Friday, July 10, 2015

Seventh Circuit Affirms No Incarceration Sentence for Ty Warner (7/10/15; 7/14/15)

The Seventh Circuit today affirmed the no incarceration sentence for billionaire Ty Warner of Beanie Baby fame.  United States v. Warner, 792 F.3d 847 (7/10/15).  The opinion on the Court's site is here; a downloaded bookmarked pdf copy is here.

The essence of the holding is that the Court of Appeals could not -- certainly did not -- conclude that the sentencing judge abused his sentencing discretion.  The panel opinion concludes:
Due deference leads us to the same conclusion here. Considering (1) Warner’s excellent character, as shown by his long history of charity and kindness to others; (2) the isolated and uncharacteristic nature of his tax evasion; (3) his attempt to enter the OVDP; (4) his guilty plea and prompt payment of his liabilities; (5) his $53.6 million FBAR penalty, which is nearly ten times the tax loss; and (6) the fact that the government charged him with only one count and itself sought a well-below-guidelines sentence, we conclude that Warner’s probationary sentence is reasonable.
Addendum 7/11/15 1:30pm:

Bottom-line, the opinion just represents an application of what the panel felt was the the sentencing judge's discretion permitted by United States v. Booker, 543 U.S. 220 (2005), here, as subsequently interpreted, provided the judge can articulate some reasonable -- at least not unreasonable -- basis.  The larger issue, in my mind, is whether that application is consistent with the tension between Booker discretion and the proper application of the Sentencing Guidelines which Congress surely meant to have some meaning.  That is way too large an issue for me to address in this blog, even if I had the ability to do it.  Maybe I will address parts of the issue later; maybe not.

In the meantime, here are some very preliminary thoughts.  My discussion generally follows the presentation in the opinion.

1.  The Government seems to have made a strategic mistake in recommending a sentence well below the Guidelines range,  The Guidelines range was 46 - 57 months, just 3 months shy of the maximum sentence for the count of conviction.  The Court summarized the bidding on the recommendations/requests for sentencing as follows:
In their pre-sentencing submissions, neither side proposed a sentence within the guidelines range. The government requested incarceration “in excess of a year and a day,” a sentence well below the recommended minimum. The probation officer recommended a prison term of 15 months. Warner argued that a sentence of probation with community service would suffice, and that it would provide greater benefit to society.
Of course, as I have noted before, the courts just are not sentencing offshore tax cheats to within Guidelines ranges (the Court says this at p. 27), so the Government's recommendation of a substantially below Guidelines sentenced may have been a recognition of this reality.  Nevertheless, I think the Government has been complicit in sending the signal to the taxpaying community that offshore tax cheats get a better sentencing deal than other tax cheats.  But, although the Government may have played a role in this, ultimately, it is the courts to place tax cheating in its proper place among federal crimes in terms of sentencing and to make the case that offshore account tax cheating is somehow more societally acceptable than other forms of tax cheating.  I don't think that case has been made.

Also, consider the following from DOJ CTM 43.12[1] SENTENCING POLICIES, here:
As for variances, it is general Tax Division policy that sentences within the advisory Guidelines range adequately reflect the seriousness of the offense, promote deterrence, and reduce unwarranted sentencing disparities. Accordingly, Tax Division attorneys should seek supervisory approval before recommending either an upward or downward variance at sentencing.
2.  The Court seems to downplay the role of the Sentencing Guidelines as just another Section 3553(a) factor.  (See pp. 11-12 of the slip opinion.)  In one sense, that is certainly true.  But treating the Guidelines as just another sentencing factor seems to downplay its critical role in the fairness of sentencing, for many of the sentencing factors are already accounted for in the Guidelines.

3.  The Court swipes at the Government's argument because key features were presented in footnotes:
A. Procedural Reasonableness 
While the government primarily takes aim at the substance of Warner’s sentence, it also claims in several footnotes that the district judge procedurally erred by overlooking two of the § 3553(a) factors: the need to deter other tax-evaders and to avoid unwarranted sentencing disparities. Setting aside the question whether the government preserved this argument, see Harmon v. Gordon, 712 F.3d 1044, 1053 (7th Cir. 2013) ("[A] party can waive an argument by presenting it only in an undeveloped footnote."), we reject it on the merits.
4.  On substantive reasonableness, the Court makes the statement that I find an accurate but result oriented statement that was at least curious:  "He [Warner] received both a shorter sentence (24 rather than 46 to 57 months) and a lighter one (probation rather than prison)."  (Slip op. 15.)  The Court does acknowledge that, from a defendant's perspective, probation beats prison, but framing the issue in a way that suggests that probation somehow equates, albeit lighter, is a bargain that most tax cheats or other criminals would love.  In this regard, the Court later (p. 22) does state:
In these circumstances, we think probation was a sufficiently serious sentence. The Supreme Court reminded us in Gall that probation involves a “substantial restriction of freedom,” and faulted the court below for discounting that fact. 552 U.S. at 48. For two years Warner will live under restrictions on his movement and activities, and he must perform at least 500 hours of community service. Moreover, he paid a $100,000 fine, the highest possible amount for a violation of 26 U.S.C. § 7201.
Most tax cheats and other criminals would love this as an alternative, but it often comes as an addition to incarceration.

The Court then launches into the FBAR penalty -- $53.6 miillion -- as part of his punishment.  I address that separately below.

5.  The Court noted the effect of good time credit which most practitioners exploit (when they can), but some readers may not know about:
The government proposed over a year and a day in prison—which would have made Warner eligible for good-time credit, likely reducing his actual time served to less than a year. See 18 U.S.C. § 3624(b)(1).
6.  The Court seems to say that the Government's recommendation framed the bidding as the parties went to the sentencing judge.  Basically, the notion (as I perceive it) is that the Government's recommendation of a year and one day signaled to the Court that Warner was an extremely sympathetic tax cheat.  (See Slip Op. 16.)  "The real choice before the district court, then, was between probation and roughly a year in prison—not 46 to 57 months."  (Note in this regard that the Court had previously noted that the probation officer had recommended 15 months (Slip Op. 7); what did the Court think the probation officer was, a potted plant? (I paraphrase Brendan Sullivan's famous quote from his representation of Oliver North in congressional hearings, see Wikipedia here.)

7.  The Court makes a big deal that, in its view, the sentencing court ultimately based the decision on its view of Warner's character.  (see e.g., Slip Op. 20.)
The district court looked behind the numbers to Warner’s character and found him to be a genuinely benevolent person. A non-wealthy defendant who showed similar qualities would be entitled to similar treatment (all else being equal). And a rich defendant who gave large gifts without real concern for others, or who did so cynically to give himself an argument at sentencing, would not deserve the same leniency.
Of course, the reason that Warner was being sentenced in the first place was that he had a major character flaw -- as rich as he was a tax cheat stealing from the country and its citizens.  (He was not Jean Valjean stealing so that others, wholly innocents, might live.)

8.  The Court (as does the concurrence) finds some support for lenient sentencing in the fact that the Government charged Warner with a single count.  This is the key portion of that discussion:
2. Seriousness of the Offense 
Section 3553(a) demands “a sentence sufficient, but not greater than necessary, to comply with the purposes” of sentencing. One of those purposes is “to reflect the seriousness of the offense, to promote respect for the law, and to provide just punishment.” 18 U.S.C. § 3553(a)(2)(A). The district court here recognized Warner’s crime as “a serious one” and respect for the law as “fundamental.” According to the government, however, this was mere lip service, for Warner’s sentence does not justly punish him or convey the seriousness of evading $5.6 million in taxes. 
In another case, justice might demand a harsher sentence, but here it does not. To begin with, the government itself took a fairly lenient approach to Warner’s punishment. It charged him with a single count of tax evasion for a single year and elected to treat his conduct in the other years as relevant for sentencing purposes rather than to charge them as separate crimes. Additionally, as we noted above, the government sought a sentence well below the guidelines range. Both decisions were within the government’s prosecutorial discretion, and we do not second-guess them. But they start-ed the district court down a path toward leniency.
As to the charge for a single count, the Court does not seem to consider the role of real offense sentencing and plea bargaining in the system.  One of the roles of the Guidelines was to reflect through relevant conduct the importance of punishing the real offense and not just adding up counts the Government could have charged.  Outside the context of a plea bargain, the Government could have on the counts from Warner's pattern of conduct, but the Guidelines -- which after all reflected real sentencing -- is to make such count loading irrelevant as indeed it probably was before and after the Guidelines.  Hence, to say that a defendant may deserve a lesser sentence by inference from the fact that the Government did not formally charge more counts is dubious.  Also, this was a plea bargain, which usually drops real and viable counts but often does not affect the sentencing calculation at all because the real offense based principally on the tax loss number is the same as if the extra counts had been charged.  Keep in mind that Warner admitted in the plea agreement that the relevant conduct was includible, thus admitting the related crimes even if he did not formally plead to counts.

9.  The FBAR penalty as punishment.  The Court clearly considers the FBAR penalty as part of the punishment, thus justifying a more lenient sentence (Slip Op. p. 22):
In addition, Warner paid full restitution and a $53.6 million FBAR penalty. Technically the FBAR penalty is civil rather than criminal in nature. See 31 U.S.C. § 5321. But it stems from the same conduct as his criminal conviction; in fact, the government specifically cited his FBAR violations in the information as evidence of his criminal tax evasion. Further, the FBAR penalty was part of Warner’s plea agreement. It is therefore one of the circumstances that informs our assessment of his sentence’s adequacy. Cf. USSG § 5E1.2(d)(5) (instructing the court, when determining fines, to consider “any collateral consequences of conviction, including civil obligations arising from the defendant’s conduct”); United States v. Anderson, 267 F. App’x 847, 850 (11th Cir. 2008) (per curiam) (upholding a probationary sentence for insider trading based in part on the defendant’s payment of restitution and a civil penalty to the SEC). 
The government now tries to downplay Warner’s FBAR penalty, claiming it represents only a fraction of the liability he faced. According to the government, it could have charged Warner a separate penalty for each year he hid his account. Even assuming the relevant statute, 31 U.S.C. § 5321(a)(5)(C)-(D), would allow separate annual penalties, the six-year limitations period would have restricted the government’s recovery to two or maybe three years. See 31 U.S.C. § 5321(b)(1). In addition, the government would have had to prove that Warner’s violations were willful. Id. § 5321(a)(5)(C). Moreover, if $53.6 million were insufficient, the government could have insisted on more before entering into the plea agreement. 
The government points out, citing Gall, that “custodial sentences are qualitatively more severe than probationary sentences of equivalent terms.” 552 U.S. at 48. That is true, and in that sense incarceration sends a stronger message than probation does. But § 3553(a) does not command courts to send the strongest message possible; it commands them to impose a sentence that is “sufficient, but not greater than necessary” in the circumstances of each case. 18 U.S.C. § 3553(a) (emphasis added). The district court concluded that in Warner’s case a probationary sentence met that standard. That conclusion was reasonable.
The first thing I note is that, although making a passing reference to the FBAR willful penalty as civil, the Court clearly considers it as a penalty for criminal conduct.  Currently, I am considering the issue of whether the FBAR willful penalty is penal in nature so that it does not survive death.  It appears to me that some part of the notions floated by this panel opinion might be helpful.

In any event, what the Court did not know or chose to ignore was that the standard plea agreement offered to all offshore account tax cheats at that time was a one count plea.  The "standard" plea deal offered all, so far as I am aware, was originally one tax perjury count (3 year felony) or one FBAR count (5 year felony); Warner's was one tax evasion count (5 year felony).  (The plea deal may be inching up now, even though the sentencing is not.)  More importantly, had the case been charged without a plea deal, additional counts almost certainly would have been added.  Finally, I had not considered that the IRS might not be able to impose annual FBAR willful violations.  The Court hedges on the issue ("Even assuming the relevant statute, 31 U.S.C. § 5321(a)(5)(C)-(D), would allow separate annual penalties,") but assumes for purposes of what it had to say that multiple annual willful penalties could apply.

10.  The Court recognized the general deterrence role for sentencing.  (See Slip op. p. 23 ff.).  But, the Court believed, Warner was so unique that no others could think that they deserve a lenient sentence because he got one.
"[T]he veteran district judge found Warner to be one of a kind."  Almost by definition, very few defendants will make that kind of impression on a sentencing judge. So Warner’s sentence tells others very little, if anything, about what treatment they would receive for a similar crime. In particular, other, more typical defendants should take no comfort in the fact that Warner avoided imprisonment.
Might this be viewed as an instance where sentencing judges have smaller fish to fry (where the rich get better justice (if not justice, then sentences) than the poor.  (The smaller fish to try is a notion I have previously attributed to Janet Spragens, a former colleague at DOJ Tax Appellate, in a different context; see IRS Data-Mining Program re Offshore Accounts; with a Diversion to the Real Golden Rule (Federal Tax Crimes Blog 9/1/12), here.

11.  The Court makes a pass at sentencing disparities, focusing particularly on those defendants who have received probation for offshore account tax crimes.  (Slip Op. 26-28.)  The Court concluded:
Ultimately, these examples prove the district court’s point: Warner is unique, and neither side’s comparisons are very helpful. As a result, his sentence does not cause any unwarranted disparities among similar defendants. And for the same reason, it does not restrict the government’s ability to obtain a prison sentence in other, more typical cases, even where the tax loss at issue is less than Warner’s.
I will have to say that, generally, when courts distinguish away what would otherwise be disparate treatment, leaving the current instant as so unique that there really are no acknowledged disparities and there is no precedential value in any future case, it is a signal that something is wrong.  It is simply a one-off case.  That may be, but I suspect that the spector this sentencing and the appellate approval will loom large in future sentencings, particularly with judges who are skeptical that the character of the defendant before them is any less worthy than Warner's (as well as with defense counsel whose goal is is to convince those judges that their defendant's character is as good as Warner's).

Addendum 7/14/15 12:15 PM

Tax Notes Today has an article on the Warner holding:  Nathan J. Richman, Beanie Babies Creator's Sentence Shows Sentencing Flexibility, 2015 TNT 134-6 (7/14/15), no link available.  I had already anticipate some of the points, so won't repeat them here.  The significant point of the article is that a careful sentencing judge, such Judge Charles P. Kocoras, here, by crafting his findings to cover all of the potentially relevant Section 3553(a), here, considerations, including the first step of proper calculation of the Sentencing Guidelines range, will make his sentence immune from review under Booker's abuse of discretion standard for substantive reasonableness.  JAT Note: The practical effect in such cases is that the relevance of the Guidelines is not at all clear.  I am not sure the Supreme Court intended that in Booker and its progeny.  (Of course, if the court makes a statement about it basis that does not make sense, a Court of Appeals will reverse.  See Third Circuit Reverses Variance to One Day from Guidelines Range of 63 to 78 Months (Federal Tax Crimes 6/1/15), here.)

This is just a variation of the truism that careful and smart judges (that is conjunctive, because some are smart and not careful) who take the time to find the facts in a manner that supports the legal conclusions they apply will usually have their cases affirmed on appeal.  The truism that flows from that is that, if the case must be litigated, the stage to win in most cases is the trial level.  That may seem obvious.  A trial attorney will want to make sure the potential appellate arguments are preserved in the record at trial, but should never forget that the place to win is usually the trial level.  Don't be so intent upon a possible appeal that you don't persuade the trial judge who, if careful and smart, will shape the opinion as much as possible to prevent reversal on appeal.

Finally, the Court of Appeals relies heavily upon the sentencing judge's finding that Warner had good character worthy of the ultimate sentencing break.  There is no indication that Warner's character was ever really tested.  He may have made some oral statement at sentencing, but that statement would have been totally scripted in his favor and not subject to cross-examination by the Government.  Basically, the sentencing judge seems to have relied principally, if not exclusively, on the many letters submitted by the defense counsel praising Warner.  One would have to assume that defense counsel did not solicit or submit to the Court letters that were less than effusive as to Warner the person or Warner the character.  And those letters that were submitted and their authors were not subject to cross-examination.  It is true that the Government could submit information to the court that would counter Warner's submissions.  I wonder if one result of this type of holding is that the Government may make stronger efforts in sentencing to attack the defendant's character rather than just relying on the Guidelines to do most of the work.

Earlier Federal Tax Crimes blogs on the sentencing and appeal are (presented in reverse chronological order):
  • Comments on the Warner Sentencing Oral Argument (9/22/14), here.
  • More on the Warner Sentencing Appeal (9/15/14), here.
  • Ty Warner Appellee Brief on Sentencing Appeal (7/28/14), here.
  • Sentencing Tales Told in Spreadsheets (6/28/14), here.
  • Booker Variances are More Common in Tax Crimes. Why? And Do They Disproportionately Benefit the Rich? (5/16/14), here.
  • When is Booker Variance Too Much? Per DOJ, Certainly in the Ty Warner Case (5/12/14), here.
  • Wow! Ty Warner is Not Quite the Innocent Abroad (2/24/14), here.
  • Interesting Debate on Affluence and Justice (2/19/14), here.
  • The Beanie Baby Man, The Tax Evader Adult Man, Ty Warner, Gets Probation! (1/14/14; Updated 1/18/14), here.
  • Sentencing Leniency for Offshore Tax Cheats (11/3/13), here.

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