe that his or her interests would be best served by testifying falsely or by testifying truthfully? Did this motivation color his or her testimony? If you find that the testimony was false, you should reject it. However, if you are satisfied that the witness told the truth, you should accept it as credible and act upon it accordingly.  
Finally, you have heard testimony from cooperating witnesses who pleaded guilty to charges arising in part out of the same facts that are at issue in this case. You are instructed that you are to draw no conclusions or inferences of any kind about the guilt of the defendants on trial merely from the fact that a prosecution witness pleaded guilty to similar charges. That witness’ decision to plead guilty was a personal decision about his own guilt. It in no way changes the presumption of innocence that applies to each defendant who is on trial here, a presumption that remains with them throughout the trial and into your jury deliberations unless and until you conclude that the Government has proven a particular defendant’s guilt by competent evidence beyond a reasonable doubt.
Immunized Witnesses  
You have heard testimony from two other types of witnesses. First, from witnesses who testified pursuant to a non-prosecution agreement, which means that the Government promised each of these witnesses that, in exchange for testifying truthfully, he or she would not be prosecuted for any crimes admitted either in Court or in interviews with prosecutors. And second, from witnesses who have testified under a grant of immunity, which means the witness’s testimony may not be used against him or her in any criminal case, except a prosecution for perjury or otherwise failing to comply with the immunity order.  
Now, it is perfectly acceptable for the Government to enter into non-prosecution agreements and to request orders of immunity, and it is entitled to call witnesses who are subject to these agreements or orders. However, like cooperating witnesses, the testimony of a witness who has been promised that he or she will not be prosecuted or who has been granted an order of immunity should be examined with greater care than the testimony of an ordinary witness. You should scrutinize it closely to determine whether or not it is colored in such a way as to place guilt upon the defendants in order to further the witness’s own interest; for such a witness, confronted with the realization that he or she can win his or her own freedom by helping to convict another, has motive to falsify his or her testimony. On the other hand, if you believe it to be true, and determine to accept the testimony, you may give it such weight, if any, as you believe it deserves.  
The full set of jury instructions is linked here.

Thursday, November 14, 2013

IRS Indian Initiative for Persons Outside OVDP; Also on Quiet Disclosures (11/14/13)

Reporting on a California State Bar Tax Section Meeting, Tax Notes reports that the IRS will soon (as early as the week of 11/11/13) ) "begin examining U.S. taxpayers suspected of holding undeclared accounts in Indian banks, according to Nicholas Connors, a supervisory revenue agent" with SB/SE.  Kristen A. Parillo, IRS Will Soon Examine U.S. Taxpayers With Undeclared Indian Bank Accounts, 2013 TNT 219-4 (11/13/13).  Some excerpts:
After receiving account information from Indian banks, the IRS has about 100 Indian bank account cases that it is sending out for examination across the country, he said. 
"I think California, because of the large Indian population, is going to get more than its fair share of cases," Connors said. "Within the Northern California/Bay Area, we're scheduled to pick up 30 or 40 of those." 
"Looking ahead, the offshore bank investigations are just going to grow," Connors said. In addition to India, "Israel is on the list of banks that is providing information to us, and from there it just keeps going on and on," he said. "Within Examination, there's talk that this could someday become a work issue for every single revenue agent in SB/SE where everyone will be working some type of offshore case."
Regarding Quiet Disclosures, Tax Notes reports:
The SEP team continues to examine quiet disclosures as well as cases regarding taxpayers who opted out of the IRS offshore voluntary disclosure program (OVDP), said Connors. "The guidance we're getting on quiet disclosures has been extremely harsh," he said. "Essentially those taxpayers walked past compliance three times: They didn't file correctly the first time, they didn't come in under voluntary disclosure, and now they're trying to hide it by slipping it in through an amended return. Don't expect much leniency if we have a quiet disclosure case; agents are being told to be aggressive." 
Again, I will repeat my mantra that the IRS has not said that the audit for persons who join OVDP and opt out will be more lenient than for persons who are audited after a quiet disclosure or a go-forward.  One could read the foregoing statement as hinting at that, but that is not been what the IRS has said to date.  All it has said is that those opting out of OVDP will be audited and get the audit result.  That is all that can happen to taxpayers who are audited after quiet disclosures or go-forwards.

Judge Holmes of the Tax Court Sets up the Allen Issue Conflicts (11/14/13; revised 11/16/13)

I have previously blogged on the Allen issue -- whether Section 6501(c)(1)'s unlimited statute of limitations may be triggered by fraud on the return that is not the taxpayer's fraud.  See Allen v. Commissioner, 128 T.C. 37 (2007), here.  The key blogs are listed below.  In a recent Tax Notes article summarizing some of the events at the California state bar tax section conference, the following was noted (Kristen A. Parillo, IRS Will Soon Examine U.S. Taxpayers With Undeclared Indian Bank Accounts, 2013 TNT 219-4 (11/13/13)):
Tax Court Judge Mark V. Holmes gave an overview of noteworthy judicial developments, including the Court of Federal Claims' September 30 decision in BASR Partnership v. United States, No. 1:10-cv-00244 (Fed. Cl. 2013) 2013 TNT 211-10: Court Opinions. That decision is "jurisprudentially interesting," Holmes said, because its holding is at odds with a 2007 Tax Court decision regarding whose fraudulent intent is required under section 6501(c)(1) to extend the three-year statute of limitations period for assessment of income taxes. 
In BASR Partnership, the court held that the phrase "intent to evade tax," as it is used in section 6501(c)(1), is limited to cases in which the taxpayer has the requisite intent to commit fraud. The court said that section 6501(a) is expressly limited to a return filed by the taxpayer; by implication, section 6501(c) is limited to fraud by the taxpayer, it concluded. (Prior coverage 2013 TNT 191-3: News Stories.) 
That reasoning is at odds with the Tax Court's decision in Allen v. Commissioner, 128 T.C. 37 (2007) 2007 TNT 44-11: Court Opinions, in which the court held that a preparer's fraudulent intent to evade tax is sufficient to keep the limitations period open. "Nothing in the plain meaning of the statute suggests the limitations period is extended only in the case of the taxpayer's fraud," the court wrote, adding that the statute "keys the extension to the fraudulent nature of the return, not to the identity of the perpetrator of the fraud." 
"So we have the express language canon, I suppose, going up against the plain language canon," Holmes said. "Something will have to give. Both of these opinions are relatively short, given the depth of material that one can bring to this issue." 
Holmes noted that Bryan T. Camp of Texas Tech University School of Law wrote several articles after the Tax Court's Allen decision in which he traced the legislative history of section 6501(a). According to Camp's research, the concepts of "false or fraudulent return" and "intent to evade tax" date back to the Revenue Act of 1862. Based on the legislative history, Camp concluded that "the section 6501(a) assessment limitations period represents a very strong public policy choice in favor of closure," such that "the fraud exception should be read to refer to the taxpayer's fraud and not the fraud of a third party such as a return preparer." (See "Tax Return Preparer Fraud and the Assessment Limitation Period," Tax Notes, Aug. 20, 2007, p. 687 2007 TNT 162-30: Viewpoint, and "Presumptions and Tax Return Preparer Fraud," Tax Notes, July 14, 2008, p. 167 2008 TNT 136-33: Viewpoint.)

Suspension of Criminal Statute of Limitations Upon Request to a Foreign Government for Information (11/14/13)

I have written before on 18 USC 3292, here, which which suspends the criminal statute of limitations while a request to a foreign government for information is pending pursuant to a grand jury investigation. See Eleventh Circuit Sustains Statute Suspension For Foreign Records Request Under 18 USC 3292 (Federal Tax Crimes Blog 8/17/12), here, and Court holds Application to Court for 18 USC 3292 Foreign Treaty Request Suspension Must be Made Within Statute of Limitations (Federal Tax Crimes Blog 2/11/12), here.  In United States v. Arrington, 2013 U.S. Dist. LEXIS 159549 (D NE 11/713), here [to come], the court has this discussion of this statute in a case where the defendant was charged "with conspiracy, mail fraud, wire fraud, and aiding and abetting for allegedly planning and perpetrating an investment scheme with intent to defraud, using mail and wire communications":
Under 18 U.S.C. § 3292, the suspension of a statute of limitations pending an official request for evidence to a foreign country is permitted under certain circumstances. 18 U.S.C. § 3292(a). The statute provides: 
Upon application of the United States, filed before return of an indictment, indicating that evidence of an offense is in a foreign country, the district court before which a grand jury is impaneled to investigate the offense shall suspend the running of the statute of limitations for the offense if the court finds by a preponderance of the evidence that an official request has been made for such evidence and that it reasonably appears, or reasonably appeared at the time the request was made, that such evidence is, or was, in such foreign country. 
18 U.S.C. § 3292(a)(1). The statute also provides that such a suspension may not extend beyond the time the foreign country takes final action, or, in any event, may not extend the statute for more than three years from the filing of the official request. 18 U.S.C. § 3292(b) & (c). 
Before suspending the running of the statute of limitations, the district court must find by a preponderance of the evidence that (1) an official request has been made for the evidence and (2) it reasonably appears or appeared at the time the request was made that the evidence of the crime is or was in a foreign country. United States v. Jenkins, 633 F.3d 788, 797 (9th Cir. 2011); 18 U.S.C. § 3292(a)(1). "[T]he government has some burden to establish, as opposed to being able to merely assert without support, that the foreign evidence it seeks meets the section's requirements." Id. at 798. A § 3292 application "must be supported by materials that 'include or [are] accompanied by some indicia of reliability.'" Id. (quoting United States v. Trainor, 376 F.3d 1325, 1331 (11th Cir. 2004)). Because § 3292 extends the limitations period (itself designed to ensure the reliability of evidence) and an application under § 3292 is made ex parte, the government must meet a "minimum evidentiary burden." Trainor, 633 F.3d at 1332.

Daugerdas Retrial Jury Instructions - Part 03 Credibility of Witnesses (11/14/13)

Judge Pauley's instructions on credibility of witnesses (see the full set here) is:
Credibility of Witnesses  
You have had an opportunity to observe all of the witnesses. How do you evaluate the credibility or believability of those witnesses? The answer is that you use your plain common sense. Was the witness candid, frank and forthright? Or, did the witness appear evasive as if he or she was trying to hide something?  
How much you choose to believe a witness may be influenced by the witness’s bias. Does the witness have a relationship with the Government or a defendant which may affect the witness’s testimony? Does the witness have some incentive, loyalty or motive that might cause the witness to shade the truth? Or does the witness have some bias, prejudice or hostility that may have caused the witness, consciously or not, to give you something other than a completely accurate account of the facts?  
You are not required to accept testimony even though the testimony is uncontradicted and the witness’s testimony is not challenged. You may decide because of the witness’s bearing or demeanor, or because of the inherent improbability of the testimony, or for other reasons, that the testimony is not worthy of belief.  
If you find that a witness willfully testified falsely, that is always a matter of importance that you should weigh carefully. If you find that any witness has lied under oath, you should view the testimony cautiously and weigh it with great care. It is, however, for you to determine how much of the witness’s testimony, if any, you wish to believe.  
Thus, there is no formula by which you can evaluate testimony. You determine for yourself every day and in a multitude of circumstances the reliability of statements made to you by others. You may consider the interest of any witness in the outcome of this case, and this is true regardless of who called or questioned that witness.  
Indeed, the issue of credibility may, but need not, be decided in an all-or-nothing fashion. If you find that a witness testified falsely in one part you still may accept his or her testimony in other parts, or you may disregard all of it. That is a determination entirely for you, the jury. 
Credibility is a complex issue.  I can't add anything to Judge Pauley's traditional formulation.

Although there is a large body of literature on the issue, I will point readers to two sources.

Another Contributing Factor to Low Sentences -- Age (11/14/13)

This past week I participated on a panel for the California State Bar titled Hot Topics in Criminal Tax Matters.  The panelists were Robert Horwitz, Tom Moore (AUSA San Francisco), Richard Pietrofeso (IRS Laguna Niguel), Steven Toscher (Hochman, Salkin, Rettig, Toscher & Perez, P.C. Beverly Hills,) and myself.  One issue that came up was the general recognition that offshore account sentences seem light relative to nonoffshore account sentences.  I have previoiusly blogged on this subject.  See Sentencing Leniency for Offshore Tax Cheats (Federal Tax Crimes Blog 11/3/13), here, and  Lower Sentences For Offshore Tax Cheats - Role of 5K1 Departures (Federal Tax Crimes Blog 9/28/13), here.  One of the participants at the conference, Richard Pietrofeso suggested another contributing factor -- age.  A Tax Notes article of the panel discussion reports (Kristen A. Parillo, Government Views Offshore Account Crackdown as a Success Despite Few Jail Sentences, 2013 TNT 218-4 (11/12/13)):
Richard Pietrofeso, area counsel (Laguna Niguel), IRS Criminal Investigation division, surmised that the jail sentences have been low because many of the offshore account holders were elderly and some had accounts that traced back to the Holocaust.
His point was that the demographics of the population of the more egregious offshore offenders -- the ones who are prosecuted -- are probably skewed toward older defendants who have had the opportunity to accumulate more wealth and therefore have the larger offshore accounts.  When those defendants are prosecuted, a sentencing judge might well consider advanced age in sentencing, particularly with respect to departures under the Guidelines and variences under Booker.

The Sentencing Guidelines has a policy statement related to age:
§5H1.1.     Age (Policy Statement)
Age (including youth) may be relevant in determining whether a departure is warranted, if considerations based on age, individually or in combination with other offender characteristics, are present to an unusual degree and distinguish the case from the typical cases covered by the guidelines.  Age may be a reason to depart downward in a case in which the defendant is elderly and infirm and where a form of punishment such as home confinement might be equally efficient as and less costly than incarceration.  Physical condition, which may be related to age, is addressed at §5H1.4 (Physical Condition, Including Drug or Alcohol Dependence or Abuse; Gambling Addiction).
 According to my data in the spreadsheet (admittedly not complete as to age, but probably fairly representative), the average age at conviction for taxpayers is 70 years old, with 84 years old being the oldest.

Irwin Schiff's 2255 Denial Affirmed on Appeal (11/14/13)

Irwin Schiff is a notorious tax protestor / tax defier.  See Wikipedia entry here.  I have written before about the district court's rejection of his attempt via 28 USC 2255, here, to obtain relief from his convictions for tax related offense from his activities.  Schiff, a Tax Protestor, Loses 2255 Motion to Vacate Conviction (9/29/12), here.  He appealed.  The Court of Appeals for the Ninth Circuit affirmed.  United States v. Schiff, 2013 U.S. App. LEXIS 22636 (9th Cir. Nov. 7, 2013) (unpublished), here.  Nothing particularly surprising in the affirmance, except perhaps the Court of Appeals' dismissive treatment of his Cheek argument.  That treatment is (bold-face supplied by JAT):
1. Schiff's argument, that appellate counsel was ineffective for not appealing the district court's exclusion of evidence of his bipolar disorder, fails. Schiff's claim regarding the exclusion of mental health evidence is similar to one raised by co-defendant Cohen on direct appeal, and which formed the basis for this Court reversing Cohen's conviction and remanding for a new trial. United States v. Cohen, 510 F.3d 1114, 1123-27 (9th Cir. 2007). But Schiff and Cohen were situated very differently with respect to knowledge about the validity of their beliefs. Even assuming Schiff's appellate counsel was ineffective, Schiff cannot demonstrate that he was harmed by counsel's failure to raise this issue on appeal. 
In Cheek v. United States, 498 U.S. 192, 201, 111 S. Ct. 604, 112 L. Ed. 2d 617 (1991), the Court distinguished between "innocent mistakes caused by the complexity of the Internal Revenue Code," as opposed to positions that "reveal full knowledge of the provisions at issue and a studied conclusion, however wrong, that those provisions are invalid and unenforceable." Id. at 205. With regard to the second category, the Court held that "a defendant's views about the validity of the tax statutes are irrelevant to the issue of willfulness." Id. at 206. 
On direct appeal, this Court characterized the evidence against Schiff as "overwhelming, particularly the evidence that he intended to deceive the government through the use of zero returns." United States v. Cohen, 262 F. App'x 14, 16 (9th Cir. 2007). The overwhelming evidence at trial was that Schiff was aware his claimed beliefs lacked merit and that he simply disagreed with the law. Schiff had previously been punished for filing zero returns. He knew that numerous tax returns submitted by his clients had been returned as frivolous by the IRS and had resulted in penalties upheld by courts. He also knew his positions regarding tax law were rejected in every court to consider them. 
Trial testimony also showed that, knowing his beliefs and activities did not comport with tax law, Schiff counseled his clients to undertake affirmative acts of misrepresentation. Schiff engaged in evasive conduct too — after his bank account was levied upon by the IRS, he opened bank accounts under false taxpayer identification numbers and avoided IRS seizure of his vehicle by titling it in a friend's name. 
Given the extensive evidence that Schiff knew his views of the tax law were incorrect, he cannot establish that his Cheek good-faith defense was prejudiced by counsel's decision not to raise on direct appeal the district court's suppression of evidence of his bipolar disorder.

Wednesday, November 13, 2013

Good Succinct Discussion of 404(b) Evidence (11/13/13)

In United States v. Anderson, 2013 U.S. App. LEXIS 22050 (11th Cir. 2013), here, an unpublished opinion, the Court discusses Rule 404(b), here, evidence, finding that the evidence in question had minimum probative value and thus perhaps should not have been admitted under Rule 403, here, titled "Excluding Relevant Evidence for Prejudice, Confusion, Waste of Time, or Other Reasons." Nevertheless, it was harmless.  Rule 404(b) provides:
(b) Crimes, Wrongs, or Other Acts.
  (1) Prohibited Uses. Evidence of a crime, wrong, or other act is not admissible to prove a person’s character in order to show that on a particular occasion the person acted in accordance with the character.
  (2) Permitted Uses; Notice in a Criminal Case. This evidence may be admissible for another purpose, such as proving motive, opportunity, intent, preparation, plan, knowledge, identity, absence of mistake, or lack of accident. On request by a defendant in a criminal case, the prosecutor must:
    (A) provide reasonable notice of the general nature of any such evidence that the prosecutor intends to offer at trial; and
    (B) do so before trial — or during trial if the court, for good cause, excuses lack of pretrial notice.
The Court's discussion is a good succinct summary of key features of Rule 404(b),. so I thought I would offer that discussion
Anderson argues that the district court improperly admitted into evidence under Federal Rule of Evidence 404(b) a pro se "letter" that she mailed to the district court before trial. In this "letter," Anderson asserted that a magistrate judge had "convert[ed]" the magistrate judge and an Assistant U.S. Attorney "into accommodated parties with respect to [a] debt," which Anderson thereby purported to "discharge." Anderson contends that this document had no probative value and was highly prejudicial, as it could only be perceived as bad-character evidence. 
We review a district court's Rule 404(b) rulings for an abuse of discretion. United States v. Matthews, 431 F.3d 1296, 1311 (11th Cir. 2005). Under this standard, we must affirm, even if we might have decided the issue differently, so long as the trial court's decision was not based on a clear error of judgment or application of the wrong legal standard. See id. at 1312. Rule 404(b) prohibits the admission of evidence of a person's crimes or other wrongful acts except in certain circumstances. Fed.R.Evid. 404(b). Nevertheless, Rule 404(b) is a "rule of inclusion," and relevant Rule 404(b) evidence "should not lightly be excluded" when it is central to the government's case. United States v. Jernigan, 341 F.3d 1273, 1280 (11th Cir. 2003) (internal quotation marks omitted); see also United States v. Sanders, 668 F.3d 1298, 1314 (11th Cir. 2012) (explaining that Rule 404(b) allows extrinsic evidence "unless it tends to  prove only criminal propensity" (internal quotation marks omitted)). In order to be admissible under Rule 404(b) the evidence must be relevant to an issue other than the defendant's character, the government must offer sufficient proof for the jury to find by a preponderance of evidence that the defendant committed the act, and its probative value must not be substantially outweighed by its undue prejudice, satisfying Rule 403. Matthews, 431 F.3d at 1310-11 (quoting United States v. Delgado, 56 F.3d 1357, 1365 (11th Cir. 1995)).

Daugerdas Retrial Jury Instructions - Part 02 Circumstantial Evidence (11/13/13)

Judge Pauley's instructions on Circumstantial Evidence and a related topic of Inferences (see full set here) are as follows:
Direct and Circumstantial Evidence  
There are two types of evidence that you may consider in reaching your verdict—direct evidence and circumstantial evidence.  
Direct evidence is evidence that proves a disputed fact directly. For example, where a witness testifies to what he or she saw, heard or did, that is called direct evidence.  
Circumstantial evidence is evidence that tends to prove a disputed fact by proof of other facts. To give a simple example, you may remember the story of Robinson Crusoe, who was marooned on a deserted island. He spent years thinking he was alone, until one day, as he walked along the beach, he noticed large footprints in the sand. Because his feet were too small to have made them, Robinson concluded that somebody else must have left the footprints, even though he had not seen anyone else—in other words, he had no direct evidence of that fact. But, it would be reasonable for him to conclude from the footprints on the beach that, in fact, he was not alone.  
That is all there is to circumstantial evidence. Using your reason and experience, you infer from established facts the existence or the nonexistence of some other fact.  
The law makes no distinction between direct and circumstantial evidence. Circumstantial evidence is of no less value than direct evidence, and you can consider either or both, and can give them such weight as you conclude is warranted. 
In their arguments, the parties have asked you to infer, on the basis of your reason, experience, and common sense, from one or more established facts, the existence of some other fact. The process of drawing inferences from facts in evidence is not a matter of guesswork or speculation. An inference is a reasonable deduction or logical conclusion which you, the jury, are permitted to draw—but not required to draw—from the facts which have been established by either direct or circumstantial evidence. In drawing inferences, you should exercise your common sense.
 As with most general instructions, these seem to be mainstream and unobjectionable.

Circumstantial evidence plays a large role in crimes where mens rea is required, because that requires the jury to determine what was in the defendant's mind when he or she committed the actus reus.  Unless the defendant admits the mens rea (unlikely if the defendant has not pled guilty), the jury must infer mens rea from the circumstantial evidence.  The quantum of mens rea for tax crimes is willfulness -- specific intent to violate a know legal duty (often referred to as the Cheek standard of willfulness).  (I set aside the possibility that conscious avoidance, however, nominated, may suffice, because that is a big issue I have discussed in various blogs before.)

I thought readers might find helpful several excerpts from my Federal Tax Crimes Book dealing with circumstantial evidence (footnotes omitted).

U.S. Banks File Long-Shot Litigation to Block FATCA Reciprocal Requirements (11/13/13)

Reuters has this article on a suit filed by Texas and Florida bankers to block reciprocal implementation information gathering on foreigners holding deposits in U.S. banks.  Kevin Drawbaugh, Dena Aubin and Patrick Temple-West, Bankers' lawsuit jeopardizes U.S. tax dodger crackdown -lawyers (Reuters 11/12/13), here.  Key exceprts:
A court challenge by Texas and Florida bankers threatens to undermine a broad U.S. government crackdown on offshore tax avoidance and jeopardize a web of carefully crafted international agreements, tax lawyers said on Tuesday. 
The Texas Bankers Association and the Florida Bankers Association, both industry groups, have filed a lawsuit attempting to block a new U.S. Treasury Department rule governing accounts held by foreigners in U.S. banks. 
The rule, written last year and set to take effect in March 2014, will require U.S. banks to disclose information to the Internal Revenue Service about any account held by a non-resident alien that earns at least $10 of interest per year. 
Failure to comply would cost a bank $100 per violation, while information provided by banks to the IRS under the rule would be made available to about 70 foreign governments. 
It was written to give those governments more incentive to comply with another law, the Foreign Account Tax Compliance Act (FATCA), that requires non-U.S. banks to tell the IRS about offshore accounts held by Americans worth $50,000 or more. 
Approved by Congress in 2010, FATCA is driving the rapid worldwide expansion of a network of bilateral tax information-sharing agreements, negotiated by the U.S. Treasury and its overseas counterparts amid heightened global concern about tax dodging. FATCA is set to take effect in July 2014. 
Many of these agreements depend, at least in part, on reciprocal information sharing of the sort made possible by FATCA and the 2012 Treasury rule that supplements it. 
The Texas and Florida bankers' claims face an uphill challenge in court on procedural grounds, lawyers said. But if they are upheld and the 2012 rule voided, it would damage U.S. credibility and "irreparably harm its reputation in the international community as a reliable partner in tax cooperation," federal lawyers said in U.S. District Court for the District of Columbia filings. 
* * * * 
Congress drafted FATCA, which was signed into law in 2010 by President Barack Obama. As Treasury and the IRS moved to implement the law, many non-U.S. banks and other financial institutions and their home government resisted. Some demanded reciprocal information sharing by the United States. 
To accommodate these requests and encourage foreign banks' compliance with FATCA, the Obama administration wrote the rules last year to require U.S. banks to report to the IRS on interest-earning U.S. accounts held by non-resident aliens.

IRS Gets New John Doe Summonses for Bank of Butterfield & Son Ltd. and Affiliates (11/13/13)

The IRS has obtained John Doe Summonses to U.S. banks regarding both ZKB and The Bank of N.T. Butterfield & Son Ltd., a Bermuda bank with subsidiary offices in Cayman Islands (see Wikipedia entry here).  As previously reported in this blog, JDS were issued to  Citigroup Inc's Citibank NA and Bank of New York Mellon Corp.  New John Doe Summons to U.S. Banks for Information About Correspondent Offshore Banks (Federal Tax Crimes Blog 11/10/13), here.

The DOJ Tax press release is here (I just cut and paste for now and will link it later; bold facing in the body of the release is provided by me):
Five Banks Directed to Produce Records for Accountsat Zurcher Kantonalbank, The Bank ofN.T. Butterfield & Son Limited and Affiliates 
WASHINGTON -- U.S. District Judge Kimba M. Wood of the Southern District of New York entered an order on Nov. 7, 2013, authorizing the IRS to issue summonses requiring Bank of New York Mellon (Mellon) and Citibank NA (Citibank) to produce information about U.S. taxpayers who may be evading or have evaded federal taxes by holding interests in undisclosed accounts at Zurcher Kantonalbank and its affiliates (collectively, ZKB) in Switzerland; and U.S. District Judge Richard M. Berman of the Southern District of New York entered an order today authorizing the IRS to issue summonses requiring Mellon, Citibank, JPMorgan Chase Bank NA (JPMorgan), HSBC Bank USA NA (HSBC), and Bank of America NA (Bank of America) to produce similar information in connection with undisclosed accounts at The Bank of N.T. Butterfield & Son Limited and its affiliates (collectively, Butterfield) in the Bahamas, Barbados, Cayman Islands, Guernsey, Hong Kong, Malta, Switzerland, and the United Kingdom. U.S. Attorney for the Southern District of New York Preet Bharara, Assistant Attorney General for the Justice Department's Tax Division Kathryn Keneally, and Acting Commissioner of the Internal Revenue Service (IRS) Danny Werfel made the announcement today. 
In these actions, the Court granted the IRS permission to serve what are known as "John Doe" summonses on Mellon, Citibank, JPMorgan, HSBC, and Bank of America. The IRS uses John Doe summonses to obtain information about possible tax fraud by individuals whose identities are unknown. The John Doe summonses approved today direct these five banks to produce records identifying U.S. taxpayers with accounts at ZKB, Butterfield and their affiliates, including other foreign banks that used ZKB and Butterfield's U.S. correspondent accounts at Mellon, Citibank, JPMorgan, HSBC, and Bank of America to service U.S. clients. 
"These cases once again demonstrate the department's resolve to uncover and identify taxpayers who tried to hide money overseas as a way to avoid federal taxes," said Assistant Attorney General Keneally. "These John Doe summonses will provide information about individuals using financial institutions from Switzerland to the Cayman Islands to Hong Kong to avoid their U.S. tax obligations. U.S. taxpayers still holding accounts who have not come clean should come forward and do the right thing before it's too late." 
"Today's action show that the use of foreign banks for tax evasion remains a high investigative priority of this office and U.S. citizens should understand that loud and clear," said U.S. Attorney Bharara. "By issuing these John Doe summonses, we continue our joint efforts with the IRS to identify and hold accountable those who try to evade their legal responsibility to pay taxes." 
"International issues remain a major focus for the IRS, and we are continuing our efforts to fight tax evaders who use offshore accounts to skirt the law," said IRS Acting Commissioner Werfel. "These John Doe summonses for correspondent account records show our determination to pursue evaders using offshore accounts, even if the person hiding money overseas chooses a bank that has no offices on U.S. soil." 
IRS Offshore Voluntary Disclosure programs and initiatives enable U.S. taxpayers to resolve their tax liabilities and minimize their chances of criminal prosecution by voluntarily disclosing previously undisclosed foreign accounts and income. To date, U.S. taxpayers have identified 371 previously undisclosed accounts at ZKB and 81 such accounts at Butterfield. In addition, a number of U.S. taxpayers with beneficial ownership and control over funds held in accounts at ZKB and Butterfield have admitted failing to report income earned from their offshore accounts on their federal tax returns. The IRS has reason to believe that other U.S. taxpayers who held or presently hold similar accounts at ZKB, Butterfield, and their affiliates have done the same in violation of federal tax law. In December 2012, three employees of ZKB were indicted for conspiring with U.S. taxpayers and others to hide at least $423 million from the IRS in secret Swiss bank accounts.

Tuesday, November 12, 2013

Daugerdas Retrial Jury Instructions - Part 01 Reasonable Doubt (11/12/13)

I have received the prepared jury instructions drafted by Judge Pauley (Wikipedia here) in the Daugerdas retrial.  The full set of jury instructions is linked here.  I did not get the transcript as they were actually read to the jury, but this should be pretty much as delivered for present purposes.  

I will use a series of posts to address various facets of the instructions that I find interesting.

This first post will deal with the reasonable doubt instruction.  The instruction as given is:
Reasonable Doubt  
I have said that the Government must prove a defendant guilty beyond a reasonable doubt. The question naturally arises: what is a reasonable doubt? The words almost define themselves. It is a doubt based in reason and arising out of the evidence in the case, or the lack of evidence. It is a doubt that a reasonable person has after carefully weighing all of the evidence in the case. 
Reasonable doubt is a doubt that appeals to your reason, your judgment, your experience and your common sense. If, after a fair and impartial consideration of all the 8 evidence, you can candidly and honestly say that you are not satisfied with the guilt of a defendant, that you do not have an abiding and firm belief of a defendant’s guilt; in other words, if you have such a doubt as would reasonably cause a prudent person to hesitate to act in a matter of importance in his or her own affairs, then you have a reasonable doubt, and in that circumstance it is your duty to acquit.  
On the other hand, if after a fair and impartial consideration of all the evidence, you can candidly and honestly say that you do have an abiding belief of a defendant’s guilt—a belief that a prudent person would not hesitate to act on in a matter of importance in his or her own affairs—then you have no reasonable doubt, and under such circumstances it is your duty to convict.  
One final word on this subject: reasonable doubt is not whim or speculation. It is not an excuse to avoid the performance of an unpleasant duty. Nor is it sympathy for one party or the other. “Beyond a reasonable doubt” does not mean a positive or mathematical certainty. The Government has met its burden if the guilt of a defendant is established beyond a reasonable doubt, not beyond all possible doubt.
I have no reason to believe that this is not as good as it gets for this genre of instruction.  Certainly Judge Pauley is one of the best and knows how to do justice with instructions.

The problem I have with the reasonable doubt standard for conviction is that it is not as certain a standard as one would hope for criminal convictions.    I do offer my thoughts on the subject from the following excerpt from my Federal Tax Crimes book (footnotes omitted; but caveat that the devil is in the footnotes which I omit so as not to devil up this blog entry; I do provide a pdf with the text and the footnotes here):

Zurcher Kantonalbank, U.S. Target, Too Big to Fail (11/12/13)

Two targets of the U.S. prosecutors' angst have already failed.  Now, there are reports that Zurcher Kantonalbank, also a target, is subject to Switzerland's too big to Fail legislation.  Matthew Allen, Zurich cantonal bank branded too big to fail ( 11/11/13), here.  Excerpts:
Switzerland’s largest cantonal bank is confident it already has a big enough risk-absorbing capital buffer to match tougher regulatory demands after being named alongside UBS and Credit Suisse as a “too big to fail” financial institution. 
The Swiss National Bank (SNB) turned up the heat on the Zürcher Kantonalbank (ZKB) on Monday by upgrading it to a category one “systemically relevant” institution. In other words, ZKB’s collapse would cause more pain than the Swiss economy could bear. 
* * * * 
US tax strife 
The ambitious ZKB has been busily expanding its business in recent times, in particular its wealth management services. But the international push for growth has led to some problems, most notably a criminal investigation in the United States into allegations that the bank helped US citizens evade taxes. 
ZKB is among a handful of Swiss or Swiss-based financial institutions that are enduring a full blown probe by the Department of Justice on this issue. The cantonal bank of Basel is the other Swiss state-owned bank on this list. 
 With a capitalisation of CHF150 billion at the end of last year, ZKB is the fourth largest banking group in Switzerland – behind UBS, Credit Suisse and Raiffeisen. It realised profits of CHF744 million in 2012, employed just over 5,000 staff and managed nearly CHF200 billion of clients’ wealth. 
 A FINMA spokesman told that the regulator supported the SNB’s decision to name ZKB as too big to fail, but declined to go into detail of how stringent the new capital requirements could be.  
 Swiss too big to fail legislation, that came into force last year, also demands that these banks cover at least 4.5% of all assets - no matter how risky - with capital reserves. ZKB said its so-called leverage ratio is already comfortably above this threshold. 
 The bank must also come up with an emergency plan of how to protect its core functions, such as retail deposits, should it collapse. ZKB said on Monday that it does not anticipate having to change strategy or cut any rsikier operations.