DOJ Tax AAG Keneally Reports on Swiss Banks Joining DOJ Swiss Bank Program (1/27/14; 1/28/14)

At a bar meeting, DOJ Tax AAG Keneally made an interim report on the U.S. Swiss bank program.  David Voreacos, Swiss Banks Seek Tax Amnesty as Third Accept U.S. Offer (Bloomberg 1/26/14), here. I include excerpts from the article in indents and comments in the flush presentation::

One-third of Swiss banks offered amnesty by the U.S. for helping Americans evade taxes have applied for the program, a federal prosecutor [AAG Keneally] stated at a Jan. 25 conference, according to three lawyers. 

The U.S. government gave more than 300 Swiss banks until Dec. 31 to seek non-prosecution agreements if they have “reason to believe” they violated tax laws. Some 106 sought to join the initiative, which requires participants to disclose how they helped Americans hide assets, hand over data on undeclared accounts and pay penalties. 

I think that those who joined are category 2 banks which were the ones who had to join by 12/31/13.  If the number is 106 and that represents one-third of banks "offered amnesty," then my math indicates that some 318 banks -- probably an approximate number -- were offered amnesty.  If is not clear to me that any set or finite number of banks were offered amnesty.  I think it was a general offer as to which banks would self-identify to join.  So, it is not clear to me where the number 318 ( app.) came from.

Bryan Skarlatos, of Kostelanetz & Fink LLP in New York, who attended the conference, said the number of banks that signed letters of intent was more than expected.

“It’s a result of the banks’ desire to have some certainty regarding their status with DOJ,” Skarlatos said. “I believe that DOJ is pleased with the response to the program so far.”

I don't think banks joined just to achieve certainty, although that may be one of their goals (when that certainty is cheaper than would be the alternative of not joining).  They were supposed to join if they self-identified misbehavior (or at least the strong possibility would that their behavior could be construed as misbehavior).  So, I think that well-counseled banks (and I am sure they were) would have joined to get a certain result that was less than the probable result if they did not join.  In that sense, I don't doubt that they did desire certainty.

“She [AAG Keneally] said that every new bank in the program is a new source of information, especially on where the money went, either to other Swiss banks or banks around the world,” said Josh Ungerman of Meadows Collier Reed Cousins Crouch & Ungerman LLP in Dallas. “She said there are a lot of avenues to get information, and some are visible and some are not so visible.”

 The message is -- those U.S. taxpayers who have not yet outed via OVDI/P need to do so.

Suspension of Statute of Limitations From the UBS John Doe Summons (1/26/14)

A reader has provided me an IRS document calculating the statute of limitations for U.S. taxpayers within the scope of the IRS's John Doe Summons (JDS) for UBS records.  The document invokes the authority of IRS 7609(e)(2), here, which provides:

(2) Suspension after 6 months of service of summons
In the absence of the resolution of the summoned party’s response to the summons, the running of any period of limitations under section 6501 or under section 6531 with respect to any person with respect to whose liability the summons is issued (other than a person taking action as provided in subsection (b)) shall be suspended for the period—
   (A) beginning on the date which is 6 months after the service of such summons, and
   (B) ending with the final resolution of such response.

Note that the statute of limitations is suspended for both civil and criminal purposes.  The cited statutes are Sections 6501, here, the civil statute and 6531, here, the criminal statute.

The document says that this suspension applies to each member of the John Doe class -- the class of persons described in the John Doe Summons (which the document does not define, but see below).  The document then states the calculation of the suspension as follows:

7/21/08 UBS John Doe Summons Served
1/21/09 Six Month Anniversary of the Service of the Summons
11/16/10 Notification to UBS Advising of the Withdrawal of the Summons (Final Period of Statute Suspension)_
664 Days Statute Suspension

Who is subject to this suspension?  The document says that it is any person in the class described in the John Doe Summons to UBS.   The following is from the John Doe Petition Documents:

The Petition for the JDS:

5. The "John Doe" summons relates to the investigation of an ascertainable group or class of persons, that is, United States taxpayers, who at any time during the years ended December 31, 2002 through December 31, 2007, had signature or other authority (including authority to withdraw funds; to make investment decisions; to receive account statements, trade confirmations, or other account information; or to receive advice or solicitations) with respect to any financial accounts maintained at, monitored by, or managed through any office in Switzerland of UBS AG or its subsidiaries or affiliates and for whom UBS AG or its subsidiaries or affiliates (1) did not have in its possession Forms W-9 executed by such United States taxpayers, and (2) had not filed timely and accurate Forms 1099 naming such United States taxpayers and reporting to United States taxing authorities all reportable payments made to such United States taxpayers. There is a reasonable basis for believing that such group or class of persons may fail, or may have failed, to comply with one or more provisions of the Internal Revenue laws. The information sought to be obtained from the examination of the records or testimony (and the identity of the persons with respect to whose tax liabilities the summonses have been issued) is not readily available from other sources. 

Yet Another BullShit Tax Shelter Goes Down Flaming (1/25/14)

In NPR Investments, LLC v. United States, 740 F.3d 998 (5th Cir. 2014), here, following the Supreme Court's lead in United States v. Woods, ___ U.S. ___, 134 S. Ct. 557 (2013), here, the Fifth Circuit applied the 40% gross valuation misstatement penalty to the partnership's bullshit tax shelter (the Son-of-Boss (SOB) type shelter).  For discussion of Woods, see Supreme Court Applies 40% Penalty to Bullshit Basis Enhancement Shelters (Federal Tax Crimes Blog 12/3/13), here. The 40% penalty will, of course, be applied to the partners, which will then permit them to assert in a separate refund proceeding any partner level defenses they may be entitled to.

I could perhaps leave it at that, but there are some interesting features of the case.

Let's start with some the facts recounted by the Court:

Harold Nix, Charles Patterson, and Nelson Roach are partners in the law firm of Nix, Patterson & Roach, LLP. They represented the State of Texas in litigation against the tobacco industry and in 1998 were awarded a fee of approximately $600 million that is to be paid over a period of time. They also received fees totaling approximately $68 million in connection with tobacco litigation in Florida and Mississippi. Nix, Patterson, and Roach share the fees 40%, 40%, and 20%, respectively. 

Nix and Patterson have participated in at least two "Son-of-BOSS" tax shelters. BOSS stands for "Bond and Options Sales Strategy." Courts, including our court and the district court in this case, have described a Son-of-BOSS transaction as "a well-recognized 'abusive' tax shelter." Artificial losses are generated for tax deduction purposes. 

Before creating NPR and engaging in the transactions at issue in this appeal, Nix and Patterson invested in another Son-of-BOSS tax shelter, known as BLIPS. It involved sham bank loans, and our court considered various tax issues related to Nix's and Patterson's transactions with regard to that shelter in Klamath Strategic Investment Fund ex rel. St. Croix Ventures v. United States.

Further, here is a critical fact conceded apparently for strategic reasons:

The joint pre-trial order in the district court reflects that NPR, Nix, Patterson, and Roach conceded that NPR lacked a profit motive during 2001.

 All of the "investors" in SOB shelters claimed that their profit motive inhered in some long-shot investment razzle-dazzle which they called the "sweet spot," wherein the economic circumstances would line up to generate a profit from the adventure. Some of the taxpayers involved, although having large otherwise uncovered income, claimed that they did not consider the tax consequences at all but focused instead solely on the sweet spot opportunity.  However, the taxpayers in NPR (the ultimate taxpayers were involved by the attorney R.J. Ruble (since convicted of tax crimes for his participation in tax shelters, including SOB shelters) apparently did consider the tax consequences (duh!):

Credit Suisse Settlement with DOJ May Top $800 Million (1/24/14)

According to Reuters, the Wall Street Journal is reporting that the Credit Suisse settlement may top $800 million.  See Katharina Bart and Oliver Hirt, Credit Suisse may agree $800 million U.S. tax settlement by July: WSJ (Reuters 1/23/14), here.  Excerpts:

U.S. authorities and Credit Suisse (CSGN.VX) could agree a settlement of more than $800 million by July for the Swiss bank's role in helping wealthy Americans dodge taxes, the Wall Street Journal reported on Thursday, citing unnamed sources. 

Credit Suisse is now the largest bank in a long-running U.S. crackdown on undeclared funds held in hidden offshore accounts, including in Switzerland. Scores of Swiss banks have offered to cooperate with U.S. authorities in order to avoid prosecution. 

* * * * 

Credit Suisse has said it is cooperating with prosecutors and keen to reach a deal and, although no indications have been given on the size of any settlement, the bank took a 295 million Swiss franc ($324 million) provision three years ago to pay expected fines and legal fees. 

The bank said in October it delivered "substantial, high-level" data on clients leaving, and is preparing to provide more specific information.

Required Records IRS Summons Enforced Again (1/23/14)

In United States v. Gendreau (SDNY DKT 12 Misc 303 1/22/14), here, Judge Pauley again rejected the taxpayer's claim of privilege for foreign account documents.  The compulsory process in question was an IRS Summons for her BSA required records of her foreign financial accounts.  (By way of background, five Circuit Courts of Appeals, including the Second Circuit covering SDNY, have rejected the privilege claims made in the context of a grand jury subpoena; this Fifth Amendment claim is in the context of an IRS summons, but I don't think the type of compulsory process matters.)

I have reviewed the opinion very briefly. I don't think it adds much to the general consensus -- and unanimity in the courts of appeals -- that the Fifth Amendment is not a basis for avoiding compelled production of BSA required records.

The context of this opinion is that, on January 25, 2013 Judge Pauley ordered production of the BSA required records on the basis that the required records doctrine trumped Fifth Amendment claims.  In response to that order:

Gendreau produced 976 pages to the IRS. But 477 of those pages were documents that the summons specifically stated it was not seeking because the IRS had obtained them by other means. Moreover, Gendreau produced documents responsive to only 6 of the Government's 32 document requests. 14 On :March 15, 20l3, Gendreau responded to the balance of the summons's document requests with a letter asserting her Fifth Amendment privilege in blunderbuss fashion. 15 As to each request, the letter stated "Ms. Gendreau is asserting her Fifth Amendment right against self-incrimination with respect to records that are otherwise responsive to this category." And for the six document requests Gendreau did respond to, she asselied her Fifth Amendment privilege over otherwise responsive records she did not produce. On March 26, 2013, Gendreau appeared for a deposition and testified under oath.

The Government then requested:

either a privilege log of the documents Genreau was withholding with information sufficient to substantiate her assertion of privilege or that she provide those withheld documents to this Court for in camera review. Gendreau maintained she had asserted privilege on a document-by-document basis and refused to provide a privilege log or submit the documents for review. On September 30, 2013, the Government filed this motion seeking enforcement of the January 25 order.

Here are the key steps in the opinion:

Republicans Target FATCA As Another Windmill to Attack (1/23/14; revised 1/27/14)

Reuters reports that Republicans are setting their sights on trying to repeal FATCA.  See Patrick Temple-West, U.S. global tax law unhurt by Republicans: Treasury official (Reuters 1/22/14), here.  Excerpt:

The law - enacted after a scandal involving Americans hiding assets from the IRS in Swiss bank accounts - has been sharply criticized by banks, libertarians and some Americans living abroad as a costly and unneeded government overreach.

See also Alan Pyke, Why Are Republicans Plotting To Sabotage A Crackdown On Tax Evasion? (Think Progress 1/22/14), here.

This is just another instance of Republicans being Republicans, tilting at windmills. The concept of tilting at windmills is from  Cervantes' Don Quixote, The Ingenious Knight of La Mancha. first published in 1604.  See Tilting at windmills (The Phrase Finder Blog), here.  Don Quixotic imagines himself a fearless knight errant sallying forth in search of adventure.  On  his quest, he imagines windmills to be evil giants whom he attacks.  As reported in the Phrase Finder entry:

The figurative reference to tilting at windmills came a little later. John Cleveland published The character of a London diurnall in 1644 (a diurnall was, as you might expect, part-way between a diary or journal): 

"The Quixotes of this Age fight with the Wind-mills of their owne Heads." 

The full form of the phrase isn't used until towards the end of the 19th century; for example, in The New York Times, April 1870: 

"They [Western Republicans] have not thus far had sufficient of an organization behind them to make their opposition to the Committee's bill anything more than tilting at windmills."

Sound familiar?

Can't just stop there, though without mentioning the song "To Dream the Impossible Dream" from the musical Man of La Mancha.  (See Wikipedia entry here.)  The song is a romanticized version of Don Quixote's quest.  The lyrics are:

To dream ... the impossible dream ...
To fight ... the unbeatable foe ...
To bear ... with unbearable sorrow ...
To run ... where the brave dare not go ...
To right ... the unrightable wrong ...
To love ... pure and chaste from afar ...
To try ... when your arms are too weary ...
To reach ... the unreachable star ...  

This is my quest, to follow that star ...
No matter how hopeless, no matter how far ...
To fight for the right, without question or pause ...
To be willing to march into Hell, for a Heavenly cause ...  

And I know if I'll only be true, to this glorious quest,
That my heart will lie will lie peaceful and calm,
when I'm laid to my rest ...
And the world will be better for this:
That one man, scorned and covered with scars,
Still strove, with his last ounce of courage,
To reach ... the unreachable star ...

 This is a great song in the right context where one's cause is righteous.  Now, whether the repeal of FATCA is the right context depends upon one's point of view.

Addendum 1/27/14:  I said that this adventure was just Republicans being Republicans.  As they say about politics, follow the money.  Reuters reports (Patrick Temple-West, Republicans bash U.S. law targeting offshore tax dodgers (Reuters 1/24/14), here.

Repeal is unlikely and the issue was not expected to resonate with average U.S. voters, said lobbyists on both ends of the political spectrum. But they said Republican opposition to the law could help the party raise campaign funds.

So, all readers and others who don't like FATCA, send your money to the Republican Party and it will tilt at windmills for you (or, more properly, for your money).

Report on Chinese Elite Offshore Companies (1/22/14)

The International Consortium of Investigative Journalists, here, has released a new report on Chinese use and abuse of offshore companies.  The report is here.  A New York Times article, Andrew Jacobs and David Barboz, Report Says China’s Elite Use Offshore Companies (NYT 1/22/14), is here.

Offshore companies, of course, deploy their assets through offshore financial accounts.  And, you will notice the names of the usual enablers for this skulduggery.

I guess the message here is that all countries need to understand the nature and scope of the problem and determine whether cooperative action is the appropriate fix.

For a related report by the same group, see Investigative Journalists Report on the Maze of Offshore Accounts as Global Problem (Federal Tax Crimes Blog 4/4/13), here.

Tax Notes Article on IRS 2013 Victories in Offshore Evasion (1/21/14)

A number of readers have commented that, in their view, the IRS OVDI/P programs and the Swiss Bank program were unwise and would prove counterproductive for U.S. interests.  There are other views.  With permission of Tax Analysts, I offer readers a recent article, Andrew Velarde, Year in Review: U.S. Scores Victories Against Offshore Evasion and Avoidance, 142 Tax Notes 17 (Jan. 6, 2014), here.

The article speaks for itself, offering the view of the IRS that the programs will benefit U.S. interests.

Some cautionary notes in the article:

As the examination of accounts held with UBS reaches its conclusion, the IRS Small Business/Self-Employed Division's special enforcement program said it will soon begin an examination of U.S. taxpayers suspected of holding undeclared accounts in Indian banks. In November Nicholas Connors, a supervisory revenue agent with the program, said that Israel is also providing information to the IRS on bank accounts held there.\ 

* * * * 

Even though several practitioners expressed uncertainty in the workings of the program, especially for accidental noncompliant taxpayers facing the OVDP's steep penalties, they were presented with a problem in how to advise some clients to bring themselves into compliance. Quiet disclosures presented their own problem, with the IRS following the recommendation 2013 TNT 82-45: GAO Reports of the Government Accountability Office and using available data-mined information to increase its examination activity of taxpayers who did not disclose offshore accounts through the OVDP. Practitioners speculated that the data mining has provided the Justice Department with a treasure trove of information that it has used to bring new cases. They argued that the chances of the IRS detecting a taxpayer performing a quiet disclosure were much higher in 2013 than in previous years.

The New Provision for Tax Restitution and Ex Post Facto (1/20/14)

In United States v. Crim, 2014 U.S. App. LEXIS 1039 (3d Cir. 2014), here, the Third Circuit rejected as premature the defendant's claim that the order of tax restitution violated the Constitution's Ex Post Facto prohibition because, in his case, the order for restitution would invoke the new procedures for immediate tax assessment which were not in existence when the conduct of the convicted offense occurred.  In the nonprecedential decision, the Third Circuit summarily rejects the argument as premature at the sentencing phase.

Crim claims his sentence violated the Ex Post Facto Clause of the United States Constitution, which states: "No bill of attainder or ex post facto Law shall be passed." U.S. Const. art. I, § 9, cl. 3. This Clause proscribes laws that change a punishment and inflict a greater punishment than the standards in effect when the crime was committed. Peugh v. United States, 133 S.Ct. 2072, 2077-78 (2013) (quoting Calder v. Bull, 3 U.S. 386, 390 (1798)). 

After Crim's conviction, Congress passed the Firearm Excise Tax Improvement Act of 2010. Among other things, the law authorizes the IRS to use its administrative powers to collect on criminal restitution when the Government is the victim by treating the criminal restitution as a tax. See 26 U.S.C. § 6201(a)(4). Before 2010, the IRS could receive restitution payments like any other victim entitled to criminal restitution but it lacked the authority to actively collect restitution. Because the IRS lacked this authority when Crim participated in the conspiracy, he claims this subsection is an unconstitutional ex post facto law as applied to him. 

Crim's argument is best described as contingent and premature, touching as it does on an enforcement mechanism that the IRS has not yet employed to collect the restitution Crim owes to the United States. If the IRS chooses to use this power against Crim, he may challenge its legality at that time. Nothing in the restitution order before us implicates the IRS's collection authority under 26 U.S.C. § 6201(a)(4).

Restitution would implicate the Ex Post Facto clause only if it were criminal punishment.  And, if it were criminal punishment, logically, under Apprendi v. New Jersey, 530 U.S. 466 (2000), here, the factual bases for restitution would need to be determined by a jury beyond a reasonable doubt rather than by the judge by a preponderance of the evidence.

I previously blogged on the underlying issue of whether restitution is criminal punishment.  See Is Restitution a Criminal Penalty Requiring the Jury to Speak? (Federal Tax Crimes Blog 12/6/12), here, discussing United States v. Wolfe, 701 F.3d 1206 (7th Cir. 2012), here.  The issue was whether the jury was required to determine restitution.  Wolfe, adopting then then minority view, held that restitution was not criminal punishment and thus the judge rather than the jury could determine restitution.  See also DOJ Tax CTM 44.01, here (not citing Wolfe, but noting the split in Circuits).  For more recent cases citing Wolfe, see United States v. Shmuckler, 911 F. Supp. 2d 362, 370 (ED Va. 2012); and United States v. Bengis, 2013 U.S. Dist. LEXIS 83992, p. 22 fn. 40 (SDNY 2013) (citing Wolfe and United States v. Pfaff, 619 F.3d 172, 175 (2d Cir. 2010)).

Restitution Less than Tax Loss Based on Burden of Proof for Unclaimed Deductions; and Application of Section 3553(a) / Booker (1/19/14)

I previously blogged on an Eighth Circuit decision addressing the revisions to the Sentencing Guidelines regarding unclaimed deductions.  See Early Court Appellate Court Decision on New Sentencing Guideline Provision Regarding Unclaimed Deductions (Federal Tax Crimes Blog 11/19/13), here.  That blog entry discusses United Sates v. Fawaz, 2013 U.S. App. LEXIS 23135 (6th Cir. 2013), here, which discusses the amendment to the Guidelines Application Note § 2T1.1, par. 3, here, regarding unclaimed deductions in computing the tax loss.  The Eighth Circuit remanded the case for re-sentencing.

UNCLAIMED DEDUCTIONS FOR TAX LOSS AND RESTITUTION

On remand, the district court re-sentenced and wrote an opinion, United States v. Safiedine, 2013 U.S. Dist. LEXIS 179364 (ED MI 2013), here.  Safiedine was the co-defendant with Fawaz; this re-sentencing opinion is for both Safiedine and Fawaz.  Here are key excerpts from the opinion regard unclaimed deductions and the relationship to restitution:

The new Application Note in § 2T1.1 provides the following guidance to courts considering such unclaimed deductions "needed to ensure a reasonable estimate of the tax loss": (1) the deductions must be "related to the tax offense and could have been claimed at the time the tax offense was committed;" (2) the deductions must be "reasonably and practicably ascertainable;" and (3) "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 [.]" Id. Defendants bear the burden of establishing an entitlement to any deduction for purposes of calculating tax loss by a preponderance of the evidence. Id. 

* * * * 

The amendment to § 2T1.1 allows the Court to account for unclaimed deductions in calculating tax loss only if the unclaimed deduction is both reasonably and practicably ascertainable. In elucidating its reasons for the amendment, the Sentencing Commission explained that this requirement is designed to ensure that sentencing courts are not required "to make unnecessarily complex tax determinations[.]" U.S.S.G. Manual supp. to app. X, amend. 774 at 42. The Court finds support for Defendants' claim that JSC is entitled to deduct payments for improvements to properties owned by other Safiedine-related entities as the lessee of those properties (under a theory of leasehold improvement). (10/22/13 Restitution Hr'g Tr. 65-66, ECF No. 128 (Kempf agreeing that a lessee of property paying for improvements to the property has a right to amortize the payments on its tax returns)).6 Nevertheless, Defendants have failed  [*19] to discharge their burden of demonstrating that the unclaimed deductions were not already claimed by another Safiedine-related entity. Based on this Court's evaluation of the evidence, it finds that such a factual determination is not reasonably and practicably ascertainable. For this reason as well, the Court concludes that Defendants' previously unclaimed deductions should not be used in calculating the tax loss for the purpose of sentencing. 

[Omit discussion of other unclaimed deductions] 

Restitution Not Allowed For Losses Beyond Count(s) of Conviction Except as Agreed or for Supervised Release (1/18/14)

In United States v. Campbell, 2014 U.S. App. LEXIS 821 (5th Cir. 2014), unpublished, here, the Fifth Circuit reversed a restitution award because the reward included amounts related to conduct other than the count of conviction and, the court held, the plea agreement did not permit the inclusion of those amounts.  Here is the relevant part of the decision:

C. The Restitution Award 

Restitution is generally available for losses stemming from the conduct of the offense of conviction. Hughey, 495 U.S. [411] at 420 [(1990)]  ("[T]he loss caused by the conduct underlying the offense of conviction establishes the outer limits of a restitution order."); see also United States v. St. Junius, 2013 U.S. App. LEXIS 25155, at *52-53 (5th Cir. Dec. 18, 2013) (substitute opinion on petition for rehearing) (holding, on plain-error review, that restitution is limited to losses stemming directly from the offense of conviction). 

Beyond that, the restitution statute, 18 U.S.C. § 3663, does not authorize restitution orders compelling payment to the IRS for a Title 26 offense. See United States v. Stout, 32 F.3d 901, 905 (5th Cir. 1994) (holding that § 3663 only permits separate restitution orders for offenses under Title 18 or 49 and vacating restitution award ordered for offense under Title 26). Section 3663 does, however, allow the sentencing court to "order restitution in any criminal case to the extent agreed to by the parties in a plea agreement." § 3663(a)(3); see also Stout, 32 F.3d at 905 n.5. 

A sentencing court may also require restitution to the IRS for a Title 26 offense as a condition of supervised release. 18 U.S.C. § 3583(d)(3) (authorizing a sentencing court to impose "any condition set forth as a discretionary condition of probation in section 3563(b) and any other condition it considers to be appropriate"); Miller, 406 F.3d at 329 ("[A]lthough . . . 18 U.S.C. § 3663 [ ] does not expressly cover tax offenses such as that under which Miller was convicted, § 3583(d) authorizes such restitution as a condition of Miller's supervised release."). Section 3583(d) allows the sentencing court to impose a condition of supervised release requiring restitution to the IRS without the defendant's agreement, but only if the restitution is "limited to losses from the crime of conviction." United States v. Nolen, 523 F.3d 331, 332-33 (5th Cir. 2008); see also Stout, 32 F.3d at 904 (vacating restitution order and remanding for resentencing where defendant never expressly agreed to pay restitution and noting that "[s]entencing courts are permitted to impose restitution as a condition of supervised release to the extent agreed to by the government and the defendant in a plea agreement." (citations omitted))

DC Court Rejects Bankers Attack on FATCA Regs (1/18/14)

In Fla. Bankers Ass'n v. United States Dep't of Treasury, 2014 U.S. Dist. LEXIS 3521 (D.D.C. 2014), here, the court sustained the IRS regulations "the regulations requir[ing] U.S. banks to report the amount of interest earned by accountholders residing in foreign countries."

The Court says in its opening:

The Bankers Associations contend, in a Motion for Summary Judgment, that the IRS got the economics of its decision wrong and that the requirements will cause far more harm to banks than anticipated. Because the Service reasonably concluded that the regulations will improve U.S tax compliance, deter foreign and domestic tax evasion, impose a minimal reporting burden on banks, and not cause any rational actor — other than a tax evader — to withdraw his funds from U.S. accounts, the Court upholds the regulations and grants the Government's Cross-Motion for Summary Judgment.

In reaching this decision, the Court rejected various challenges to the regulations based on the Administrative Procedure Act, often referred to as APA, and the Regulatory Flexibility Act.  Interestingly, the Court did reject the Government's threshold argument that the suit was barred by the Anti-Injunction Act, Section 7421(a), concluding:

Although the Court owes some deference to the Government's opinion of whether or not the AIA applies, see Seven-Sky v. Holder, 661 F.3d 1, 13 (D.C. Cir. 2011), abrogated on other grounds by Nat'l Fed'n of Indep. Bus., 132 S. Ct. 2566, it must nevertheless heed the D.C. Circuit's admonition that the AIA does not bar suits like this one brought merely for "purpose of enjoining a regulatory command." Id. at 8. Indeed, the AIA "has never been applied to bar suits brought to enjoin regulatory requirements that bear no relation to tax revenues or enforcement," even if a tax-related penalty could follow. Id. at 9. And the regulations at issue here, like the Foodservice reporting requirement, fit that bill. As the DJA and AIA are coterminous, neither Act prevents the Bank Associations' suit.

Eighth Circuit Affirms Offshore Account Related Conviction (1/18/14)

In United States v. Picardi, ___ F.3d )___, 2014 U.S. App.LEXIS 502 (8th Cir. 2014), here, the Eight Circuit affirmed conviction on counts of tax evasion (5 counts), tax perjury (5 counts) and FBAR violations (3 counts).  The Court of Appeals states the background succinctly as follows:

Picardi was a surgeon in western South Dakota. In the mid-1990s, Picardi became a client of Anthony Kritt, an attorney and a certified public accountant. From 1997 until 2003, Picardi participated in an "employee leasing program" promoted and run by Kritt that required Picardi to enter a contract with Montrain Services, Ltd., an Irish corporation, to lease his services as a physician. Montrain Services contracted with Professional Leasing Services, Inc., a Nevada corporation that was operated by Kritt, to provide Picardi's services to Professional Leasing Services. In turn, Professional Leasing Services contracted with Picardi's medical group to "lease" Picardi's services to it. 

Picardi's income from this program was distributed in a manner designed to avoid taxes. Picardi's medical group paid Professional Leasing Services a "leasing fee" for Picardi's medical services. Professional Leasing Services then paid Picardi a small portion of this "leasing fee" as wages, which Picardi reported as income on his tax returns. In a series of complex transactions, the other, larger portion of the "leasing fee" was transferred into foreign financial accounts set up for Picardi. Picardi did not report this portion as income on his federal income tax returns from 1999 until 2003. On paper, the unreported portion of Picardi's income was "deferred compensation" inasmuch as he was supposed to be unable to access it until he retired or turned seventy years old. Picardi did, however, access and use the funds through another series of complex transactions made to look like loans. Picardi further reduced his taxes by categorizing the portion of his income sent overseas as "professional leasing services" expenses on his medical practice's corporate income tax returns. In April 2003, Picardi withdrew from the "employee leasing program," but he continued to maintain his interest in the foreign accounts containing his "deferred compensation." For the 2004 to 2008 tax years, Picardi failed to disclose to the Internal Revenue Service ("IRS") his financial interest in the foreign accounts. 

A federal grand jury returned a superseding indictment charging Picardi with five counts of income tax evasion, in violation of 26 U.S.C. § 7201; five counts of filing a false return, in violation of 26 U.S.C. § 7606(1); and three counts of failing to file with the IRS a required form regarding his interests in foreign accounts, in violation of 31 U.S.C. §§ 5314 and 5322 and 31 C.F.R. §§ 103.24 and  [*4] 103.27(c). Picardi proceeded to a jury trial. At trial, Picardi claimed that he had a good faith belief that the "deferred compensation" component of the "employee leasing program" was legal and that he relied upon the expert and legal advice of Kritt. The jury found Picardi guilty of all thirteen counts, and he was sentenced to 60 months' imprisonment. Picardi then timely filed this appeal.

Taxpayer Advocate Report on OVDI/P's Burden on Benign (Relatively) Taxpayers (1/18/14)

In the recently issued Taxpayer Advocate FY 2014 Objectives Report to Congress and Special Report to Congress, here, the Taxpayer Advocate included a report titled OFFSHORE VOLUNTARY DISCLOSURE: The IRS Offshore Voluntary Disclosure Program Disproportionately Burdens Those Who Made Honest Mistakes, here.

Key Excerpts (footnotes omitted):

Definition of the Problem: 

* * * Designed for “bad actors,” these programs burdened “benign actors” who inadvertently violated the rules by requiring them to “opt in and opt out” to get a fair result. The programs were punitive, charging average penalties of more than double the unpaid tax and interest associated with the unreported accounts. Because those opting out faced prolonged uncertainty and a risk of even more severe penalties, some agreed to pay more than they should, as described in prior reports. 

Unlike those who remain in the programs, those who opt out are audited, which essentially penalizes them for coming forward. On average, the IRS assessed penalties of nearly 70 percent of the unpaid tax and interest in the audits of those who opted out. Thus, while those who opt out generally face smaller penalties than those inside the OVD programs, they still face very significant ones. 

For those who remained in the 2009 program, the median offshore penalty applied to those with the smallest accounts (i.e., those in the 10th percentile with accounts of $87,145 or less) was disproportionate — nearly six times the median unpaid tax. Among unrepresented taxpayers with small accounts it was even more disproportionate — nearly eight times the unpaid tax. It was also disproportionately greater than the median penalty paid by those with the largest accounts (i.e., those in the 90th percentile with accounts of more than $4.2 million) who paid about three times the unpaid tax. Given the harsh treatment applied to those with small accounts, some have made “quiet” disclosures by correcting old returns and others have begun to comply prospectively — in each case without subjecting themselves to the lengthy and seemingly-unfair OVD process. 

While 7.6 million U.S. citizens reside abroad and many more U.S. residents have FBAR filing requirements,8 the IRS received only 807,040 FBAR submissions in 2012.9 Yet the FBAR audit rate is less than one quarter of one percent. Thus, the IRS has likely failed to address significant information reporting noncompliance.

Article on Moving Money: International Financial Flows, Taxes, and Money Laundering (1/17/14)

I just became aware of a recent article by Richard Gordon and Andrew P. Morriss titled Moving Money: International Financial Flows, Taxes, and Money Laundering, 37 Hastings Int'l & Comp. L. Rev. 1 (2014).  The article is available through paid services such as LEXIS-NEXIS.  See here.  A draft of the article is available on Professor Gordon's SSRN page, here.  Here is his SSRN abstract for the article.

Moving Money: International Financial Flows, Taxes, & Money Laundering
Abstract:  

Allegations by political leaders and others that offshore financial centers enable multinational enterprise to avoid paying a “fair” amount of tax — and that they enable wealthy individuals to evade paying any tax, much of it on ill gotten gains — are once again garnering headlines and inspiring government action. One of the most prominent commentators on these topics, The Tax Justice Network, has recently claimed that thanks to the services of tax havens $21-$32 trillion of wealth of questionable origin remains hidden and untaxed, and that such abuse must be stopped through greater regulation. In this paper we argue that such claims rest on poor data and analysis, and on mistakes about how financial transactions, international taxation, and anti-money laundering rules actually work. We further argue that demands for more regulation without considering cost and effectiveness rely on a belief that international financial transactions are assumed illegitimate unless tightly controlled, rather than primarily reflecting the normal, legitimate workings of an efficient market.

It is not a light read, but an enlightening one.  At the risk of misfocusing the analysis in the article and not giving the entire context, I thought I would offer some excerpts that might whet the appetite of readers to read the whole article (footnotes omitted and bold face supplied by JAT):

Most recently, the Tax Justice Network caught public attention by arguing that, "[a] significant fraction of global private financial wealth ... has been invested virtually tax-free through the world's still-expanding black hole of more than 80 "offshore' secrecy jurisdictions" though they also ranked the United States in the top five in terms of financial secrecy. Similarly, the popular press often portrays "offshore" transactions as sources of criminal activity. 

* * * * 

These arguments rest on a profound misunderstanding of how financial transactions occur. We argue below that much of this "tax justice" literature is driven by its incorrect assumptions about money, business, finance, and government. The assumptions are disguised by often overheated rhetoric and pseudoscientific, or completely unscientific calculations. Like a three card monte dealer rapidly shifting cards on a box while distracting his victims with rapid chatter, some proponents of "tax justice" divert debates over tax policy, global finance, and international business away from the economic underpinnings of financial transactions and the fundamental substantive policy differences that should be the focus of discussion. Although they seek to persuade policymakers that adopting their proposed policies will not limit the beneficial aspects of the existing financial system, what they are advocating is a fundamental reordering of global finance in ways that we contend would reduce social welfare. 

BBT Is Persistent But, Alas, Not Even a Stub After the Whole Cigar Flamed Out (1/16/15)

I previously reported on BBT's loss in the STARS tax shelter of the bullshit genre.  See Salem Financial, Inc. v. United States, 112 Fed. Cl. 543, 2013 U.S. Claims LEXIS 1372 (9/20/13), here, discussed in my blog.  Yet Another Bullshit Tax Shelter Goes Down; BB&T's Streak on Bullshit Tax Shelters Continues (9/21/13), here.  Well, since it did not get the loaf, BBT tried to get part of the loaf -- maybe just the end pieces, see here -- on petition for rehearing for the Court of Federal Claims to reconsider the denial of $74,551,947.40 of interest deductions.  The purported basis for the request that the court reconsider was the Tax Court decision in Bank of New York Mellon Corp. v. Commissioner, T.C. Memo. 2013-225 (Sep. 23, 2013), here, where the Tax Court rejected the same type of STARS shelter but allowed the interest deductions.

In an opinion, here, on January 7 to ring in the New Year, the Court of Federal Claims denied the relief, reasoning in the following excerpts  (emphasis supplied):

The Tax Court's decision is not controlling authority in this Court. See Otis Elevator Co. v. United States, 618 F.2d 712, 719 (Ct. Cl. 1980) (finding that Tax Court decisions are not controlling law in the Court of Federal Claims). At best, this decision provides persuasive authority. However, what little persuasive value the decision might have is undermined by the fact that the Court has already considered and rejected the arguments advanced in BB&T's motion. A motion for reconsideration is not an opportunity for the losing party to retread old arguments from earlier briefs as BB&T attempts to do here. In its RCFC 59(e) motion, BB&T argues that it paid interest on a bona fide loan, the proceeds of which were available for it to use in its banking business. Similarly, in its post-trial briefing, BB&T argued that the Court should find that the Loan had a non-tax purpose and non-tax effects such that the Court should allow BB&T to deduct interest payments made on the Loan. See BB&T Post-Trial Br., Dkt. No. 210 at 242-46. The Court rejected the argument in BB&T's post-trial brief and found that the STARS Loan lacked economic substance because it was devised solely to provide BB&T with a pretext for engaging in a sham transaction. Salem, 112 Fed. Cl. at 587. The Tax Court's decision in Bank of New York provides no basis for the Court to revisit arguments that have been litigated, considered by the Court, and rejected. 

BB&T raises one new matter that differs from its post-trial brief when it argues that the Loan was commercially viable on its own because it did not assist as a technical matter in the claim for foreign tax credits. As described below, the Court rejects the argument that the Loan was commercially viable on its own. However, even if this was not the case, the Court would not consider this argument. A motion for reconsideration may not be used to raise an issue that was available to be litigated at the time the complaint was filed, and this argument was available to BB&T when it filed its post-trial brief. Thus, BB&T has failed to meet the standard for reconsideration and its motion is denied.

In addition, the New York Mellon case was factually different based on the difference between the Tax Court's findings and the Court of Federal Claims findings (or lack of findings because of lack of proof).

I am sure BBT will appeal the entire loss to the Court of Appeals for the Federal Circuit to test that court's appetite, somewhat limited at this point, for bullshit tax shelters.

The Intersection of Conspiracy and Tax Obstruction (7212(a)) (1/16/14)

In United States v. Floyd, ___ F.3d ___, 2014 U.S. App. LEXIS 253 (1st Cir. 2014), here, the First Circuit panel affirmed the defendants' convictions and sentencings arising from their tax evading payroll tax scheme and warehouse banking scheme.  Judge Selya (Wikipedia here) wrote the decision for the panel. (More on Judge Selya at the bottom of this blog.)

The defendants were convicted of two counts of the defraud / Klein conspiracy under 18 USC 371, here -- one count for the payroll tax scheme and the second count for the warehouse banking scheme.  The Klein conspiracy is a conspiracy to impair or impede the lawful functioning of the IRS.  The defendants were also convicted of tax obstruction under Section 7212(a), here, which criminalizes impairing or impeding the lawful functioning of the IRS.

Klein Conspiracy and Tax Obstruction

The Court's affirmance of the conspiracy convictions seem fairly routine -- at least I don't think they are worthy of discussing here.  Moreover, the affirmance of the tax obstruction convictions is also routine and not otherwise noteworthy.  What is noteworthy, is the reminder that the conspiracy and the substantive counts were so closely related in the conduct involved, with the key difference that conspiracy is not the same crime as the substantive counts.  Ianelli v. United States, 420 U.S. 770, 781-2 (1974), citing Pinkerton v. United States, 328 U.S. 640, 643 n. 11 (1946).  In other words, the conspiracy is based on the agreement to obstruct rather than the obstruction itself, except of course the pesky overt act requirement.  Indeed, in this regard, some persons (including me) have referred to tax obstruction as a one-person conspiracy.  See also David F. Axelrod, Larry A. Campagna, James A. Bruton III, The “New” Tax Laws - 26 U.S.C. Section 7212(a) and the One-Person Conspiracy (Paper prepared for ABA National Institute on Criminal Tax Fraud in 1999).  The notion of a one-person Klein conspiracy is an oxymoron, of course, but the oxymoron conveys some truth.

I previously discussed the relationship between tax obstruction and the Klein conspiracy.  See Tax Obstruction Crimes -- Section 7212 and Klein Conspiracy (Federal Tax Crimes Blog 5/26/11), here.  Here are key excerpts:

2. As the Klein conspiracy is defined by the courts (a broader definition than the word defraud would normally connote), the two crimes substantially overlap in targeting conduct which impairs or impedes the lawful functions of the IRS. The difference is that the conspiracy requires two or more actors pursuant to a conspiratorial agreement whereas tax obstruction only requires a single actor (although it can include multiple actors as well). Because the interpretations overlap, tax obstruction may be viewed as a one person Klein conspiracy. (I realize that statement technically is an oxymoron, but the larger point, I think is correct; see CTM 17.02 (2001 ed.) where DOJ Tax asserted that tax obstruction may be charged where the Klein conspiracy is “unavailable due to insufficient evidence of conspiracy,” although that statement is omitted from the 2008 ed.)  

3. With this overlap in interpretation, the Government could take the standard formula of the Klein conspiracy (impair or impede, etc.) and turn the alleged conspiracy into an offense conspiracy to violate Section 7212 rather than couching it in defraud conspiracy lingo. That's not the way the Government does it, but it seems to me that that is the practical effect of this overlap. Or, I suppose, a conspiracy to impair or impede can simultaneously be both an offense conspiracy to violate Section 7212(a) and a Klein / defraud conspiracy.

Taxpayer Playing the Bullshit Tax Shelter Game Tries to Shift Blame to the Enablers (1/16/14)

I recently posted on Blum v. Commissioner, 737 F.3d 1303 (10th Cir. 2013).  See Another Bullshit Shelter Bites the Dust (Federal Tax Crimes Blog 12/19/13), here. One aspect of Blum was the effect of the decision in related civil litigation where Blum tried to recover for his costs of getting into a too good to be true tax shelter which created basis out of thin air (actually more like a vacuum; thin air is still some air).  In the tax case, the Tax Court had questioned whether Blum was an innocent duped by the tax shelter promoters.  In the civil case where Blum was trying to portray himself in that light, the district court felt otherwise, perhaps relying in part on the Tax Court's assessment of his role.

In a recently filed civil case, a prominent and sophisticated taxpayer is suing Deutsche Bank and BDO Seidman over the taxpayer's investment in a bullshit tax shelter of similar genre to the one involved in Blum.  See Deutsche Bank, BDO Seidman Sued by Lane Over Tax Shelter (Bloomberg News 1/3/14), here.  The case is R. J. Lane v. Deutsche Bank AG, et al. (Cook Cty Circuit Court).  The opening paragraph describes the key background for Lane's desire to engage in the maneuver which brought him woe:

1. Plaintiff R.J. Lane ("Lane" or "plaintiff") is the former president and chief operating officer of a Fortune 100 computer software company ("Software Company"). In the year 2000, Lane exercised a portion of his stock option holdings in the Software Company. The Software Company reported this option exercise to the Internal Revenue Service as more than $250,000,000 in ordinary income to Lane. Lane, like many well-compensated executives, relied on a variety of tax and legal advisors to help him manage and account for his income -- such as the income reported to the IRS from the options he exercised in 2000. 

2. By the time the Software Company paid Lane his year 2000 compensation, Lane had already established a tax planning and financial advisory relationship with an attorney, Michael S. Kerekes ("Kerekes"). Kerekes was, at the time, a senior tax partner and attorney at the accounting and financial services firm known in the United States as BDO Seidman, LLP (now known as BDO USA, LLP and referred to herein as "BDO"). 

3. Lane trusted Kerekes and believed that Kerekes possessed the type of investment, tax and legal expertise necessary to help him make good financial decisions. Even though Lane was a very successful businessman and corporate executive, he nonetheless relied on Kerekes and BDO to provide him with the best and most current advice with respect to tax planning and complex financial investments. Put another way, Lane's corporate acumen did not make him a tax or financial planning expert.

Kerekes previously pled to conspiracy and tax evasion for his role in promiting bullshit tax shelters.  Judge Apportions Restitution in a Massive Tax Shelter Case (8/20/12), here, and The Daugerdas Indictment - Part #1 - the Players (6/11/09), here.  And, of course, as alleged ad nauseum in the lengthy complaint, other prominent players involved in Lane's adventures have been subject to the criminal justice system.  Most prominently, Deutsche Bank entered a NonProsecution Agreement, BDO Seidman entered a Deferred Prosecution Agreement and a prominent partner in a prominent law firm pled guilty.  So there is no doubt that the tax shelter was a fraudulent tax shelter and that the parties who promoted the shelter to Lane misbehaved.

The question in the Lane's case is whether Lane is quite the innocent that he alleges.  I don't know the other side of the story.  But, like Blum, Lane is a sophisticated person.

Again, I don't know Lane's facts but I can speak generally from my observations of the investors in bullshit tax shelters.  In most cases, they knew the gambit was too good to be true and paid the big bucks to the promoters in order to get one or more "opinions" that, they hoped, would give them some imagined defense to penalties -- civil and criminal -- for playing the too good to be true game.  Blum got called out on the gambit by the Tax Court and the District Court.  Lane hopes to fare better.

Addendum:  Remember that, in this genre of tax shelter, the taxpayer was required to make a representation as to his purpose for participating -- that he engaged for profit independent of tax savings.  The shelter would not have been  implemented without that representation.  As sophisticated as these taxpayers were, they must have known that the representation -- which requires no special tax expertise -- is untruthful.  So the shelter went forward because they told a lie.  That lie could have been the basis for criminal charges, at least in the more egregious cases, but it appears that none of the investors have not been prosecuted for the big lie.  So, they got the major benefit for which they paid the enablers -- at least no criminal prosecution.

How many of these taxpayers would have entered these shelters -- paying exorbitant fees for the steps in the shelters -- solely for the alleged profit potential independent of the purported tax benefits?  Not one, I dare say.

And,  many of these taxpayers had independent advisers who certainly must have told them that all they were really getting for the exorbitant fees was some type of potential reliance argument to avoid civil and criminal penalties.  And the good independent advisers would have told them that even the penalty protection might not work.  And,  on the merits, good independent advisors would have told them that they could not conclude that the shelters would more likely than prevail.

Switzerland's Quixotic Efforts to Close the Barn Door After the Horse Has Left the Barn (1/16/14)

Switzerland is reportedly investigating at least one Swiss banker -- Renzo Gadola -- ensnared in the U.S. criminal initiative who is cooperating with the U.S.  See Rachel Bade, Switzerland probing banker who is helping U.S. tax investigations (Politico 1/14/14), here.  Excerpts:

Switzerland is taking a new tack to protect its prized banking secrecy — one that could undermine the efforts of U.S. tax authorities to snag tax evaders stashing funds offshore. 

The country, which bars citizens from dishing banking secrets to foreign governments, is probing former Swiss banker Renzo Gadola for spilling the beans on wealthy Americans with hidden bank accounts, according to the Office of the Attorney General of Switzerland. 

It marks the first public admission by Switzerland that it is probing one of its own for helping U.S. offshore tax efforts. The Swiss contend they’re merely upholding their privacy laws, but some say the investigation sends a message to bankers: Keep quiet or else. 

* * * * 

Still, the Gadola probe comes at a critical time, with the U.S. prosecuting another former Swiss banker, Raoul Weil, Gadola’s former boss at UBS. 

* * * * 

Although some lawyers expect Weil to eventually make a deal with U.S. authorities, the Gadola investigation could complicate such a decision. 

* * * * 

Disclosure of client data and business secrets is a crime in Switzerland punishable by up to three years in prison. At the same time, U.S. prosecutors almost demand such information if bankers want to avoid jail time. 

After being captured in 2010, Gadola provided a trove of secrets to the Justice Department, including details on former colleagues and schemes UBS used to avoid U.S. detection. He even participated in secretly recorded phone calls with American clients, according to court records.
Several whistleblowers are now wanted in Switzerland, mostly on charges of stealing documents, including HSBC Geneva tech employee Hervé Falciani, passed data to France, and Heinrich Kieber, a former LGT Bank of Liechtenstein employee, who received millions of euros from the Germans for similar activity.

Canada Implements Offshore Tax Whistleblower Program (1/16/14)

Canada is reported to have implemented a tax whistleblower process, including a hotline, to report offshore tax evaders.  See Jason Fekete, Tax cheats whistleblower hotline up and running (Canada.com 1/15/14), here.  Excerpts:

Revenue Minister Kerry-Lynne Findlay announced Wednesday the government has opened the tipster line for people with information on offshore tax evaders. 

The whistleblower program — now dubbed the Offshore Tax Informant Program (OTIP) — will pay cash rewards to snitches with tips on international tax evasion. 

The CRA will enter into a contract with tipsters and pay them between five and 15 per cent of the federal tax collected for quality information leading to tax assessments and collection of more than $100,000 in additional federal taxes.

I guess the next question is whether Canada will have the negotiating position to bring the banks -- particularly Swiss banks -- to the table for "discussions."

First Circuit Rejects Tax Defier's Complaints About IRS Packing Heat and Improper Good Faith Defense Instructions (1/15/14)

In United States v. Adams, 740 F.3d 40 (1st Cir. 2014), here, the court affirmed the defendant's conviction, rejecting two interesting arguments -- one about IRS agents' authority to pack heat while executing a search warrant and the other, the common claim that the district court erred in rejecting the defendant's proffered good faith instruction.

The opinion is short and well written.  The introduction is as follows:

Defendant-appellant Charles Adams, an unabashed opponent of the tax laws, advances two discrete claims of error regarding his convictions on charges of conspiracy and tax evasion. One claim, which raises a question of first impression at the federal appellate level, implicates the lawfulness of a premises search conducted by armed agents of the Internal Revenue Service (IRS). The other claim challenges the district court's jury instructions. After careful consideration, we reject his claims and affirm the judgment below.

1.  Packing Heat -- Still Unsettled.

Just so the terminology is meaningful, I mean this in one of the senses I found on the Urban Dictionary, here:  "To carry a firearm. Usually refers to the act of carrying a handgun."  (There are other definitions there, some of which are only metaphorically related to guns.)  The court's discussion of this issue is:

 On March 19, 2004, a magistrate judge issued a warrant that authorized the search of the defendant's home in Wrentham, Massachusetts. Four days later, armed IRS agents executed the warrant and seized evidence that the government later used against the defendant. 

During pretrial skirmishing, the defendant moved to suppress this evidence. Pertinently, he asserted that the search was unlawful because the manner of its execution was not authorized by statute. The defendant based this assertion on 26 U.S.C. § 7608 [here], which deals with the "[a]uthority of internal revenue enforcement officers." 

The defendant's argument takes the following shape. Subsection (a) of the statute, which deals with IRS enforcement of laws pertaining to alcohol, tobacco, and firearms, explicitly allows agents enforcing those laws to carry guns. See 26 U.S.C. § 7608(a)(1). Subsection (b), which deals with IRS enforcement of other tax laws, contains no similar grant of explicit permission to carry guns. The defendant posits that the absence of any such explicit permission in subsection (b) indicates Congress's intent to prohibit IRS agents enforcing those laws from carrying firearms. See United States v. Hernández-Ferrer, 599 F.3d 63, 67-68 (1st Cir. 2010) (discussing principle of expressio unius est exclusio alterius). And because the agents who searched his home were armed and not investigating any offense involving alcohol, tobacco, or firearms, the defendant argues that the search was unlawful and the evidence seized should therefore be suppressed.

The Beanie Baby Man, The Tax Evader Adult Man, Ty Warner, Gets Probation! (1/14/14; Updated 1/18/14)

This is breaking news.  Ty Warner has been sentenced to probation -- no incarceration.  See Beanie Babies creator Ty Warner gets 2 years probation for tax evasion (Chicago Tribune 1/14/14), here.

I offer the key documents as follows:

• Docket No 24 Defendants Sentencing Memorandum.zip - here.
• Docket No 24 Defendants Sentencing Memorandum-Exh A.pdf - here. (This is a spreadsheet of convictions and sentencing in offshore matters that the defense team believed most relevant to their proffered request for no incarceration.)  I have posted a subsequent blog on this spreadsheet:  Sentencing Tales Told in Spreadsheets (6/28/14), here.
• Docket No 26 Govt Sentencing Memorandum.zip - here.
• Docket No 28 Defendant's Supplement to Sentencing Memorandum.zip - here.
• Docket No. 30 Judgment in Warner case.pdf - here.

I do not yet have the transcript from sentencing wherein the Judge presumably would have announced his reasons for the sentence.  I also do not know whether the judge will write an opinion for his reasons, particularly since I suspect the Government will appeal.  I want to understand why the sentencing judge, Judge Kocoras, would have imposed that sentence. I want to hear what the reasons were before I pass judgment on that judge's judgment (of course Judge Kocoras is the judge and I am not; I can only pass judgment on the judge.)  Judge Kocoras' Wikipedia entry is here.  Right off hand, I only know one member of the defense team, Mark Matthews, here, so I offer him my kudos here.  (My kudos are probably worth less than Mr. Warners' kudos, which should be substantial!)

These cases are by their nature fact dependent and each party -- even the judge -- puts his spin on the facts.  But, the advisory Guidelines calculations were essentially agreed.  The key numbers in the Guidelines calculations were as follows:

• Tax loss (including relevant conduct) - $5,594,877 -- with resulting tax table level of 24.
• Adjustment  for sophisticated means - +2;
• Acceptance of Responsibility - -3
• Resulting offense level for sentencing table - 23 -- with sentencing range of 46-57 months.

Accordingly, from the bottom of the guideline range, the judge departed 46 months.  Quite a departure.  One day when (more likely, if) I have time, I would like to include a stat showing the number of months of downward departure from the bottom of the indicated sentencing range.  I would suspect -- but it is only a suspicion -- that this was the largest departure simply because his tax loss numbers which drove the calculation were so high.

Other aspects of the sentencing judgment:

• Probation: 2 years.
• Community Service:  500 hours at Leo, Tilden and Richards High Schools
• Fine:  $100,000
• Costs of prosecution:  $500

Restrictions on International Travel: None, but requires approval of court of probation officer to leave the district.

Readers of this blog will know that this result echoes the sentencing of Mary Estelle Curran.  See Sentencing Judge on Offshore Prosecution Chastises the Government for Lack of Judgment (4/25/13), here.

I do ask the question that comes immediately to mind.  What is it about the very rich that seems to resonate with sentencing judges?

And, of course, the obvious question is whether the Government will appeal.  It can appeal the sentence.  And, is not the Government practically required to appeal when the lesser wealthy are treated more harshly?

From an early article:  Janet Novack, No Jail Time For Beanie Babies Billionaire Tax Evader Ty Warner (Forbes 1/14/14), here.  Excerpts (emphasis supplied by JAT):

New Taxpayer Advocate Report to Congress Addressing, Inter Alia, OVDI/P Concerns (1/10/14; supplemented 1/13/14)

The Taxpayer Advocate has issued a new report addressing concerns, including the administration of OVDI/OVDP.  Taxpayer Advocate FY 2014 Objectives Report to Congress and Special Report to Congress.  The initial page is here.  The Report page is here.  The portion on OVDI/P is here.

The issues covered in the report are:

• The IRS Harms Taxpayers by Refusing to Issue Refunds to Some Victims of Return Preparer Fraud
• The Current Limited Oversight of Return Preparers Makes Taxpayers Vulnerable to Unscrupulous or Incompetent Preparers
• As the IRS Adopts a Specialized Approach to Identity Theft Victim Assistance, Concerns About Complete and Timely Account Resolution Remain
• Implementation of the IRS’s Return Review Program Is at Extreme Risk, Which Could Cause Significant Harm and Cost
• Collection Update: The IRS’s Tepid Approach to Implementing Recent Changes in Collection Policies Has Limited Taxpayer Access to Important Collection Options
• The TAS Collection Case Review Yielded Valuable Insights on How TAS Can Improve Advocacy in Collection Cases
• TAS Prepares for Implementation of Health Care Provisions
• The IRS has Revoked the Exempt Status of Thousands of Organizations in Error, Causing Significant Harm to Taxpayers
• TAS Works to Ensure Taxpayers Know Their Rights and  Obligations
• IRS Offshore Voluntary Disclosure Programs Continue to Burden “Benign Actors” and Damage IRS Credibility
• Shared Jurisdiction and Lack of Coordination between IRS and FinCEN Burdens Taxpayers and Undermines Compliance Efforts
• International Taxpayer Service Initiatives Continue but Need a More Formal Structure
• IRS ITIN Policy Changes Make Return Filing Difficult and Frustrating
• Cuts to IRS Tax Forums Mean Lost Opportunities

Although the report on OVDI/P is short, I just have not had time to study it for comments here.  I do provide the following excerpts from the OVDI/P portion (footnotes omitted):

Swiss Court Blocks Disclosure of Julius Baer Information to IRS -- More Delay (1/10/14)

Alice Baghdjian and Katharina Bart, UPDATE 1-Swiss court ruling outlines details of U.S. case against Baer (Reuters 1/8/14), here.  Excerpts:

U.S. prosecutors are accusing Swiss bank Julius Baer of helping more than 400 Americans hide undeclared money from the taxman, according to a ruling made public by a Swiss court on Wednesday. 

* * * * 

According to the Swiss ruling, U.S. tax authorities alleged at least 400 Americans hid more than $600 million from the IRS. Julius Baer private bankers used "codenames and numbers", as well as "travelling account statements", to conceal the identity of the account owners, the court document stated. 

The bank also advised wealthy Americans to use "sham corporate entities" to hide their money and ensured that bank correspondence wouldn't be sent to them in the United States in order to avoid detection, the court said, citing the IRS judicial aid request.
Julius Baer told clients they were safe from IRS prying because the Swiss bank didn't have a U.S. office, unlike larger rivals such as UBS, according to the court documents. 

* *  * * 

The Swiss court said the IRS pieced together the information from the indictment in 2011 of two former Julius Baer private bankers, Daniela Casadei and Fabio Frazzetto, as well as from voluntary disclosures from more than 400 one-time clients of the Swiss bank who admitted to their hidden accounts. 

* * * * 

The details of the U.S. case against Baer came to light through a ruling backing an appeal by two clients of the bank. The court ruled the couple's bank account data must not be disclosed to U.S. tax authorities, because the IRS had not provided enough detail to warrant judicial assistance from Switzerland.

Bloomberg reports on this development as well.  See Giles Broom, Swiss Court Blocks Julius Baer Client Data Transfer to U.S. (BloombergBusinessweek 1/8/14), here.  Key excerpts:

U.S. Request 

Julius Baer informed some American clients in May that their accounts meet the criteria of a U.S. request for data. The IRS is seeking information on accounts “owned through a domiciliary company” and held at any time between the beginning of 2002 and the end of 2012, the Zurich-based bank wrote in a letter obtained by Bloomberg News and dated May 16. 

Tax Evasion 

The Federal Administrative Court, which judges cases of appeal against decrees issued by Swiss federal authorities, reaffirmed in the statement that under the 1996 accord, “administrative assistance shall not be granted for presumed tax evasion, even if high amounts are at stake.” The court also confirmed that “the mere failure to declare a bank account may be qualified -- at the utmost -- as a tax evasion, which is not subject to administrative assistance.” 

The U.S. Senate has yet to ratify a 2009 protocol revising the 1996 accord to make it easier for Swiss banks to hand over data on clients suspected of tax evasion to the IRS.
In a separate decision on Jan. 6, the Federal Administrative Court threw out an appeal by a Julius Baer client that missed a deadline and as a consequence the client’s account data may be transferred to the U.S. Both decisions by the Federal Administrative Court can be referred to the Federal Supreme Court within 10 days.

 JAT Comment:  The Reuters article says that the Swiss case arose from "an IRS request for judicial aid."  It seems, however, that it arose more likely from the a request under the exchange of information provision in the double tax treaty.  I think what happens under that treaty is that the U.S. depositors are notified and can contest.  So presumably, some one or more U.S. depositors objected and brought one or more Swiss proceedings.  If that is the case, when that information is ultimately disclosed (as it will be when or even before the treaty is ratified), those contesting taxpayers are at very high risk of criminal prosecution for these delaying tactics that likely refreshed the statutes of limitations (plus I doubt that they notified the U.S. Attorney General as U.S. law requires.)

Swiss Banks Cutting Job on Impairment of their Tax Cheat Business Model (1/10/14)

A new EY report on Swiss banks identifies losses in jobs.  Swiss banks look to job cuts to absorb US tax pressure: Poll (Economic Times 1/9/14), here.  Key excerpts:

Swiss banks look set for new job cuts this year, despite ever-rosier figures, amid rising regulatory pressure and a US clampdown on tax-dodgers, consultants EY said Thursday.  

In a study on the 2014 outlook for the country's banking sector, EY underlined the tough environment for what is a cornerstone of the Swiss economy.  

* * * * 

Hit by a US crackdown on tax cheats, EY said that the private banking sector, which caters for the wealthiest clients, was facing the greatest pressure.  

"The increasingly unfavourable conditions are currently leading many banks to reassess their business models," said Bruno Patusi, head of wealth and asset management at EY Switzerland.  

"The competitive pressure and the tax agreement concluded with the US will tend to accelerate the consolidation," he said.  

The crisis has driven the battle against tax-dodging to the top of government agendas, forcing Swiss banks to defend the country's long-held tradition of banking secrecy.  

* * * * 

According to the survey, 73 per cent of banks believe that the US-driven solution is damaging the sector.  

Rather than fearing losses, banks are mainly worried by the cost of employing expensive lawyers to comb through accounts and pass on mounds of data to US tax authorities.  

Three-quarters of the banks said that they also expected the automatic exchange of customer information to become the global standard, meaning the final death knell for banking secrecy. 

JAT Comment:  If the world community impaired the Somali pirates business model by stricter enforcement measures the pirates would have to cut back on their "employees" as well or seek a new business model.

If there are substantial cuts in jobs in the Swiss financial sector, one might infer that, since the developments impair the Swiss banks' ability to enable their customers to cheat on taxes (U.S., German, French, etc.), that a substantial number of bank employees were engaged in that "business model" and are just no longer needed.  I doubt that the banks will find much sympathy in the world community for that job loss.

Raoul Weil Pleads Not Guilty: Thoughts and Speculations (1/8/14)

Raoul Weil, the top UBS banker, pled not guilty yesterday.  See Zachary Fagenson, UPDATE 2-Ex-UBS banker pleads not guilty in major tax fraud case (Reuters 1/7/14), here.  For prior blogs on Weil, see the list at the end of this blog.

The not guilty plea is a routine step in a criminal case.  So there really is nothing eventful in Weil's plea itself.  A plea deal is often agreed to or finalized after the initial not guilty plea, and the defendant will still qualify for hte sentencing benefits of accepting responsibility provided it is not immediately before trial after all the preparation work has been done.

The article, however, does report some speculations from Bradley Birkenfeld's lawyer on his whistleblower claim that the government may be "negotiating a 'sweetheart deal'" with Weil in order to keep him from implicating prominent former UBS account holders.  This claim is made on the lawyer's web site under an entry titled Federal Court Hearing Scheduled for UBS Tax Fraud Kingpin Raoul Weil (Whistleblowers Protection Blog 1/6/13), here.  The source of the lawyer's claim is obviously Birkenfeld, who worked for Weil at UBS.

I can't speak to whether the lawyer's claim is true.  I am skeptical.  If the Government wanted to keep things quiet , the Government would not have obtained his indictment and then pursued his extradition.  This smacks of a conspiracy theory with scant but speculations on thin threads.

I do note at least the possibility that Weil could be a whistleblower and claim some gargantuan award.  Of course, his central role in the tax underpayments involved would likely disqualify him from a whistleblower award.  See Section 7623(b)(3), here.

Tax Notes Today has an article offering skeptical comments on the lawyer's claim.  Stephanie Soong Johnston, Former UBS Banker Pleads Not Guilty to Tax Fraud Conspiracy Charges, 2014 TNT 5-2 (1/8/14).  Peter Hardy, a well-known criminal tax lawyer (bio here), expresses his doubts as well.  From the article:

 "He may or may not know embarrassing details, but generally speaking, the DOJ wants to prosecute, when appropriate, the elite, not to make sweetheart deals to protect them," Hardy told Tax Analysts. "The government is going to want him to enter into a guilty plea and cooperate."

According to Hardy, it is unusual that Weil faces only one count of conspiracy because economic crime cases, including tax fraud, usually include multiple counts. Because the general statute of limitations for tax crimes is six years and the last overt act the indictment references is in 2006, the government may not be able to add any additional charges, he said.

Prosecuting the Banks: Does the U.S. Prefer Foreign Banks to U.S. Banks? (1/4/14)

There have been some commenters on this blog who complain about the Government's mistreatment of Swiss banks, all the while American banks are not prosecuted.

Today's news reports that JP Morgan Chase -- a very big and powerful U.S. bank -- has agreed to a deferred prosecution agreement and penalties of $1.7 billion with more to come from a civil case by regulators.  Ben Protess and Jessica Silver-Greenberg, JPMorgan Settles With Federal Authorities in Madoff Case (NYT DealBook 1/7/14), here.

The circumstances are not the same, of course, because the conduct which led to this agreement involved U.S. players, including JP Morgan Chase, and the conduct or nonconduct occurred in the U.S.  But it does establish some key points:

1.  The mighty banks in the U.S. are at risk.  The DealBook article also notes

In November, JPMorgan paid a record $13 billion to the Justice Department and other authorities over its sale of questionable mortgage securities in the lead-up to the financial crisis.

2.  JP Morgan takes the hit in these cases because, at a minimum, it did not smell the rat that was waived before its nose.

In addition, in the fraudulent tax shelter boom times in the late, for some reason it was the foreign banks who were the prominent enablers of the fraudulent / bullshit shelters.  Some of those foreign banks were similarly prosecuted.  See Another Chapter Closes in the Tax Shelter Wars - Deutsche Bank Admits Crimes and Takes $553,633,153 Hit (Federal Tax Crimes Blog 11/22/10), here, and HVB Cops Plea in KPMG Tax Shelter Fraud (Tax Prof Blog 2/15/06), here.  See also Dutch Bank Funded U.S. Tax Shelters: Rabobank Supplied Cash for Structures Under Investigation (WSJ 5/2/13), here.  (I think the supplied cash is a bit of an overstatement; usually they supplied bookkeeping entries only.)

Why is it that foreign banks -- not just Swiss banks -- imagine that they are entitled to enable U.S. tax evasion with impunity?  Why do they complain when they are called on the carpet for doing so?

I think it is for the same reason that JP Morgan has seen its brand tarnished for the same reason.  Why ask questions when you are making money.  See What Motivates the White Collar Criminal? (Federal Tax Crimes Blog 1/7/14), here.

What Motivates the White Collar Criminal? (1/7/14)

Peter Hemming recently had a good brief discussion on the issue of what motivates people to violate the law.  Peter J. Hemming, When Good People Do Bad Things (NYT DealBook 11/26/13), here.  He deals with the general genre of white collar crime cases.  I refer readers to that discussion because tax crimes are a subset of white collar crimes and the discussion is brief and good.

The discussion relates principally to insider trading.  But some of the discussion certainly resonates with tax crimes. Here is an excerpt:

Perhaps misconduct by some groups can be ascribed to the belief that so long as everyone else seems to be doing something, it cannot actually be wrong. Continuing investigations into global banks’ manipulation of the London interbank offered rate, or Libor, as well as foreign currency exchange rates are replete with examples of traders exchanging information and boasting of their ability to artificially raise or lower a benchmark rate. These are not isolated instances, but part of a pattern of conduct over months and even years. So it cannot be chalked up to the heat of the moment. 

What is so puzzling about people who have led otherwise good lives is that they are unlikely to have engaged in the misconduct if it is presented to them in stark terms. Ask a Wall Street trader, for example, whether he or she would trade on material nonpublic information received from a corporate insider, and the answer from most would be “no” — at least if there was a reasonable chance of being caught.

Civil Tax Fraud and Criminal Tax Evasion - Relevance of Intent at the Time of Filing (1/3/14)

The Procedurally Taxing Blog has this terrific entry:  Leslie Book, A Round Trip Ticket to Unwanted IRS Attention: False Documents and Fraud (Procedurally Taxing 12/31/13), here. The Blog discusses the opinion by Judge Holmes in the Tax Court in Brown v. Commissioner, T.C. Memo. 2013-275, here.  I strongly encourage readers of this blog to read it.

I will use that blog entry to extend the discussion in that blog.  So, I will give a very succinct summary.  In late 2003, The taxpayer bought an expensive plane for use in his business.  He wanted to claim 50% bonus depreciation, so he needed to place the plane in service in 2003.  On December 30, 2003, he took delivery for two short flights, returning from the second flight early on December 31, 2003.  At the destination on each of those flights, he claimed to have met with persons for business purposes.  Upon return, and into the following year, the customizers on the plane made modifications to the plane he claimed he needed for his business.  So, his significant business use did not start until well into 2014.  The question is whether he had placed the plane in service by actual business use in 2003, so that he could qualify for the 50% bonus depreciation. His proof of the business purpose consisted in part of letters from two of the persons he claimed to have met with for business purposes.  The letters had not been prepared contemporaneously, and the Judge Holmes seemed to think that they may have been prepared incident to the audit to support the claimed bonus depreciation.  The IRS was more than suspicious.  The IRS denied the depreciation and asserted penalties -- the 75% civil fraud penalty under Section 6663, here, and, in the alternative, the 20% accuracy related penalty.  The parties stipulated as to significant adjustments increasing tax and stipulated that some of those adjustments were fraudulent, thus subject to the 6663 penalty.  At the trial, the only issue was the bonus depreciation.  Under Section 6663's burden shifting rules, since the taxpayer had stipulated to fraud, the taxpayer bore the burden of showing by a preponderance of the evidence that the bonus depreciation claim was not fraudulent.  Judge Holmes denied the civil fraud penalty, but sustained the accuracy related penalty.  Judge Holmes reasoned that the the taxpayer had shown by a preponderance of the evidence that the bonus depreciation was not fraudulent.  In part, the Court reasoned (Slip Op. 45-48, footnotes omitted and emphasis supplied):

The Commissioner first contends that the "thank you" letters -- purportedly from Mastro and Pasquale but really drafted by one of Brown's employees years later -- were false documents. The Commissioner is correct that making false documents is one of the factors that indicates fraud. See, e.g., Spies, 317 U.S. at 499. Still, while these letters weren't actually written by Mastro or Pasquale, we know at least Pasquale did sign the one with his name on it. Thus, while the contents of Pasquale's letter were -- as Pasquale mildly put it -- "a little bit over the top," it's not clear that the contents of either letter were patently false. 

But even if they were, we don't find that they bear on the fraud analysis here. It's well established that fraudulent intent must exist at the time the taxpayer files the return. See Gleis v. Commissioner, 24 T.C. 941, 952 (1995), aff'd, 245 F.2d 237 (6th Cir. 1957); Holmes v. Commissioner, T.C. Memo. 2012-251, at *37. We found that Brown (via Fitzgerald) generated those letters during the audit process; that is, actions that took place after the filing of the return. While we have said that post-filing events can indicate fraudulent intent at the time of filing, see Holmes, at *37, we don't see any evidence that Brown formed the intent to create those letters when he filed the 2003 return. Brown testified that his practice was to have Fitzgerald write letters on behalf of business associates only "when the IRS requests them" -- that is, after a return has been filed. On the unusual facts of this case, we do find this bit of Brown's testimony credible, and it does persuade us that the letters are not good proof that Brown intended to evade tax at the time he filed his returns. See id. at *41 (finding that "[A]lthough petitioner failed to cooperate with respondent's agents by intentionally submitting a false document, his failure does not compel the conclusion that he had a fraudulent intent in filing his 2000-04 tax returns"); id. at *32 ("Although respondent has proffered some evidence of fraud, that evidence relates exclusively to petitioner's postfiling actions and does not convince us of his intention to evade tax when he filed his tax return for each year in issue").