Court Denies Preliminary Injunction in FATCA and FBAR Challenge (9/30/15)

In Crawford v. United States Dep't of the Treasury, 2015 U.S. Dist. LEXIS 131496 (SD OH 9/29/2015), here, the Court denied a preliminary injunction in the case seeking the following relief:

Plaintiffs seek preliminary injunctive relief on all claims. The first claim challenges the validity of the Canadian, Czech, Israeli, and Swiss IGAs used by the Treasury Department. The second claim addresses the information reporting provisions FATCA and the IGAs impose not on Plaintiffs, but on foreign financial institutions. The third claim aims at the heightened reporting requirements for foreign bank accounts under FATCA, the IGAs, and the FBAR. These reporting requirements require U.S. citizens to report information about their foreign bank accounts. The fourth claim challenges the 30% tax imposed by FATCA on payments to foreign financial institutions from U.S. sources when these foreign institutions choose not to report to the IRS about the bank accounts of their U.S. customers (the "FFI Penalty"). Similarly, the fifth claim challenges the 30% tax imposed by FATCA on account holders who exercise their rights under the statute not to identify themselves as American citizens to their banks and to refuse to waive privacy protections afforded their accounts by foreign law (the "Passthrough Penalty"). The sixth claim challenges the penalty imposed under the Bank Secrecy Act for "willful" failures to file an FBAR for foreign accounts, which can be as much as the greater of $100,000 or 50% of the value of the unreported account (the "Willfulness Penalty").

The case is not particularly noteworthy from a legal perspective.  It just denied a preliminary injunction.  The likelihood of getting any ultimate relief in the case, preliminary or otherwise, is minimal.  (The pursuit of the case is more a way to make a statement and perhaps encourage those who can be encouraged by such futile statements to make contributions to the people and organizations who proclaim such futile statements.)

In a sense, though, the case is interesting.  I cut and paste certain excerpts that I found interesting:

On Claims by Senator Rand Paul (Wikipedia entry here).

Senator Paul seeks to base legal standing for Counts 1 and 2 in his role as a U.S. Senator, charged with the institutional task of advice and consent under the Constitution. He contends that the IGAs exceed the proper scope of Executive Branch power and should have been submitted for Senate approval. ¶¶ 28, 29. Senator Paul's argument that the Executive Branch is usurping Congress's powers by not submitting the IGAs for a vote-that he has a "right to vote"-is a claim that the Executive Branch is not acting in accordance with the law and that he may remedy such violation in his official capacity as a senator. In Raines v. Byrd, several members of Congress challenged the constitutionality of the Line Item Veto Act of 1996, asserting that the statute infringed on their power as legislators. 521 U.S. at 816. The Supreme Court held that they lacked Article III standing. It noted that their claim asserted "a type of institutional injury (the diminution of legislative power), which necessarily damages all Members of Congress and both Houses of Congress equally." Id. at 821. Because Plaintiffs' "claim of standing [was] based on a loss of political power, not loss of any private right," their asserted injury was not "concrete" for the purposes of Article III standing. Id. Raines bars Senator Paul's claims. This is true even if he frames the conduct he challenges as a "usurpation" of congressional authority. See Chenoweth v. Clinton, 181 F.3d 112, 116 (D.C. Cir. 1999) (a claim of usurpation of congressional authority is not sufficient to satisfy the standing requirement); see also Walker v. Cheney, 230 F. Supp. 2d 51, 73 (D.D.C. 2002) ("the role of Article III courts has not historically involved adjudication of disputes between Congress and the Executive Branch based on claimed injury to official authority or power."). 

Senator Paul has not been authorized to sue on behalf of the Senate. This fact also weighs against finding standing. See Raines, 521 U.S. at 829 ("We attach some importance to the fact that appellees have not been authorized to represent their respective Houses of Congress in this action[.]"). Members of Congress possess an adequate remedy (since they may repeal the Act or exempt appropriations bills from funding its implementation). Raines, 521 U.S. at 829. 

Nor can Senator Paul base his standing on a more generalized interest in "vindication of the rule of law." See Steel Co. v. Citizens for a Better Env't, 523 U.S. 83, 106 (1998); see also Hollingsworth v. Perry, 133 S. Ct. 2652, 2662 (2013) ("[A]n asserted right to have the Government act in accordance with law is not sufficient, standing alone[.]" (quotation omitted)). A legislator does not hold any legally protected interest in proper application of the law that is distinct from the interest held by every member of the public. Senator Paul thus fails to allege a particularized, legally cognizable injury by his claim that the Executive Branch is not adhering to the law. See Campbell v. Clinton, 203 F.3d 19, 22 (D.C. Cir. 2000) (Congressional plaintiffs do not "have standing anytime a President allegedly acts in excess of statutory authority"). 

Senator Paul has "not been singled out for specially unfavorable treatment." Raines, 521 U.S. at 821. All Plaintiffs here, including Senator Paul, have an adequate remedy to challenge the reporting requirements and penalties that they oppose: they may work toward repeal of the laws through the legislative process. Id. Of course, FATCA, the IGAs, and the FBAR requirements are not exempt from constitutional challenge, but they must be challenged by an individual who has suffered a judicially cognizable injury. Id. Plaintiffs in this case do not qualify. 

In sum, Paul has alleged no injury to himself as an individual, the institutional injury he alleges is wholly abstract and widely dispersed, and his attempt to litigate this dispute at this time and in this form is contrary to historical experience. Raines, 521 U.S. at 829.

JAT Comment:  Rand Paul's appearance in this futile case is just another instance of congressmen posturing for their base rather than really trying to solve problems.

On the FBAR penalty:

GE Asks the Supreme Court to Screw Up Again to Bless a BullShit Tax Shelter (9/26/15; 9/28/15)

I have written before about one of GE's adventures into bullshit tax shelters in the case styled TIFD-III-E Inc. v. United States.  After the initial appellate decision, it was clear that the Second Circuit did not buy into GE's nonsense.  But, after multiple ups and downs where a stubborn district court judge enamored of GE just did not get the point, the Second Circuit finally called a halt with summary reversal of the district court on the final negligence penalty issue.  I recount those ups and downs in a number of blogs which I list at the bottom of this blog entry.

Well, one would think that with the thrashing it got in the Second Circuit, GE would just move on to other bullshit tax shelters that it can better hide from the IRS.  (Even bullshit tax shelters work when the IRS is unable to get past the fog to discover them.)  But no, GE seeks vindication in the Supreme Court for its bullshit tax shelter.  On September 17, 2015, a petition for certiorari, here, was filed. [Note to readers, when the link is clicked the document appears but may not be viewable in the browser; download the pdf and it will be viewable; I will try to get a better pdf to post that will be viewable in the browser.] The style of the petition is TIFD III-E, LLC, Tax Matters Partner for Castle Harbour-I Limited Liability Company v. United States (Sup. Ct. No. 15-331).  I will post the Government's brief in opposition when it is filed.

I will make a few comments on the petition for certiorari.

First, I cut and paste the "Questions Presented."  Stating the question presented is an art form, when practiced at a high level is designed to suggest the desired answer (it is in an advocate's brief, after all):

QUESTIONS PRESENTED 

Over 60 years ago, this Court ruled in Commissioner v. Tower, 327 U.S. 280 (1946), and Commissioner v. Culbertson, 337 U.S. 733 (1949), that a partnership must be respected for purposes of federal taxation if a court finds, based on the totality of circumstances, that the parties in good faith and acting with a business purpose intended to join together in the conduct of the enterprise. In light of that longstanding test, the questions presented are:  

1. Whether the Second Circuit erred in ruling that,  even when parties form a partnership with real assets to operate a business for a legitimate purpose, courts may nevertheless deem the interests of some partners invalid, and thus ineligible for recognition under the tax laws, based on a judgment that the partners' interests in the partnership are "more akin to debt than equity." 

2. Whether a taxpayer can be subject to a penalty under 26 U.S.C. § 6662(a) for underpayment of tax attributable to negligence when the tax return raises a question that is unsettled or reasonably debatable. 

GE introduces its argument by stating:  "In this extraordinary case, which has been the subject of three separate appeals...."  Three separate appeals in a single case is unusual, perhaps even extraordinary.  But. in my view, it is only extraordinary because GE was able to smoke its claims past a district judge three times, only to be batted down all three times.  Indeed, any reasonable district judge would have realized on the first remand that the Second Circuit was not buying into GE's nonsense.

On  the merits of its claim, GE quibbles about whether the Second Circuit was remiss in not calling the transaction a sham.  But, what GE did was to  dress a lending transaction up as a partnership.  Is that not a sham even if the word sham is not used?  I don't think use of the word sham is necessary to the Second Circuit's holdings.

While the contours of a tax partnership may be necessarily uncertain with precision, this case does not present a proper vehicle to clarify the contours.  I would be surprised if the Supreme Court wants to re-visit the issue.  The earlier Supreme Court cases properly offer guidance, necessarily general and nonspecific, to the lower courts.  No more is needed or likely to be provided in this case.

Two More Banks Obtain NPAs under DOJ Swiss Bank Program (9/25/15)

On September 25, 2015, DOJ announced here that Migros Bank AG (Migros) and Graubündner Kantonalbank (Graubündner) have entered an NPA under the DOJ program for Swiss banks, here.  The penalties are:

Migros Bank AG (Migros)	$15.037 million
Graubündner Kantonalbank (Graubündner)	$3.616 million

Here are key excerpts.

Migros was founded in 1957 and is headquartered in Zurich.  As of Dec. 31, 2014, Migros Bank had 66 offices (all in Switzerland) and more than 1,300 employees.  In January 2001, Migros Bank entered into a Qualified Intermediary (QI) Agreement with the Internal Revenue Service (IRS).  The QI regime provided a comprehensive framework for U.S. information reporting and tax withholding by a non-U.S. financial institution regarding U.S. securities.  Migros Bank issued several directives to its employees concerning the QI Agreement.  An October 2000 directive stated that persons subject to U.S. taxes who did not want to be disclosed to the “U.S. tax authority” would not be authorized to hold or purchase U.S. securities in their accounts beginning on Jan. 1, 2001.  The directive further stated that persons subject to U.S. taxes who disclosed their identities to the U.S. tax authority via an IRS Form W-9 could purchase and sell U.S. securities without restriction. 

Migros Bank also created a handbook regarding the QI Agreement, which was first issued to its employees in 2003.  The handbook recognized that “the U.S. retains the right to full taxation of its citizens,” but also that a “U.S. person has the option not to disclose to U.S. tax authorities.”  The handbook instructed Migros Bank employees that “[i]f a U.S. person does not wish to disclose to U.S. tax authorities, it is sufficient if the W-9 form is not filled out for Migros Bank,” and that the customer could sign a waiver to forego investing in U.S. securities.  The handbook further instructed Migros Bank employees that clients residing in the United States “who would like to refrain from disclosure” could be “tended to” by, among other things, retaining their mail in Switzerland through hold-mail agreements, not making regular fund transfers  to the United States and not sending payment orders from the United States. 

From 2001 until 2005, Migros Bank accepted referrals of U.S. persons as new clients from an external asset manager based in Switzerland.  The external asset manager brought a total of 165 U.S.-related accounts to Migros Bank during that period, and most of those accountholders were U.S. residents.  The maximum value of these accounts during that period was approximately $62 million.  The external asset manager had full control of his clients’ accounts, and Migros Bank’s relationship managers usually interacted with him rather than with his clients.  In 2005, Migros Bank decided to terminate its relationship with the external asset manager, but it did not end the relationship until the end of 2006 in order to provide the external relationship manager with additional time to contact his clients and possibly move their funds to other depositary banks.  Alternatively, his clients could elect to stay at Migros Bank and give the external asset manager powers of attorney to continue managing their accounts. 

In December 2008, Migros Bank’s executive board established a working group of bank officials to study the situation of U.S.-domiciled clients, whom Migros Bank considered to be the riskiest U.S. persons from a U.S. tax-enforcement perspective, identify any related risks to Migros Bank and propose measures to limit such risks.  The working group assessed the risk of U.S. tax authorities taking actions against additional Swiss banks as moderate and the risk of Migros Bank’s website and e-banking services causing it to fall under U.S. bank supervision as low.  They also assessed the risk of relationship managers’ insufficient legal and linguistic knowledge causing erroneous advice to U.S.-domiciled clients as moderate. 

The working group considered discontinuing business with all U.S.-domiciled clients to be a “low priority” because that business generated earnings with hardly any additional expenditure and had “further potential as various banks are discontinuing the provision of advisory services.”  Instead, the working group considered the creation of a U.S. desk to be a top priority.  The working group presented a business case for this option that envisioned obtaining an additional one percent share of the total U.S.-domiciled clients with more than 1 million Swiss francs in assets then being served by all Swiss banks.  The working group estimated that there were more than 2,500 UBS clients alone in that category.  The business case also envisioned potentially obtaining an additional two percent share of all other U.S.-domiciled clients, “depending on the strategy.”  The working group estimated that this course of action would result in Migros Bank having 250 million Swiss francs under management from U.S.-domiciled clients. 

The executive board ultimately decided, starting in 2009, to create a U.S. desk by re-assigning all U.S.-domiciled clients, whether in premium or retail banking, to a group of premium-banking relationship managers who spoke English and had received specialized regulatory training.  The head of the premium-banking department had ultimate responsibility over this team, which eventually included nine relationship managers.  In May 2009, Migros Bank issued a directive requiring that the head of the premium-banking department approve all new U.S.-domiciled clients, prohibiting Migros Bank employees from sending correspondence to the United States or accepting orders received by telephone, fax or mail from the United States, and prohibiting U.S.-domiciled clients from initiating transactions through the e-banking system.  After issuing the directive, Migros Bank accepted 37 new U.S.-related accounts in the remainder of 2009.  Of these, 17 were funded by transfers from banks with operations already under investigation by the department, or Category 1 banks. 

Since Aug. 1, 2008, Migros Bank provided banking services for 898 U.S.-related accounts, with more than $273 million in assets.  Migros Bank will pay a penalty of $15.037 million. 

Graubündner was founded in 1870.  It is headquartered in Chur, Switzerland, and has 63 branches, all located within the Canton of Graubünden. 

Wyly Brothers Seek Bankruptcy Relief from Disgorgement Order from Offshore Shenanigans (9/18/15)

Keith Fogg, here, a professor at Villanova Law School, has this great posting on the Wyly brothers, one of whom is now deceased.  Issue Preclusion in Bankruptcy Case Where SEC Securities Enforcement Action Aids the IRS in Establishing a $2 Billion Claim (Procedurally Taxing Blog 9/18/15), here. I previously posted (blog postings listed below) about the SEC's novel theory on disgorgement to include the tax loss in the securities litigation.  The Wyly brothers now seek to contest the actual tax liability in bankruptcy and, presumably, thereby obtain relief from the restitution order.  I do recommend Keith's entire discussion but do "cut and paste" certain excerpts below.

The tax merits of the Wyly’s liability ends up being litigating in bankruptcy court because B.C. 505(a) permits debtors to litigate the merits of their tax liability while in bankruptcy if the merits have not been previously litigated. Even though the Wyly brothers did not previously litigate the merits of their tax liability, they did litigate about many of the underlying issues during the disgorgement phase of the SEC litigation. The findings of the court in the SEC litigation and how those findings impact the actual tax merits litigation becomes the focus of the tax merits case heard before the bankruptcy court. The SEC suit had two phases, the violation phase and the disgorgement phase. The bankruptcy court here notes that the opinion issued in the disgorgement phase “carefully sets forth the details of the creation and direction the Offshore Trusts based on the jury verdict (the violation phase), the undisputed facts, and the District Court’s own factual findings.” 

Between 1992 and 1996 Sam and Charles Wyly caused the establishment of offshore trusts and various subsidiary entities. Some of the trusts were settled for the benefit of their families and some charitable organizations (the Bulldog trusts) and some were nominally settled by a foreign citizen (the Bessie trusts). Between 1992 and 1999, Sam and Charles transferred securities to these trusts. “These securities were in the form of options and warrants in public companies for which Sam and Charles served as directors during part or all of the relevant time period.” The trusts and subsidiary companies exercised options and warrants and engaged in other activities regarding the securities between 1995 and 2005. The bankruptcy court, following on the district court opinion, found that the trusts could have lawfully deferred taxation on the income related to the securities if Sam and Charles had given up beneficial ownership of the securities. During this period Sam and Charles never disclosed beneficial ownership of the securities in the offshore trusts to the SEC making their actions toward the IRS and the SEC consistent. 

The jury found that, in fact, Sam and Charles controlled the securities throughout this period and beneficially owned the securities. Consequently, the jury found them liable on nine counts of securities fraud. “Disgorgement serves to remedy securities law violations by depriving violators of the fruits of the illegal conduct.” In the disgorgement phase the district court found that Sam and Charles maintained a consistent position with respect to the IRS and the SEC regarding the securities for the purpose of avoiding taxation and that the appropriate measure of damages should look to the income tax not paid as a result of the securities fraud. Because of the link between the securities case and the issues presented in the 505(a) litigation over the amount of the tax liability related to the offshore trusts, the government sought issue preclusion (collateral estoppel) on 64 issues decided during the securities litigation. Because the debtors did not point to any distinctions among the 64 issues, the bankruptcy court treated them as a unit.

Keith Then discusses the issue preclusion issue.

My previous blogs on the disgorgement proceedings are:

• Wylys Ordered to Disgorge Hundreds of Millions of Tax Benefits With Interest (Federal Tax Crimes Blog 9/27/14), here.
• Wyly Brothers' Use and Tax Abuse of Offshore Banks and Entities (Federal Tax Crimes Blog 8/5/14), here.
• SEC Suit for Disgorgement of Federal Income Tax Related to Securities Fraud (Federal Tax Crimes Blog 6/16/13), here.

Two More Banks Obtain NPAs under DOJ Swiss Bank Program (9/17/15)

On September 17, 2015, DOJ announced here that St. Galler Kantonalbank AG (SGKB) and E. Gutzwiller & Cie, Banquiers (Gutzwiller) have entered an NPA under the DOJ program for Swiss banks, here.  The penalties are:

St. Galler Kantonalbank AG (SGKB)	$9.481 million
E. Gutzwiller & Cie, Banquiers (Gutzwiller)	$1.556 million

Here are key excerpts.

St. Galler Kantonalbank AG (SGKB) has its headquarters in the Canton of St. Gallen, Switzerland.  It was founded in 1868 to provide credit services to Cantonal residents and to assist in the development of the regional economy.  By Cantonal law, the Canton of St. Gallen is SGKB’s majority shareholder, owning 54.8 percent of SGKB’s shares.
SGKB offered a variety of traditional Swiss banking services that it knew could assist, and that did in fact assist, U.S. clients in the concealment of assets and income from the Internal Revenue Service (IRS).  These services included hold mail, as well as code name or numbered account services.  These services helped U.S. clients eliminate the paper trail associated with the undeclared assets and income they held at SGKB in Switzerland.  By accepting and maintaining such accounts, SGKB assisted some U.S. taxpayers in evading their U.S. tax obligations. 

SGKB agreed to open accounts for at least 58 U.S. taxpayers who had left other banks being investigated by the department without ensuring that each such account was compliant with U.S. tax law from their inception at SGKB.  SGKB also issued checks, including series of checks, in amounts of less than $10,000 that were drawn on accounts of U.S. taxpayers or structures in at least nine cases, totaling $3 million.  For example, one U.S. taxpayer made 31 wire transfers for just less than $10,000 between June 2012 and December 2012.  SGKB further processed large cash withdrawals totaling approximately $5.8 million for at least 14 U.S. taxpayers at or around the time the clients’ accounts were closed, even though SGKB knew, or had reason to know, the accounts contained undeclared assets. 

Since Aug. 1, 2008, SGKB held accounts for 41 entities or structured accounts.  Eight of these accounts came to SGKB as part of the acquisition of business from Hyposwiss Privatbank AG, of which SGKB formerly was the parent company.  Of the remaining 33 entities, 18 were incorporated at or around the time their SGKB accounts were opened.  These entities were incorporated in Switzerland, Liechtenstein, St. Vincent and the Grenadines, the United States, Ireland, Panama, Haiti and Belize. 

In August 2008, SGKB mandated that no new funds would be accepted from U.S. residents without a signed IRS Form W-9.  However, certain executives had full discretion and authority to make exceptions to this policy, in keeping with SGKB’s general bank policy of permitting flexibility in its directives.  One executive first requested the authority to make a specific exception because he already had agreed to accept a “pipeline” of problematic U.S.-related accounts from UBS and wanted to keep his word to his former UBS colleague.  This “pipeline” consisted of six U.S.-related accounts with approximately $9.2 million in assets under management.  This executive granted another significant exception from this policy in connection with clients of an external asset manager.  At least 72 accounts with approximately $150 million in assets under management were opened at an SGKB subsidiary between late October and December 2008 without a Form W-9 as an exception to SGKB’s policy.  The majority of these accounts were transferred from UBS. 

Since Aug. 1, 2008, SGKB held a total of 626 U.S.-related accounts with approximately $303 million in assets under management.  SGKB will pay a penalty of $9.481 million.

Court Approves John Doe Summons to Belize Banks (9/17/15)

DOJ announces here that a district court authorized the IRS "to serve a 'John Doe'” summons seeking information about U.S. taxpayers who may hold offshore accounts at Belize Bank International Limited (BBIL) or Belize Bank Limited (BBL)."  The petition, memorandum in support and declaration of the agent are here.

The key summary from the press release is:

According to the IRS declaration, BBL is incorporated and based in Belize, and directly owns BBIL.  The IRS declaration further states that Belize Corporate Services (BCS) is incorporated and based in Belize and offers corporate services including the purchase of “shelf” Belizean international business companies.  BBL, BBIL and BCS are all corporate subsidiaries of BCB Holdings Limited, according to the declaration.  The declaration describes and IRS Revenue Agent’s review of information submitted by BBL and BBIL customers who disclosed their foreign accounts through the IRS offshore voluntary disclosure programs.  The customers in the “John Doe” class may have failed to report income, evaded income taxes, or otherwise violated the internal revenue laws of the United States, according the declaration. 

The IRS uses what are known as “John Doe” summonses to obtain information about possible violations of internal revenue laws by individuals whose identities are unknown.  The John Doe summonses approved today direct Citibank and Bank of America to produce records identifying U.S. taxpayers with accounts at Belize Bank International Limited, Belize Bank Limited, or their affiliates, including other foreign banks that used BBIL and BBL’s correspondent accounts to service U.S. clients.  The court also granted the IRS permission to seek records related to Citibank’s and Bank of America’s correspondent accounts for BCS and information related to BCS’s deposit accounts at Bank of America.  

A correspondent account is a bank account that one bank maintains for another bank.  Financial transactions involving U.S. dollars flow through U.S. banks; therefore, foreign banks that do business in U.S. dollars, but do not have an office in the United States, obtain a correspondent account in order to reach U.S. customers.  Transactions in the correspondent account leave a trail in the United States that the IRS can follow, including by using a John Doe summons.  The John Doe summons can let the IRS obtain records of money deposited, paid out through checks, and moved through the correspondent account through wire transfers. 

* * * * 

The Justice Department has previously obtained similar orders from the U.S. District Court of the Southern District of New York, permitting a John Doe summons on UBS AG for records of Swiss bank Wegelin & Co.’s correspondent account at UBS and from the U.S. District Court of the Northern District of California, permitting a John Doe summons on Wells Fargo, N.A., for records of the Barbados-based Canadian Imperial Bank of Commerce FirstCaribbean International Bank (FCIB).

The petition,memorandum and declaration here set forth the detail behind this summary.

These banks will be added to the IRS's Foreign Financial Institutions or Facilitators, here.  U.S. taxpayers with accounts in the listed banks joining OVDP after one of their banks are listed will be subject to the 50% penalty in OVDP (provided that they do not opt out, in which case, who knows).

Another Swiss Bank Obtains NPA Under DOJ Swiss Bank Program (9/16/15)

On September 15, 2015, DOJ announced here that Bank La Roche & Co AG ("La Roche"), has entered an NPA under the DOJ program for Swiss banks.  La Roche will pay  a penalty of $9.296 million penalty.  Here are key excerpts.

La Roche was founded in 1787 and is based in Basel, Switzerland, with offices in Olten and Bern, Switzerland.  In 2011, La Roche closed a Hong Kong asset management subsidiary that opened in 2008.  On Feb. 13, 2015, La Roche sold its business to Notenstein Privatbank AG.  Most of La Roche’s employees and the clients of La Roche, with the exception of U.S. taxpayers and a few other clients, will be transferred to Notenstein Privatbank AG.  The transaction is expected to close in October 2015.  Thereafter, La Roche intends to wind down its remaining business and relinquish its banking license. 

La Roche assisted some U.S. clients in opening and maintaining undeclared accounts in Switzerland and concealing the assets and income the clients held in their accounts from the Internal Revenue Service (IRS).  La Roche used a variety of means to assist some U.S. clients in concealing the assets and income the clients held in their La Roche undeclared accounts, including by: 

• providing numbered accounts for 70 U.S. taxpayers; 

•  holding bank statements and other mail relating to 66 U.S.-related numbered accounts, as well as 20 named accounts of U.S. taxpayers domiciled in the United States; 

•  allowing substantial cash and precious metal withdrawals in connection with the closures of 27 U.S. taxpayers’ accounts for a total amount of $11.6 million; 

•  maintaining records in which certain U.S. taxpayers expressly instructed La Roche not to disclose their names to the IRS; 

•  providing travel cash cards to five U.S. taxpayers upon their request; and 

•  opening an account in June 2010 for a U.S. taxpayer who left UBS and who transferred $126,000 from UBS to the La Roche account.

In 51 instances, La Roche maintained accounts for U.S. taxpayers as beneficial owners of accounts held by non-U.S. corporations, foundations or other entities, some of which were sham entities, that concealed the beneficial ownership of the U.S. taxpayers.  These entities included Liechtenstein foundations, two of which were established or administered by a Liechtenstein trust company, whose manager and director had a long-standing personal relationship with La Roche. 

Due in part to the assistance of La Roche and its personnel, and with the knowledge that Swiss banking secrecy laws would prevent La Roche from disclosing their identities to the IRS, some U.S. clients of La Roche filed false and fraudulent U.S. Individual Income Tax Returns (IRS Forms 1040), which failed to report their interests in their undeclared accounts and the related income.  Some of La Roche’s U.S. clients also failed to file and otherwise report their undeclared accounts on Reports of Foreign Bank and Financial Accounts (FBARs). 

As part of its participation in the Swiss Bank Program, La Roche provided information concerning 10 U.S. client accounts held at La Roche in Switzerland since August 2008 sufficient to make treaty requests to the Swiss competent authority for U.S. client account records.  It also provided a list of the names and functions of individuals who structured, operated or supervised the cross-border business at La Roche. 

Since Aug. 1, 2008, La Roche maintained 201 U.S.-related accounts with a maximum aggregate value of approximately $193.9 million.  136 of these accounts were beneficially owned by U.S. clients domiciled in the United States, 36 of which were maintained in the names of entities.  La Roche will pay a penalty of $9.296 million.

Tenth Circuit Affirms a Tax Obstruction Charge (9/15/15)

In United States v. Sorensen, 801 F.3d 1217, 2015 U.S. App. LEXIS 16362 (10th Cir. 2015), here, the Tenth Circuit affirmed a conviction for tax obstruction, § 7212(a), here.  The opinion addresses a lot of issues.  I address only a few here.  The Court's introduction sets up the issues I want to discuss:

From 2002 to 2007, Jerold Sorensen, an oral surgeon in California, concealed his income from the Internal Revenue Service ("IRS") and underpaid his income taxes by more than $1.5 million. He did so by using a "pure trust" scheme, peddled by Financial Fortress Associates ("FFA"), an entity he found on the Internet. After attending an FFA seminar and consulting with its representatives, he began depositing his dental income into these trusts without reporting all of it to the IRS as income. Over the years, he also retitled valuable assets in the trusts' names. In 2013, after a series of proffers, the government charged him with violating 26 U.S.C. § 7212(a) for corruptly endeavoring to obstruct and impede the due administration of the internal-revenue laws. A jury convicted him of the charged offense. 

On appeal, Sorensen raises seven arguments: (1) his conduct amounts to evading taxes so it is exclusively punishable under 26 U.S.C. § 7201, and not under § 7212(a); (2) the district court erred by refusing his offered instruction requiring knowledge of illegality; (3) the district court erred by giving the government's deliberate-ignorance instruction; (4) the district court erred by instructing the jury that it could convict on any one means alleged in the indictment; (5) the district court erred by refusing to allow him to provide certain testimony from a witness in surrebuttal; (6) the prosecution misstated evidence in its closing rebuttal argument; and (7) cumulative error. Exercising jurisdiction under 28 U.S.C. § 1291, we conclude that none of Sorensen's arguments merit relief. We affirm his conviction.

Is § 7212(a) Properly Charged in a Case Where § 7201 Could Have Been Charged.

Sorenson argued that, since the facts made out a case of tax evasion, he should have been charged with tax evasion and not with tax obstruction.  The Court easily handled that by holding that the two are separate crimes and the Government has discretion as to which crimes to charge.  In so holding the Court said:

We now turn to why tax evasion and tax obstruction are not identical crimes. In Williamson, we rejected the argument that "corruptly" has the same meaning as "willfully" as used to prove tax evasion under 26 U.S.C. § 7201—the "voluntary, intentional violation of a known legal duty." 746 F.3d at 991 (emphasis in original) (quoting Cheek v. United States, 498 U.S. 192, 201 (1991)). Further, we noted that Congress chose to use two different elements—corruptly versus willfully—to define the separate mens-rea requirements in defining the separate tax crimes. Id. at 991-92. 

In addition to these differences, it is also important to consider that the two statutes provide different penalties. Willfully evading taxes is the more serious crime, punishable by up to five years of imprisonment, while corruptly obstructing or impeding the due administration of the tax laws is punishable by up to three years. The difference in penalties suggests that a violation of § 7212(a) requires different culpability and wrongdoing than a violation of § 7201.

The Court of Appeals also rejected the argument that the CTM mandates or suggests that the more appropriate charge is evasion rather than obstruction if evasion is readily provable.  The Court noted that it depends upon what is readily provable and that it is interesting that, in making the argument, Sorenson was conceding that evasion was readily provable.  In any event, compliance with such departmental guidelines is not for the courts to police, particularly when charging decisions are relegated to the Government.

Another BullShit Tax Shelter Bites the Dust (9/12/15)

We have yet another great opinion attacking bullshit tax shelters for what they are -- bullshit.  See Bank of N.Y. Mellon Corp. v. Commissioner, ___ F.3d ___, 2015 U.S. App. LEXIS 15993 (2d Cir. 2015), here.  The opinion is by Denny Chin (Wikipedia, here), a truly outstanding judge.

First, here is the unofficial summary:

Appeals and cross‐appeal heard in tandem from a judgment of the United States Tax Court (Kroupa, J.) and an opinion and order of the United States District Court for the Southern District of New York (Stanton, J.) applying the ʺeconomic substance doctrineʺ to transactions involving foreign tax credits.   The Tax Court considered the effect of foreign taxes in its pre‐tax analysis and denied the claimed foreign tax credits as lacking economic substance, but allowed interest expense deductions for the loan associated with the transactions.   The district court held that the economic substance doctrine applies to transactions involving foreign tax credits generally and that foreign taxes are to be included in calculating pre‐tax profit.  
    AFFIRMED.

Well, that's pretty cryptic.  I won't try to summarize the complex facts whereby the parties involved tried to exploit the tax regimes of the countries involved.  The Court summarizes its holdings in the Conclusion as follows:

The Court summarizes all of its holdings in the conclusion:

CONCLUSION 

Accordingly, the decisions of the district court and Tax Court are AFFIRMED. To summarize: 

(1) We reject AIG's contention that foreign tax credits, by their nature, are not reviewable for economic substance. The purpose of the "economic substance" doctrine is to ensure that a taxpayer's use of a tax benefit complies with Congress's purpose in creating that benefit. Accordingly, we hold that the "economic substance" doctrine can be applied to disallow a claim for foreign tax credits. 

(2) In determining whether a transaction lacks economic substance, we consider: (a) whether the taxpayer had an objectively reasonable expectation of profit, apart from tax benefits, from the transaction; and (b) whether the taxpayer had a subjective non-tax business purpose in entering the transaction. Gilman, 933 F.2d at 147-48. In our Circuit, we employ a "flexible" analysis where both prongs are factors to consider in the overall inquiry into a transaction's economic substance. 

(3) The focus of the objective inquiry is whether the transaction "offers a reasonable opportunity for economic profit, that is, profit exclusive of tax benefits." Gilman, 933 F.2d at 146 (internal quotation marks omitted). We conclude, as a matter of first impression in this Circuit, that foreign taxes are economic costs and should thus be deducted when calculating pre-tax profit. We also conclude that it is appropriate, in calculating pre-tax profit, for a court both to include the foreign taxes paid and to exclude the foreign tax credits claimed. In so holding, we agree with the Federal Circuit in Salem and disagree with decisions of the Fifth and Eighth Circuits (Compaq and IES, respectively). 

(4) Under the subjective prong, a court asks whether the taxpayer has a legitimate, non-tax business purpose for entering into the transaction. 

(5) As to AIG's transactions, we hold that there are unresolved material questions of fact regarding the objective factors -- i.e., the economic effects of the cross-border transactions and the reasonableness of AIG's expectation of non-tax benefits. There are also material questions of fact regarding AIG's subjective business purpose for entering the cross-border transactions. Because a reasonable factfinder could resolve these questions in favor of the government and conclude therefrom that the cross-border transactions lacked economic substance, the district court did not err in denying AIG's motion for partial summary judgment. 

(6) As to BNY's transactions, we hold that the Tax Court correctly concluded that the STARS trust transaction lacked economic substance. We also hold that the Tax Court did not err in concluding that the $1.5 billion loan from Barclays had independent economic substance, and that BNY was therefore entitled to deduct the associated interest expenses. Accordingly, we affirm the Tax Court's judgment in its entirety.

I now want to focus on the economic substance holding related to the the foreign tax credit manipulation that the Fifth Circuit and the Eighth Circuit had blessed in Compaq Comput. Corp. v. Commissioner, 277 F.3d 778 (5th Cir. 2001); and IES Indus., Inc. v. United States, 253 F.3d 350 (8th Cir. 2001).  Essentially, in calling the tax shelters in the instant cases bullshit, the Court was, in kinder judicial language, calling Compaq and IES bullshit as well.  So, let's see how it did that:

Another Swiss Bank Obtains NPA Under DOJ Swiss Bank Program (9/11/15)

On September 10, 2015, DOJ announced here that Valiant Bank AG ("Valiant"), has entered an NPA under the DOJ program for Swiss banks.  Valiant will pay  a penalty of $3.304 million penalty.  Here are key excerpts.

According to the terms of the non-prosecution agreement signed today, Valiant agrees to cooperate in any related criminal or civil proceedings, demonstrate its implementation of controls to stop misconduct involving undeclared U.S. accounts and pay penalties in return for the department's agreement not to prosecute this bank for tax-related criminal offenses. Valiant traces its origins to 1824 and is headquartered in Bern, the capital of Switzerland. Today, Valiant is the successor of 40 banks. 

Valiant offered hold mail services and numbered accounts to its U.S. clients, including some U.S. clients who had not provided Valiant with an Internal Revenue Service (IRS) Form W-9. Valiant also accepted funds from 19 UBS accountholders who exited UBS. Eleven of these 19 U.S. persons provided a signed Form W-9. The remaining eight U.S. persons who did not were later forced to close their Valiant accounts. 

For 26 accountholders who refused to sign a Form W-9, Valiant cashed out or converted into gold hundreds of thousands (and even millions) of dollars in account balances. In late November 2011, one accountholder withdrew more than one million Swiss francs in various currencies and 114,000 Swiss francs in gold coins, gold bars and precious metal. Another accountholder withdrew $2 million in cash and wired 400,000 Swiss francs to a U.S. bank. In both instances, the accountholders refused to sign a Form W-9. Other accountholders withdrew only amounts under $10,000 either by U.S. dollar cash withdrawals or by check or wire transfer to the United States, or transferred large sums to non-U.S. institutions. For example, one accountholder transferred over 435,000 euros to France and $350,000 to Luxembourg. Two other accountholders each transferred 75,000 Swiss francs to Dubai and closed their accounts with cash withdrawals of over 300,000 Swiss francs. 

In 2009, an accountholder refused to sign a Form W-9 and requested that Valiant ignore the accountholder's U.S. status. The accountholder's non-U.S. spouse later opened a separate account at Valiant, and the accountholder transferred more than $1 million into that account. According to an "Agreement of Donation" between the accountholder and the accountholder's non-U.S. spouse, the purpose of the transfer was "to make a donation" and "without any consideration." The agreement provided that the donation was "irrevocable." The non-U.S. spouse then transferred the funds to UBS and instructed Valiant to close the account. 

Some U.S.-related accounts at Valiant were held in the name of non-U.S. entities with one or more U.S. beneficial owners. In one case, a British Virgin Islands entity opened an account at Valiant through a third-party Swiss entity assigned to manage the account. The entity holding the account designated four U.S. persons as beneficial owners, but signed a Valiant form declaring that the account was for the benefit of non-U.S. persons. 

Since Aug. 1, 2008, Valiant had 330 U.S.-related accounts, out of a total of 600,000 accounts. The maximum aggregate dollar value of the U.S.-related accounts was $147.4 million. Valiant will pay a penalty of $3.304 million.

KPMG Under Scrutiny in Canada Over Sham Offshoring Wealth for Canadians (9/11/15)

This saga sounds familiar, but apparently with delaying tactics in court not generally experienced in the U.S.  Dave Seglins, Harvey Cashore and Frederic Zalac, Federal probe of KPMG tax 'sham' stalled in court (CNBC News 9/10/15), here.

In February 2013, a federal court judge ordered KPMG to turn over a list of (as yet) unidentified multimillionaire clients who placed their fortunes in an Isle of Man tax shelter scheme that the CRA is arguing is a "sham." 

The CRA hoped to learn the scope of KPMG's "Offshore Company Structure" in order to identify potential tax cheats, as well as recoup millions in unpaid taxes and penalties.
But KPMG filed a court motion to quash the judge's order. For 30 months, the case known as Minister of National Revenue (MNR) vs KPMG has sat dormant before the court with no signs the top-tier accounting firm has handed over any list of wealthy clients. Neither the government nor KPMG has requested a court date to resolve the outstanding order of Justice Noel. 

* * * * 

According to court documents, the family essentially gave away the money to an arm's-length company that invested it and then "gifted" the proceeds back as non-taxable income.   

In court, the CRA says the structure was a deliberate "sham" created to "deceive" federal tax authorities. 

But when CRA won a court order in February 2013 to force KPMG to hand over a list of all multi-millionaire clients invested in the same Isle of Man plan, the accounting firm filed a court motion to overturn the judge's ruling. 

Now, MNR vs KPMG remains mysteriously stalled. 

* * * * 

New DOJ Policy on Prosecuting Individuals Beyond Corporate Crime (9/10/15)

DOJ has announced new policies that, in the words of an NYT article, "prioritize the prosecution of individual employees — not just their companies — and put pressure on corporations to turn over evidence against their executives." Matt Apuzzo and Ben Protessept, Justice Department Sets Sights on Wall Street Executives (NYT 9/9/15), here.  The policies are state in a Memorandum by Sally Quillian Yates to DOJ Officers about the new policy, here.  DAG Yates discussed the policy in remarks at NYU, here.

The key seems to be to deter corporate misbehavior by getting to the people in charge who can be sent to prison.  The corporation itself cannot be sent to prison, but can only pay fines and take other remedial actions.  And, the corporation -- a lifeless breathless legal fiction -- does not commit crimes; rather its officers, employees and agents do.

Among the key points is to focus on individuals early in the investigation so that appropriate cases can be built against culpable individuals.  And, the corporation can mitigate its damages by cooperating in its own investigation as well as the investigations of the overall culpability.  The NYT article quotes Ms. Yates as saying: "We mean it when we say, ‘You have got to cough up the individuals.’"

Of course, those who remember the tax shelter prosecutions in the Southern District of New York after the turn of the 2000s will recall that pressure was placed on the entities -- most significantly KPMG -- to cough up individuals.  Some fairly high individuals were coughed up.

It is not clear precisely what this will mean in the real world of white collar crimes involving corporations.  The devil will be in the implementation.

Another good quote:  "We’re not going to be accepting a company’s cooperation when they just offer up the vice president in charge of going to jail.”

As an example of what DOJ wants to avoid, the NYT article says:

A criminal case last year against BNP Paribas, France’s biggest bank, demonstrated the gap between charging a bank and its employees. Even as officials extracted a record $8.9 billion penalty and made the company one of the first giant banks to plead guilty to a crime, no BNP employees faced charges. The Justice Department said the bank insulated its employees by withholding records until after a deadline had passed to file individual charges.

* * * * 

Still, even if the Justice Department’s effort succeeds, it will not automatically put more executives behind bars. Mr. Garrett, the University of Virginia law professor, analyzed the cases in which corporate employees had been charged.

More than half, he said, were spared jail time.

Offshore Account Conviction Affirmed (9/10/15; 9/12/15)

In United States v. Hough, ___ F.3d ___, 2015 U.S. App. LEXIS 15973 (11th Cir. 2015), here, involving offshore accounts and related skullduggery, the Court starts its opinion as follows:

It may be, as the Downton Dowager bemoaned, that "[l]ie is so unmusical a word," n1 but it strikes the right note for some of the statements that Dr. Patricia Lynn Hough made in her tax returns.
   n1 Downton Abbey: Season 3, Episode 6 (Carnival Films Oct. 21, 2012).

Hough lost the case, but did obtain a limited remand for recalculation of the sentencing because of incomplete facts to support the tax loss calculation.

I will supplement this blog more detail and discussion on this opinion because it is very interesting.  But, I just don't have time to do that right now.

In the meantime, the following is a bullet point of key issues decided:

• The evidence was sufficient to permit the jury to conclude that there was a defraud / Klein conspiracy.
• The evidence was sufficient to permit the jury to conclude that the defendants filed false returns because, in part, she failed to report the foreign accounts on Schedule B.
• The district court did not abuse its discretion in the cross examination of expert witnesses and, in any event, if error, it was harmless.
• The district court did not err in admitting co-conspirator (her husband) statements because there was sufficient evidence of conspiracy.
• The district court did not make sufficient findings to support its tax loss determination -- specifically, it did not properly determine that the foreign entity was a partnership rather than an association taxable as a corporation.

There is some good stuff in each of those bullet  points.  More later.

The blog entry for the conviction is:  Another UBS Related Offshore Account Conviction (5/9/14; 5/12/14), here.

Addendum 9/12/15 5:00pm

The appellate briefs are linked here for viewing or download:

• Hough's opening brief, here.
• U.S. Answering brief, here.
• Hough's reply brief, here.

I supplement to add a discussion of just a couple of issues.

Trial Court Issues Contempt Order for Summons Noncompliance While Case is on Appeal (9/7/15)

In United States v. Soong, 2015 U.S. Dist. LEXIS 118585 (ND Cal. 2015), here, the district court held the taxpayers in contempt in a summons enforcement case for foreign account records.  Readers of this blog will recall that there have been many cases involving whether the IRS could use compulsory process (summons or subpoena) to compel the production of foreign account records that a U.S. person is required to maintain under the BSA.  Although there were some taxpayer victories in the district court, ultimately the Courts, including the Ninth Circuit, held uniformly that, under the required records doctrine, the the Government can compel production over an otherwise validly asserted Fifth Amendment claim, Apparently, recognizing that contesting the required records doctrine would not carry the day, the Soongs argued that the court could or should not enforce because of improper service of the summons.  The district court rejected that defense and ordered enforcement of the summons.  The taxpayers then filed notice of appeal but did not seek to stay the enforcement order in the district court.  Upon the taxpayers' failure to produce, the Government asked the trial court for contempt sanctions.

The district court rejected the taxpayers defense as follows:

First, they seem to suggest that this Court does not have jurisdiction to find them in contempt of this Court's Enforcement Order because the Soongs' appeal of that Order is currently pending before the Ninth Circuit. However, it is well established that a district court "retain[s] a limited equitable jurisdiction to enforce its orders" even after a notice of appeal has been filed. Kelley v. C.I.R., 45 F.3d 348, 351 n.5 (9th Cir. 1995); see also Hoffman v. Beer Drivers & Salesmen's Local Union No. 888, 536 F.2d 1268, 1276 (9th Cir. 1976) (holding that an appeal from a district court order does not divest the district court of jurisdiction to enforce its order). Or, as the Sixth Circuit has held, "[w]here, as here, the district court is attempting to supervise its judgment and enforce its order through civil contempt proceedings, pendency of appeal does not deprive it of jurisdiction for these purposes." Island Creek Coal Sales Co. v. City of Gainesville, 764 F.2d 437, 440 (6th Cir. 1985). Thus, the Court finds that it retains the authority to enforce compliance with its order irrespective of the fact that the Soongs' appeal of the Enforcement Order is currently pending. 

Alternatively, the Soongs again argue that this Court lacks personal jurisdiction over them because they are currently living abroad, and any attempted service on them at their Union City home was improper and legally ineffectual. See Opp. Br. at 4. Thus, the Soongs contend that "there is no personal jurisdiction for the district court until the Ninth Circuit says there is. Absent a final determination that this Court has jurisdiction over the Soongs, there is no jurisdiction to support the issuance of a Contempt Order." Id. (emphasis in original). The Soongs have the law backwards. As the Supreme Court has squarely held, "[i]t would be a disservice to the law if we were to depart from the long-standing rule that a contempt proceeding does not open to reconsideration the legal or factual basis of the order alleged to have been disobeyed and thus become a retrial of the original controversy." Rylander, 460 U.S. at 756 (quoting Maggio v. Zeitz, 333 U.S. 56, 69 (1948)). Or, as the Ninth Circuit has stated this basic principle of law: "Disagreement with the court is not an excuse for failing to comply with court orders." Adriana Int'l Corp. v. Thoeren, 913 F.2d 1406, 1412 (9th Cir. 1990); see also Hyde & Drath v. Baker, 24 F.3d 1162, 1168 (9th Cir. 1994) (same). This Court has already determined that it does have jurisdiction over the Soongs, and until the Soongs prove otherwise, they are obligated to comply with this Court's orders. See Adriana, 913 F.2d at 1412. If the Soongs did not want to comply with this Court's Enforcement Order pending their appeal, they should have sought a stay of this Court's order either in this Court or before the Ninth Circuit. Having failed to do so, however, the Soongs have no valid excuse for failing to comply with the unambiguous command of this Court. The Soongs must produce the documents the IRS has requested in its summonses. 

Because it is undisputed that the Soongs have not complied with this Court's Enforcement Order, and because it is beyond doubt that the Soongs have no valid excuse for this failure, the Court finds clear and convincing evidence that the Soongs are in contempt. Balla v. Idaho State Bd. of Corrections, 869 F.2d 461, 466 (9th Cir. 1989) ("As we have previously stated, civil contempt is appropriate when a party fails to comply with a specific and definite court order.") (citations omitted). In its motion, the Government asks this Court to impose a coercive fine on the Soongs in an effort to gain their compliance with this Court's Enforcement Order (i.e., to get the Soongs to produce the documents requested by the IRS in its summonses). Where the Court issues a fine in an effort to gain the contemnor's compliance with one of the Court's orders, the Supreme Court has held that the fine amount must take into account "the character and magnitude of the harm threatened by continued contumacy, and the probable effectiveness of any suggested sanction in bringing about the result desired." Unites States v. United Mine Workers of Am., 330 U.S. 258, 304 (1947); see also Whittaker Corp. v. Execuair Corp., 953 F.2d 510, 516 (9th Cir. 1992). "[I]n fixing the amount of a fine to be imposed as a . . . means of securing future compliance, [the Court should] consider the amount of defendant's financial resources and the consequent seriousness of the burden to that particular defendant." United Mine Workers, 330 U.S. at 304. 

Here, the Court believes that a coercive daily fine should be imposed on the Soongs for each day they remain out of compliance with this Court's Enforcement Order. See Bagwell, 512 U.S. at 829 (explaining that civil contempt fines may be imposed to ensure compliance with a Court order so long as the contemnor has a "subsequent opportunity to reduce or avoid the fine through compliance"). The Court finds that a fine of $500 a day per spouse (or $1,000 a day collectively as a couple) payable to the Court is the appropriate fine amount. The Soongs' appear to have tremendous financial resources -- the IRS has stated that the Soongs' privately held corporation earned revenues in excess of $200 million annually, and the Soongs apparently deposited at least $10 million in a foreign bank account -- and thus a lesser fine amount is unlikely to secure their compliance with this Court's order. Moreover, the Court believes this fine amount is appropriate in light of the lengthy period of non-compliance with the IRS's summonses, and the risk that further delay will prejudice the IRS's investigation if the evidence sought in its summonses is lost or destroyed. The Soongs have made no effort to comply with this Court's order for nearly a year-and-a-half, and have refused to comply with the IRS investigation for years before that. The Soongs' should not be permitted to put off compliance any longer. 

III. CONCLUSION 

The Soongs admit that they have not complied with this Court's Order Enforcing the IRS's document summonses. Thus, the Soongs are in contempt. Beginning Friday, September 11, 2015, the Soongs shall pay a daily fine to the Clerk of Court in the amount of $500 per person ($1,000 total) until they come into substantial compliance with this Court's order.

IRS and DOJ Tax Conferences Before Indictment (9/6/15)

I was visiting with a seasoned tax crimes practitioner yesterday who suggested that I remind readers about the process to best insure that conferences are obtained at two critical steps in the pre-indictment process.  So here is the reminder.

At the conclusion of the CI investigation when the special agent, in consultation with the CT attorney, has prepared his Special Agent Report ("SAR") recommending prosecution, the procedure is:

9.5.12.3.1  (07-25-2007), Taxpayer Conference Procedures [here] 

1. A taxpayer conference will be offered as a matter of course. A taxpayer who is the subject of a criminal prosecution recommendation will be afforded a conference with the SAC and CT Counsel. 

2. The taxpayer conference will not be held if the taxpayer is the subject of a grand jury investigation or if the SAC determines that such a conference would not be in the best interest of the government. 

3. If a taxpayer conference is held, it should be done before the SAC makes a referral to the DOJ, Tax Division.

Many practitioners do a belt and suspenders and, in the course of the investigation, if a prosecution recommendation appears likely, will formally request a conference via letter to the Special Agent with a copy to the SAC, citing the the IRM.  Of course, the conference is not mandated in the circumstances in paragraph 2.  So the belt and suspenders approach may be irrelevant.

If there is a conference, the IRM contemplates that the taxpayer will attend the conference accompanied by an attorney but allows the attorney alone to attend.  IRM 9.5.12.3.4  (07-25-2007), Conducting the Taxpayer Conference.  I think it is normal practice to not have the taxpayer attend, but should the taxpayer attend he should be counseled to avoid saying anything other than pleasantries at the beginning and end of the conference and should even avoid nonverbal communications (facial expressions, etc.)

Article on Attacking Use of Foreign Accounts by Indians (9/5/15)

WaPo has this article:  Rama Lakshmi, India targets tax evaders who hide ‘black money’ at home and abroad (Washington Post 9/13/15), here.  [Not sure why the date is 9/13 when it is posted on 9/5.) Key excerpts:

Among the pledges that propelled Indian Prime Minister Narendra Modi to power a year ago was one to bring home millions of dollars of illicit money the super rich had stashed abroad. 

Trying to make good on his promise, his government has introduced a string of tough new measures in recent months designed to crack down on so-called black money, and fueling panic among India’s elite and growing numbers of millionaires. 

The anxiety has deepened in recent weeks as a government-imposed tax payment deadline for those who have stashed their cash in foreign accounts approaches on Sept. 30.
The Associated Chambers of Commerce and Industry of India recently issued a statement denouncing the new law for creating “fear and panic” among industry leaders and trading professionals. 

“People are uneasy and worried. The penalty and term of imprisonment are disproportionately high,” said Nishith Desai, a corporate lawyer in Mumbai.
And industry experts say that the rich are frantically searching for new tax havens and other ways to skirt the law, which includes penalties of up to 10 years in jail.
* * * *
Overseas evasions 

Another Swiss Bank Obtains NPA Under DOJ Swiss Bank Program (9/4/15)

On September 3, 2015, DOJ announced here that another  Schroder & Co. Bank AG,, has entered an NPA under the DOJ program for Swiss banks.  HBL will pay  a penalty of $10.354 million penalty.

Here are key excerpts:

According to the terms of the non-prosecution agreement signed today, Schroder Bank agrees to cooperate in any related criminal or civil proceedings, demonstrate its implementation of controls to stop misconduct involving undeclared U.S. accounts and pay penalties in return for the department’s agreement not to prosecute the bank for tax-related criminal offenses. 

Schroder Bank was founded in 1967 and received its Swiss banking license in 1970.  Since 1984, Schroder Bank has had a branch in Geneva.  The bank has two wholly owned subsidiaries, Schroder Trust AG (domiciled in Geneva) and Schroder Cayman Bank & Trust Company Ltd. (domiciled in George Town, Grand Cayman).  Schroder Cayman Bank & Trust Company Ltd. provides services to clients such as the creation and support of trusts, foundations and other corporate bodies.  Both subsidiaries also acted in some cases as an account signatory for entities holding an account with the bank.  Schroder Bank is in the process of closing the operations of Schroder Trust AG and Schroder Cayman Bank & Trust Company Ltd. 

Schroder Bank opened accounts for trusts and companies owned by trusts, foundations and other corporate bodies established and incorporated under the laws of the British Virgin Islands, the Cayman Islands, Panama, Liechtenstein and other non-U.S. jurisdictions, where the beneficiary or beneficial owner named on the Form A was a U.S. citizen or resident.  In addition, a small number of accounts were opened for U.S. limited liability companies (LLCs) with U.S. citizens or residents as members, as well as for U.S. LLCs with non-U.S. persons as members.  Schroder Bank communicated directly with the beneficial owners of some accounts of trusts, foundations or corporate bodies, and it arranged for the issuance of credit cards to the beneficial owners of some such accounts that appear in some cases to have been used for personal expenses. 

Schroder Bank also processed cash withdrawals in amounts exceeding $100,000 or the Swiss franc equivalent.  For at least three U.S.-related accounts, a series of withdrawals that in aggregate exceeded $1 million were made.  In addition, at least 26 U.S.-related accountholders received cash or checks in amounts exceeding $100,000 on closure of their accounts, including in at least three cases cash or checks in excess of $1 million.
Between 2004 and 2008, four Schroder Bank employees traveled to the U.S. in connection with the bank’s business with respect to U.S.-related accounts.  In 2008, Swiss bank UBS AG publicly announced that it was the target of a criminal investigation by the Internal Revenue Service (IRS) and the department, and that it would be exiting and no longer accepting certain U.S. clients.  In a later deferred prosecution agreement, UBS admitted that its cross-border banking business used Swiss privacy law to aid and assist U.S. clients in opening accounts and maintaining undeclared assets and income from the IRS.  Between Aug. 1, 2008, and June 30, 2009, Schroder Bank opened eight U.S.-related accounts with funds received from UBS, which was then under investigation by the U.S. government. 

Since Aug. 1, 2008, Schroder Bank had 243 U.S.-related accounts with approximately $506 million in assets under management.  Schroder Bank will pay a $10.354 million penalty. 

In accordance with the terms of the Swiss Bank Program, Schroder Bank mitigated its penalty by encouraging U.S. accountholders to come into compliance with their U.S. tax and disclosure obligations.  While U.S. accountholders at Schroder Bank who have not yet declared their accounts to the IRS may still be eligible to participate in the IRS Offshore Voluntary Disclosure Program, the price of such disclosure has increased. 

Most U.S. taxpayers who enter the IRS Offshore Voluntary Disclosure Program to resolve undeclared offshore accounts will pay a penalty equal to 27.5 percent of the high value of the accounts.  On Aug. 4, 2014, the IRS increased the penalty to 50 percent if, at the time the taxpayer initiated their disclosure, either a foreign financial institution at which the taxpayer had an account or a facilitator who helped the taxpayer establish or maintain an offshore arrangement had been publicly identified as being under investigation, the recipient of a John Doe summons or cooperating with a government investigation, including the execution of a deferred prosecution agreement or non-prosecution agreement.  With today’s announcement of this non-prosecution agreement, noncompliant U.S. accountholders at Schroder Bank must now pay that 50 percent penalty to the IRS if they wish to enter the IRS Offshore Voluntary Disclosure Program.

Ninth Circuit Affirms False Claim Convictions for Tax Preparer (9/2/15)

In United States v. Defoor, 2015 U.S. App. LEXIS 15400 (9th Cir. 2015), unpublished, here, the Ninth Circuit affirmed conviction of a tax preparer for a fraudulent income tax return scheme in violation of 18 U.S.C. §§ 2 (aiding and abetting), 286 (conspiracy to defraud the government with respect to claims) and 287 (False, fictitious or fraudulent claims).  The Ninth Circuit rejected several arguments (listed at the end of this blog), but the one that I found most interesting is the argument that the trial court should have given instructions that advised the jury that, for conviction, the defendant must have intended to violate the law.

Readers will recall that the standard tax crimes (certainly those in Title 26) require that the defendant act willfully.  As interpreted, the willfulness requirement in tax crimes means intentional violation of a legal duty.  Cheek v. United States, 498 U.S. 192 (1991).  Cheek means that ignorance of the law is a defense.  Even if a defendant intended the acts (actus reus), if he does not intend to violate the law (intend to commit a crime), then he is not guilty of the crime.

The crimes for which Defoor was convicted are not Title 26 crimes.  The crimes are:

§ 287. False, fictitious or fraudulent claims 

Whoever makes or presents to any person or officer in the civil, military, or naval service of the United States, or to any department or agency thereof, any claim upon or against the United States, or any department or agency thereof, knowing such claim to be false, fictitious, or fraudulent, shall be imprisoned not more than five years and shall be subject to a fine in the amount provided in this title. 

§ 286. Conspiracy to defraud the government with respect to claims 

Whoever enters into any agreement, combination, or conspiracy to defraud the United States, or any department or agency thereof, by obtaining or aiding to obtain the payment or allowance of any false, fictitious or fraudulent claim, shall be fined under this title or imprisoned not more than ten years, or both.

Aiding and abetting is not a crime in itself, but simply makes someone as a principal who was not otherwise a principal in the substantive crime (§§ 286 and 287) who aids and abets another who is a principal and requires the same mens re for the substantive crimes.  (Technically, in this case, the defendant appears to have been a principal in the underlying substantive crimes, so it is not clear whether he could have been convicted as an aider and abettor; but putting that aside.)

Sections 287 and 297's mens rea is "knowing such claim to be false fictitious and fraudulent" in § 286 and knowing falsity is implicit in § 286.

Whistleblower Award of $11.6 Million; Areas of WBO Emphasis Includes Offshore Accounts (9/1/15)

The National Whistleblower Center announced here yesterday an IRS Whistleblower Award of $11.6 million.

In the press release, one of the lawyers (Dean Zerbe) is quoted.  Here is an excerpt:

The IRS has a strong interest in hearing from – and rewarding -- whistleblowers who know about tax cheats.  From conversations I have had with senior IRS officials, the IRS is especially interested in hearing from whistleblowers who know details about the latest corporate tax shelters as well as informed whistleblowers who have knowledge about US taxpayers with illegal offshore accounts around the world – especially Hong Kong, Singapore and Central America.