Wednesday, June 29, 2016

On Foreign Enabler Indictments, Sealed Indictments and INTERPOL Red Alerts (6/29/16)

I am told that a number of Swiss bankers and other enablers during the heyday of their U.S. tax games (up to the UBS resolution in 2009 and even beyond that who tried to continue the scam) now fear to leave Switzerland.  Those that have already been indicted will be concerned because of what happened to Raoul Weil, the indicted Swiss banker who ventured out of Switzerland after indictment and was arrested in Italy on an Interpol red notice and was detained and extradited to the U.S. for trial.  (Weil was tried and acquitted.)  So, certainly, those whose indictments have been publicly announced have a choice of trying to resolve their indictment or taking risk should they leave Switzerland.

But,  those who have not been publicly indicted should also be concerned.  The U.S. can have sealed indictments -- and my speculation is that there are some sealed indictments out there for Swiss enablers (bankers and otherwise).  The U.S. can have INTERPOL issue a Red Notice (an INTERPOL device  "identifying and locating these persons with a view to their arrest and extradition or similar lawful action").  With sealed indictments, the enablers may not have a reason to suspect that the U.S. has requested a Red Notice.  See e.g., USAO MD FL press release of 8/31/15, here, stating that there was a sealed indictment and arrest based upon an INTERPOL Red Notice); Jeremy Evans & Andrewas Stargard, Executives Beware: The Long-Arm of the U.S. Government Strikes Again (Paul Hastings Client Alert April 2014) (reporting an extradition in antitrust case, noting that the procedure "likely followed" was the one in an earlier case "using Pisciotti’s sealed indictment to obtain an Interpol red notice, effectively an international arrest warrant" and further noting that "a sealed indictment may leave the [foreign] executive ignorant of any potential risk [of travel]."); and Steven F. Cherry, Leon B. Greenfield, Kurt G. Kastorf, Department of Justice’s First Antitrust Extradition Highlights the Danger of Foreign Travel for Executives Under Investigation (ABA Business Law Today April 2014) (reporting on the same incident).

And, this is not just a Swiss enabler concern.  DOJ has noised for a long time that it is looking beyond Switzerland.

Readers might be interested in the U.S. Attorney Manual provision on Interpol Red Notices, here.  The provsion is short so I quote it in full:
611. Interpol Red Notices 
An Interpol Red Notice is the closest instrument to an international arrest warrant in use today. Interpol (the International Criminal Police Organization) circulates notices to member countries listing persons who are wanted for extradition. The names of persons listed in the notices are placed on lookout lists (e.g., NCIC or its foreign counterpart). When a person whose name is listed comes to the attention of the police abroad, the country that sought the listing is notified through Interpol and can request either his provisional arrest (if there is urgency) or can file a formal request for extradition. 
Please be aware that if a Red Notice is issued, the prosecutor's office is obligated to do whatever work is required to produce the necessary extradition documents within the time limits prescribed by the controlling extradition treaty whenever and wherever the fugitive is arrested. Further, the prosecutor's office is obliged to pay the expenses pursuant to the controlling treaty. Those expenses, which can be quite high, will typically include the costs of translating the extradition documents and may include the costs of hiring local counsel to represent the United States. Further, these obligations, which remain until the fugitive is arrested or the Red Notice is withdrawn, may result in prosecutors who have succeeded the Assistant United States Attorney who originally requested the Red Notice having to prepare the documents and arrange for payment of hefty fees years after the fugitive originally fled from the United States. Therefore, it is important for prosecutors to make certain that the case is significant enough to warrant placing their offices under such a burden in deciding whether or not to request issuance of a Red Notice.
For more on INTERPOL Red Alerts, see:
  • INTERPOL Web Site on "Notice," here.
  • Wikipedia on Interpol Notice, here.

For More on Sealed Indictments
  • Sealed Indictments - A Primer (Federal Tax Crimes Blog 7/11/12; revised 6/19/16), here.
  • Sealing an Indictment Pending Arrest in Tax Cases (Federal Tax Crimes Blog 7/3/14), here.

Credit Suisse Banker, Fugitive from Indictment, Pleads Guilty for Offshore Enabler Misbehavior (6/29/16)

I am late in reporting this guilty plea by a previous indicted Swiss banker who was a fugitive until his guilty plea.  The DOJ Press Release is here.
Michele Bergantino, 48, a citizen of Italy and a resident of Switzerland, pleaded guilty before U.S. District Judge Gerald Bruce Lee to conspiring to defraud the United States by assisting U.S. taxpayers to conceal foreign accounts and evade U.S. tax during his employment as a banker working for Credit Suisse AG on its North American desk. 
“Mr. Bergantino is now the third fugitive to come to the United States and plead guilty to charges in this case,” said Acting Assistant Attorney General Ciraolo. “To those who have actively assisted U.S. taxpayers in using offshore accounts to evade taxes, the message is clear:  staying outside the United States will provide little comfort.  We will investigate and charge you, and will work relentlessly to hold you to account for your actions.” 
“Hiding assets and creating secret accounts in an attempt to evade income taxes is a losing game,” said U.S. Attorney Boente. “Today’s plea shows that we will continue to prosecute bankers and U.S. citizens who engage in this criminal activity. I want to thank our law enforcement partners and prosecutors for their work on this important case.” 
Bergantino admitted that from 2002 to 2009, while working as a relationship manager for Credit Suisse in Switzerland, he participated in a wide-ranging conspiracy to aid and assist U.S. taxpayers in evading their income taxes by concealing assets and income in secret Swiss bank accounts.  Bergantino oversaw a portfolio of accounts, largely owned by U.S. taxpayers residing on the West Coast, which grew to approximately $700 million of assets under management.  Bergantino admitted that the tax loss associated with his criminal conduct was more than $1.5 million but less than or equal to $3.5 million.   
During his time as a relationship manager, Bergantino assisted many U.S. clients in utilizing their Credit Suisse accounts to evade their U.S. income taxes and to facilitate concealment of the U.S clients’ undeclared financial accounts from the U.S. Treasury Department and the Internal Revenue Service (IRS).  Among the steps taken by Bergantino to assist clients in hiding their Swiss accounts were the following:  assuring them that Swiss bank secrecy laws would prevent Credit Suisse from disclosing their undeclared accounts to U.S. law enforcement; discussing business with clients only when they traveled to Zurich to meet him; structuring withdrawals from their undeclared accounts by sending multiple checks, each in amounts below $10,000, to clients in the United States; facilitating the withdrawal of large sums of cash by U.S. customers from their Credit Suisse accounts at Credit Suisse offices in the Bahamas, in Switzerland, particularly the Credit Suisse branch at the Zurich airport and at a financial institution in the United Kingdom; holding clients’ mail from delivery to the United States; issuing withdrawal checks from Credit Suisse’s correspondent bank in the United States; and taking actions to remove evidence of a U.S. client’s control over an account because the U.S. client intended to file a false and fraudulent income tax return.  Moreover, Bergantino understood that a number of his U.S. clients concealed their ownership and control of foreign financial accounts by holding those accounts in the names of nominee tax haven entities, or structures, which were frequently created in the form of foreign partnerships, trusts, corporations or foundations. 
A good article is David Voreacos, Ex-Credit Suisse Banker Pleads Guilty in Tax Evasion Case (Bloonberg 6/22/16), here.

Bergantino did not have to subject himself to U.S. criminal jurisdiction.  He was a resident of Switzerland which does not extradited for tax crimes.  He could have remained in Switzerland; Switzerland is a good place to live but it can be confining for people used to traveling in Europe and beyond.  (As I have noted, it can operate sort of as a "Club Fed."  See Switzerland as Club Fed for Swiss Enablers of U.S. Tax Crimes (Federal Tax Crimes Blog 10/24/13), here; for other Federal Tax Crimes Blogs mentioning or discussing "Club Fed", see here).  I infer that, in his assessment of whether to subject himself  to U.S. criminal jurisdiction and plead, Bergantino must have determined that the benefits outweighed the costs and risks.  The major risk for him is that the Court would impose material incarceration period.  But, I suspect that his very able lawyer mitigated the risk of that in the plea agreement, so that he will obtain either no incarceration period or a very short period, and that mitigation was key to Bergantino's cost/risk assessment.

One of the risks if he did not subject himself to U.S. jurisdiction voluntarily is that, should he leave Switzerland, he  might be subjected involuntarily through the INTERPOL Red Notice.  I discuss the INTERPOL Red Notice in a blog immediately following this blog entry.

Sunday, June 26, 2016

Fifth Circuit Opinion Reversing Tax Evasion Conviction Because Evasive Acts Did Not Have Tax Evasion as Goal And Affirming on Wire Fraud (6/26/16)

In United States v. Biyiklioglu, 2016 U.S. App. LEXIS 10847, at *5 (5th Cir. June 15, 2016), unpublished, per curiam, here, Biyiklioglu appealed "his conviction and sentence for wire fraud, aggravated identity theft, tax evasion, and money laundering."  In the underlying scheme, Biyiklioglu "transferred money online among his bank accounts and numerous fraudulent PayPal accounts and then disputed certain transactions so as to cause double payments to his bank accounts and corresponding losses to PayPal."  The scheme is more complex, but that is a good summary for purposes of this blog entry.  On appeal, he raised several arguments.  I address only some of the arguments and the Court's resolution.

TAX EVASION - AFFIRMATIVE ACT OF EVASION

Although the gravamen of the scheme was transactions designed to defraud Pay Pal, two charges involved tax evasion which often accompanies schemes to defraud.  In furtherance of the scheme to defraud, the taxpayer undertook some evasive acts to avoid detection of the fraud.  An element of tax evasion is an affirmative act of evasion which, according to the Court, the Government attempted to prove via evasive acts to avoid detection of the fraud.  The Court held that such a showing of evasive acts to avoid detection of the fraud was not sufficient to show an affirmative act of tax evasion.  The Court's analysis was (Slip Op. 15-16):
Biyiklioglu also argues that the government did not prove the second element required for a conviction under § 7201, an affirmative act constituting an evasion or attempted evasion of tax. The indictment identifies his "affirmative acts of evasion" as "concealing and attempting to conceal from all proper officers of the United States [*23]  of America his true and correct income, opening multiple bank accounts, opening and using PayPal accounts in other people's names, and forming Big Stake Investments LLC and opening bank accounts in its name." Biyiklioglu argues that: (1) he did not file any tax returns or make false reports of any kind so as to affirmatively conceal his income; (2) the bank accounts were opened using his name and social security number, and the fact that there were multiple accounts did not result in greater secrecy; (3) opening and using PayPal accounts in other people's names did not conceal income because all of the transfers occurred between PayPal and Biyiklioglu's bank accounts and could be easily traced by reviewing his bank statements; and (4) Big Stake Investments and all of the bank accounts opened for it were opened with Biyiklioglu's name and social security number, so there was no increase in secrecy. 
"The mere failure to pay a tax voluntarily when due, even if willful, does not establish a criminal attempt to evade." United States v. Nolen, 472 F.3d 362, 379 (5th Cir. 2006). "Affirmative acts that satisfy the second element [of § 7201] may include keeping double sets of books, concealment of assets, or 'any conduct, the likely effect of which would be to mislead or to conceal.'" Miller, 588 F.3d at 907 (quoting Spies v. United States, 317 U.S. 492, 499, 63 S. Ct. 364, 87 L. Ed. 418, 1943 C.B. 1038 (1943)). "If the tax-evasion motive plays any part in such conduct the offense may be made out even though the conduct may also serve other purposes such as concealment of other crime." Spies, 317 U.S. at 499. 
The evidence at trial proved that Biyiklioglu created numerous bank accounts and structured elaborate transactions to defraud PayPal and to conceal his fraud from PayPal and the banks. The government, relying on this evidence, conclusorily argues that "[t]he evidence sufficiently established the affirmative acts supporting [Biyiklioglu's] conviction" for tax evasion. However, the government has not identified any evidence suggesting that a motive to evade taxes contributed to this deception, nor does the court's own review of the trial record reveal any such motive. Indeed, the government fails even to argue that Biyiklioglu was motivated by a desire to evade taxes. In United States v. Jones, we held that a defendant's "placing money on circuitous paths of cashier's checks and funneling it into a house purchased through a convoluted scheme designed to put it out of reach" was sufficient to support his conviction for tax evasion. 459 F. App'x 379, 384 (5th Cir. 2012). Jones, however, took these actions "while his tax file was in active collection," and the evidence supported the government's contention that the only conceivable reason for his conversion of fees into cashier's checks—which Jones failed to report in his financial statement to the IRS—was to evade taxes. Id. Here, in contrast, the obvious explanation for Biyiklioglu's complex and circuitous transactions was the perpetuation of his fraud, and there is no evidence that he took any action for the purpose of evading tax liability. Accordingly, we reverse Biyiklioglu's conviction for tax evasion as to counts 21 and 22.
JAT Comments on Tax Evasion.  Often the taxpayer's defense to evasion is that he did not willfully evade his tax liability.  This is because the Government would not make the charge if it could not show the more objective elements of tax due and affirmative act of evasion..  But all acts of evasion may not be acts of tax evasion.  Here, the evasion was of detection of the underlying fraud.  Hence, the Court reversed.

WIRE FRAUD INSTRUCTIONS - WHAT DOES DEFRAUD MEAN?

Wednesday, June 22, 2016

Another Crack in Foreign Account Secrecy - UBS Delivers Singapore Affiliate Records Pursuant to IRS Summons (6/22/16; 6/23/16)

Correction:  The blog has been corrected as a result of new information:  UBS has indicated that the client consented to the disclosure of Singapore account information, thus mooting the summons enforcement issue.  Corrections are made in this blog entry where appropriate, and are specifically noted.

I previously reported that the IRS has summonsed UBS for records from a Singapore affiliate and had sought judicial enforcement of the summons. U.S. Summonses Singapore Bank Records from UBS (3/4/16 & 3/5/16), here.  DOJ Tax has announced in a press release, here, that UBS "has now produced all Singapore-based records responsive to the request and the IRS determined that UBS complied with the summons, the Justice Department has voluntarily dismissed its summons enforcement action against the bank." The press release explained, somewhat cryptically:
The IRS served an administrative summons on UBS for records pertaining to accounts held by Ching-Ye “Henry” Hsiaw.  According to the petition, the IRS needed the records in order to determine Hsiaw’s federal income tax liabilities for the years 2006 through 2011.  Hsiaw transferred funds from a Switzerland-based account with UBS to the UBS Singapore branch in 2002, according to the declaration of a revenue agent filed at the same time as the petition.  UBS refused to produce the records, and the United States filed its petition to enforce the summons.
JAT Comments: 

1.  According to the U.S.'s Motion for Voluntary Dismissal,(Dkit. 16), there was no formal show cause hearing or order to enforce.  Rather,
Shortly after the petition was filed, the parties engaged in discussions to determine if they could resolve the matter amicably and without the necessity of any further court involvement. Upon completion of those discussions, UBS AG advised the United States that it would comply with the IRS summons and produce all Singapore-based bank records responsive to the IRS  summons. On May 31, 2016, UBS AG served its initial document production and, thereafter, supplemented its production on June 10, 2016. On June 17, 2016, after reviewing the bank’s document production, the IRS determined that UBS AG has complied with the IRS summons. In view of the above, the United States voluntarily dismisses its petition with prejudice. 
2. [Corrected 6/23/16] UBS has indicated that "complied with the summons based on client consent in accordance with Singapore law."  David Voreacos, UBS Gives IRS Records on U.S. Citizen’s Account in Singapore (Bloomberg 6/22/16), here..  In an earlier posting of this blog I stated that it was not clear on the documents I reviewed why UBS provided the documents required by the summons.  [End of Correction]  Readers will likely recall the earlier UBS proceeding involving a John Doe Summons to UBS that was the starting point for the IRS and DOJ's offshore account initiative starting around 2008.  The summons in this case was a regular summons, although since it was for financial account records, it might have been a third party recordkeeper summons.  The summons is here.  The key difference would be that, in a criminal investigation,  regular summonses require no notice to the taxpayer but third party recordkeeper summonses do. § 7609(c)(2)(E). [Addition 6/24/16]  Asher Rubinstein noted in the comment below that the summons was a Bank of Nova Scotia Summons, which, I understand is just a regular summons to an affiliated entity of a foreign bank for records of the affiliated foreign bank.  I discussed this issue when originally reporting on the case.  U.S. Summonses Singapore Bank Records from UBS (Federal Tax Crimes Blog 3/4/16 & 3/5/16), here, see particularly paragraph 1 under JAT Comments.  [End of Addition]

3.  Normally, in high stakes summonses, if the summonsed third party has an interest in not producing the documents (and certainly, given UBS's role as a player in the offshore account market, it has that interest), it might await a formal order from the Court.  This would then give the summonsed party some cover with the client and perhaps, in this case, with the regulatory authorities in the foreign jurisdiction whose bank secrecy laws may be implicated. [Clarification 6/23/16]  In this case, however, since the client apparently consented to the disclosure, UBS did not need such cover. [End of Clarification]

4.  [Correction 6/212/16] As note noted in the corrections above, UBS did not cave and therefore this brouhaha is mooted in terms of its future effects, but I have to think that, if the IRS did it once, it will do it again in either a regular summons (perhaps of the thirdparty recordkeeper genre) or a John Doe Summons. [End of Correction]

5.  Singapore does not have a tax treaty or mutual legal assistance with the U.S., for exchange of such tax information, so there is no formal mechanism for exchange of information that might permit a specific request to a named taxpayer or what has become known as a group request for unidentified U.S. taxpayers meeting certain characteristics.  (I call such group requests under a treaty request a John Doe Treaty Request.)

6.  It is interesting that the press release specifically mentions that Hsiaw apparently moved his account from UBS Switzerland to the UBS affiliate in Singapore in 2002.  The IRS has been obtaining so-called leaver lists from Swiss Banks, but I was not aware that they would go all the way back to 2002.  Of course, UBS is a special situation so that the IRS may have obtained such a leaver list or even the UBS bank records on U.S. clients from 2002.

Tuesday, June 21, 2016

TIGTA Report on Improvement in Some Features of OVDP (6/21/16)

The Treasury Inspector General for Tax Administration has released a report titled Improvements Are Needed in Offshore Voluntary Disclosure Compliance and Processing Efforts (June 2, 2016 Reference Number: 2016-30-030), here.  The key highlights presented are:
WHAT TIGTA FOUND 
The IRS needs to improve its efforts to address the noncompliance of taxpayers who are denied access to or withdraw from the OVDP. TIGTA reviewed a stratified random sample of 100 taxpayers from a population of 3,182 OVDP requests that were either denied or withdrawn from the OVDP. Although 29 of these 100 taxpayers should have been potentially subject to FBAR penalties, the IRS did not initiate any compliance actions. Projecting the sample results to the population of denied or withdrawn requests, the IRS did not assess approximately $21.6 million in delinquent FBAR penalties. 
TIGTA also identified internal control weaknesses that led to delayed or incorrect processing of OVDP requests through poor communication among IRS functions involved in the OVDP. These weaknesses include the use of separate inventory controls and two separate IRS addresses for taxpayers to send correspondence, which contributed to incorrect processing of some taxpayer disclosure requests. In addition, the IRS does not have a process to determine the appropriate skill level needed for revenue agents to work OVDP request certifications. OVDP cases are not equivalent to audits of taxpayers’ returns and generally do not require as much technical analysis as traditional tax audits. 
WHAT TIGTA RECOMMENDED 
TIGTA recommended that the IRS: 1) review all denied or withdrawn offshore voluntary disclosure requests identified in this report for potential FBAR penalty assessments and criminal investigation; 2) develop procedures for reviewing denied and withdrawn cases for further compliance actions; 3) centrally track and control OVDP requests; 4) establish one mailing address for taxpayer correspondence; 5) ensure that employees adhere to timeliness guidelines throughout the entire OVDP process; and 6) classify OVDP certifications so that some can be worked by lower-graded revenue agents.  
IRS management agreed with all six recommendations and has taken or plans to take corrective action on five of them. Although the IRS agreed with the potential value of establishing one mailing address for taxpayer correspondence, this recommendation has been put on hold until a decision is made about the future status of the OVDP.
The report has a summary of the development of the various programs over the years since 2009 and the processing system.  The report focuses on taxpayers who were denied access to OVDP or who, having entered, withdrew or opted out.  Those persons were subject at a minimum to civil audit and some were potentially subject to criminal investigation and prosecution.  The report concludes that the IRS should have better following-through mechanisms.  Based on what it believes was an appropriate representative sample, the report suggests that there is some revenue from auditing and/or investigating those individuals.  I have not analyzed the report otherwise, but do find the following interesting.

1. Withdrawn OVDP Requests.  The sample selected included 50 taxpayers out of a total population of 781 withdrawn OVDP requests.  Only 20% of those in the sample had some form of compliance action or were included in the Streamlined Procedure.  "Of the Streamlined Procedure cases that have closed, 10 taxpayers were assessed $142,711 in penalties."  (JAT Note:  It is not clear to me what the group that withdrew and then were accepted in Streamlined Procedure is comprised of; my understanding was that those who were in OVDP up to the point of the intake letter could not withdraw and must either seek Streamlined Transition within OVDP or must opt out (different than witndrawing); I suppose it could include the class of people who had passed preclearance but not yet submitted the intake letter.)

2. Denied OVDP Request.  TIGTA reviewed 50 of 2,401 taxpayers who were denied entry to OVDP.  Only 12 of the 50 "were denied participation in the OVDP were either subjected to further criminal investigation or examination efforts, or were deceased."  Then, these is some detail behind the 34 (68 percent) of taxpayers in the sample.  (JAT Comment:  I have to say that I have had only taxpayer who failed preclearance because he had been scheduled for NRP audit; he ultimately got the OVDP result without formally being in the program.)

3. Recommendation to Review Denied or Withdrawn Requests. TIGTA recommended that the LB&I Division review all denied or withdrawn requests for FBAR penalty assessments and possible referral to CI.  In the Management's Response the IRS agreed and had technical specialists review all withdrawn and denied requests, with follow up indicated for 17.  The IRS disagreed with the revenue potential from such follow-throughs.

4. Recommendation for Immediate Review of Denied or Withdrawn Requests  TIGTA recommended (Recommendation 2) that "The Commissioner, LB&I Division, and the Chief, CI, should develop procedures to require the immediate review of any future denied or withdrawn offshore voluntary disclosure requests for further compliance actions."  IRS agreed.

5.  Other Administrative Recommendations. The balance of the recommendation dealt with processing and administration procedures.  However, I did find that, in response to a recommendation (Recommendation 4) that the IRS have one mailing address for submitting offshore voluntary disclosure requests and related documentation:
The IRS agreed with this recommendation, but is putting the recommendation on hold until a decision is made about the future status of the OVDP. While the IRS agreed with the potential value in this recommendation, at this time and in light of the nonpermanent status of the OVDP, it cannot commit the resources needed for making this change.
I infer from this that there is some current consideration being given about "the future status of the OVDP."  The IRS has always said that it could modify or withdraw the terms of OVDP at any time (although it would be expected to be prospective only and may even have a delayed effective date).

Friday, June 17, 2016

The Tax Court Sticks to Its Allen Holding that the Taxpayer's Fraud is not Required for § 6501(c)(1)'s Unlimited Statute of Limitations (6/17/16; 6/20/16)

I have previously blogged on the issue of whether the unlimited statute of limitations for fraud in § 6501(c)(1), here, requires the taxpayer's personal fraud or, on the other hand, merely a fraudulent position as a result of someone else's fraud (such as a return preparer).  The issue rose to prominence after the Tax Court's decision in Allen v. Commissioner, 128 T.C. 37, 40 (2007) which held that the taxpayer's personal fraud was not required; all that was required, according to Allen, was fraud on the return without regard to the taxpayer's personal culpability.  The Second Circuit seemed to agree in City Wide Transit, Inc. v. Commissioner, 709 F.3d 102 (2d Cir. 2013).  But, the Court of Appeals for the Federal Circuit did not agree (at least two of three judges on the panel did not agree).  BASR P'ship v. United States, 795 F.3d 1338 (Fed. Cir. 2015).  The Government did not seek rehearing or certiorari in BASR, so that matter seemed to be practically resolved because taxpayers could choose to litigate the issue in the Court of Federal Claims (governed by its Court of Appeals, the Court of Appeals for the Federal Circuit).

But, there will be cases with the issue that are not litigated in the Court of Federal Claims.  One just was.  Finnegan v. Commissioner, T.C. Memo. 2016. 118, here.  There, the return preparer fraudulently prepared the return.  Allen of course was the governing authority in the Tax Court, so the Tax Court was bound to follow Allen unless it chose to reconsider Allen.  It chose not to.  The relevant portion of the opinion is short, so I quote it in full (Slip Op. pp. 17-18):
OPINION 
We must decide whether respondent has proved that petitioners’ returns were prepared falsely or fraudulently with the intent to evade tax.
I. Limitations Period 
We begin with an analysis of the limitations period for assessment of income tax. The Commissioner generally must assess any income tax within the three-year period after a taxpayer files his or her return. Sec. 6501(a). In the case of a false or fraudulent return with the intent to evade tax, however, tax determined to be due may be assessed at any time. Sec. 6501(c)(1). In Allen v. Commissioner, 128 T.C. at 42, we held that section 6501(c)(1) applies even if it is the preparer of the return, and not the taxpayer, who falsely or fraudulently  prepared the return with the intent to evade tax. But see BASR P’ship v. United States, 113 Fed. Cl. 181 (2013), aff’d, 795 F.3d 1338 Fed. Cir. (2015). n6
   n6 We see no reason to revisit Allen v. Commissioner, 128 T.C. 37 (2007), on account of BASR P’ship v. United States, 113 Fed. Cl. 181 (2013), aff’d, 795 F.3d 1338 (Fed. Cir. 2015). In the Court of Appeals for the Federal Circuit’s opinion, a persuasive dissent was filed, as well as a concurring opinion that relied on sec. 6229, a provision inapplicable in the instant case. Accordingly, even in cases appealable in the Federal Circuit, it is unclear whether, in the absence of the application of sec. 6229, which interpretation of sec. 6501(c)(1) would prevail. Moreover, there is no jurisdiction for appeal of any decision of the Tax Court to the Court of Appeals for the Federal Circuit. Sec. 7482(a)(1). Additionally, the parties have not cited BASR P’ship and do not contend we should revisit Allen. Thus, Allen is controlling precedent in the instant case, and we do not revisit the analysis and conclusion in that Opinion.
This is a cautionary tale.  First, practitioners must help their clients in forum choices.  Where this issue is presented, the best forum choice is the Court of Federal Claims which, under Flora, requires full pre-payment of some amount, perhaps the full tax in issue.  Second, taxpayers going to the Tax Court either by petition for redetermination of a deficiency or in a CDP hearing where liability can be contested (not all CDP cases if an opportunity to contest was previously available) will not fare well. Third, since sporadic litigation will continue in forums other than the Court of Federal Claims (particularly the Tax Court), it would appear that this issue will bubble up to other Circuits and, unless the IRS gives up the issue, a conflict may develop that might cause the Supreme Court to grant certiorari.  The Finnegan case is appealable to the Eleventh Circuit which has not yet addressed the issue.  My sense is that the Eleventh Circuit will be a taxpayer-friendly venue on this issue.  Still, the Eleventh Circuit could create a conflict with the Court of Appeals for the Federal Circuit..

Finally, just a coincidence having nothing to do with the merits, Allen was decided by Judge Kroupa, who resigned from the Tax Court and was recently indicted.  See Former US Tax Court Judge Kroupa Indicted (Federal Tax Crimes Blog 4/4/16; 4/5/16), here.

Les Book has an excellent discussion of Finnegan at Tax Court Sticks to Its Guns and Holds Fraud of Preparer Can Indefinitely Extend Taxpayer’s SOL on Assessment (Procedurally Taxing Blog 6/20/16), here.

JAT Correction: An earlier version of this blog entry indicated that the Finnegans lived within the Second Circuit which would make City Wide an influential, if not controlling, authority on appeal.  Actually, at the time of filing the petition, they lived in the Eleventh Circuit which has yet to speak on this issue.

Wednesday, June 15, 2016

Attorneys as Witnesses Against Clients (6/15/16)

I recently posted on an aspect of the Zukerman Indictment.  See Update on the Zukerman Indictment - Potential Waivable Conflicts of Interest of Advocate as Witness (Federal Tax Crimes Blog 5/28/16; 6/9/16), here.  NYT has a related article: Peter Henning, When Lawyers Testify Against a Client (NYT DealBook 6/13/16), here.

The key points of Henning's article are:

1.  Henning opens:
There may be no more fertile ground for obtaining damaging information in an investigation than from a lawyer about a client. People tend to be more open with their lawyers, or perhaps worse, try to lie to them to use legal advice to keep from getting caught.
JAT Note:  There is a third possibility. Some clients may be using the lawyer in a way that can implicate the lawyer in the skulduggery, so as make the lawyer a bargaining chip with prosecutors if the client needs it later.  In this regard, a standard first meeting line I have with clients in criminal matters is that, if anyone in this room is going to jail, it will not be me.  Client representation in criminal cases requires warm zeal for the client, but warm zeal does not require that the lawyer improperly extend himself for the client.

2.  Henning discusses what prosecutors can do to get to the lawyer's information.  In Zukerman, of course, they got to the lawyer's information by successfully asserting the crime-fraud exception to the attorney-client privilege.  That put the lawyers in the uncomfortable position of testifying against the client.  And, it put the lawyers in an uncomfortable position with respect to their continuing representation of a valuable client.

3.  Henning suggests that the presence of lawyers in offshore planning raises the possibility that otherwise confidential communications might be pierced.  He mentions specifically the Panama Papers disclosures.

4.  Henning questions the use of this prosecutor tool as leverage by prosecutors to chill the attorney-client relationship, discussing certain ethical rules applicable to prosecutors.

Third Circuit Reminders on the Limits of the Cheek "Defense" (6/15/16)

In United States v. Tuka, 2016 U.S. App. LEXIS 10742 (3d Cir. 2016), unpublished here, the taxpayer was convicted for "multiple counts of tax evasion, in violation of 26 U.S.C. § 7201, and multiple counts of willful failure to file tax returns, in violation of 26 U.S.C. § 7203."  The Court of Appeals affirmed the taxpayer's conviction and sentence.

The taxpayer, an airline pilot on disability, sought to avoid including certain airline disability payments in his income and paying tax on those payments. Prior to 2003, he apparently made the claim on the notion that the tax was unconstitutional, leading the Court of Appeals to call him a "tax protestor."  In 2003, however, he lost the issue in the Tax Court and in the Third Circuit Court of Appeals.  Tuka v. Commissioner, 120 T.C. 1, aff’d 85 F. App’x 875 (3d Cir. 2003). He persisted, leaving in place instructions to the plan administrator not to withhold and then, in 2005, filing new instructions with the new plan administrator. That persistence after 2003 led to his criminal indictment, conviction and sentencing.

The Court of Appeals held first that the evidence was sufficient to support the convictions for tax evasion and failure to file.  As is frequently the case in criminal tax cases that go to trial, the taxpayer's defense was that the Government had not proved that he acted willfully.  This is sometimes called the "Cheek" defense, after Cheek v. United States, 498 U.S. 192 (1991), also involving an airline pilot asserting that his income was not taxable.  Cheek established the principle that a subjective belief that the law does not impose income tax is not willful under the criminal tax statutes regardless that it is not an objectively reasonable belief.  But, Cheek added some twists that tax protestors do not like.  First, if it is a constitutional claim that income is not taxable, the Cheek defense does not work.  Second, in assessing whether the taxpayer had a sincerely held belief, the jury is entitled to consider the reasonableness of the belief -- the more unreasonable, the less likely it is to be sincerely held.  On this second point, the Court of Appeals held:
After this Court in 2003 affirmed the Tax Court’s decision that Tuka’s disability benefits were taxable, any subjective belief that Tuka’s disability benefits were not taxable became objectively unreasonable. And while an honestly held belief, regardless of its reasonableness, will still negate the element of willfulness in a tax prosecution such as this, the jury was free to infer from this unreasonableness that Tuka did not actually hold such a belief. Cheek v. United States, 498 U.S. 192, 203-04 (1991) (“[T]he more unreasonable the asserted beliefs or misunderstandings are, the more likely the jury will consider them to be nothing more than simple disagreement with known legal duties imposed by the tax laws and will find that the Government has carried its burden of proving knowledge.”). 
Thus, we will uphold Tuka’s convictions under 26 U.S.C. §§ 7201 and 7203.
The Court of Appeals next affirmed the sentencing court's application of the obstruction enhancement in U.S.S.G. § 3C1.1 for the Sentencing Guidelines calculation.  The Court held:
Perjury is one form of obstruction of justice. See U.S.S.G. § 3C1.1 cmt. n.4(B). A defendant qualifies for the perjury enhancement by giving “false testimony concerning a material matter with the willful intent to provide false testimony . . . .” United States v. Dunnigan, 507 U.S. 87, 94 (1993). In assessing whether Tuka’s testimony at trial satisfied the elements of perjury, the District Court was required “to accept the facts necessarily implicit in the verdict.” United States v. Boggi, 74 F.3d 470, 478-79 (3d Cir. 1996) (internal quotation marks and citation omitted). And while “it is preferable for a district court to address each element of the alleged perjury in a separate and clear finding, express separate findings are not required.” Id. at 479 (internal quotation marks and citation omitted). 
One fact “necessarily implicit” in the jury’s verdict is that Tuka did not have a good-faith belief that his disability benefits were not taxable, for if he did have such a belief, the jury would not have convicted him. Thus, his testimony asserting such a good-faith belief must have been false and material. Cf. id. (concluding that the defendant’s testimony at trial “was necessarily material” because the jury would not have convicted him if it had believed the testimony). In explaining why it was applying the enhancement, the District Court stated, “I’m disappointed in you, Mr. Tuka, to have testified in the fashion that you did . . . . I agree[ ] with th[e] finding [that you were not truthful].” App. 597. Though the court could have more clearly enunciated its findings as to each individual element, these statements sufficiently indicated that it thought Tuka’s testimony satisfied these elements. 
Thus, the court did not commit error, clear or otherwise, in applying the enhancement under § 3C1.1.
JAT Comments:

Friday, June 10, 2016

Two Tax Crimes Cases on Plea Rejections After Previously Accepted (6/10/16)

Plea agreements are contracts, well like contracts anyway.  Contracts (or like contracts) in order to be enforceable require a meeting of the minds (certainly as indicated by the words of the "contract" (or like contract)).  Today, I discuss, by referring to another article, that aspect of a plea bargain in an earlier case in which the judge withdrew a plea pursuant to a plea agreement where there probably was a meeting of the minds as to the matters covered in the plea agreement but the parties clearly were not in agreement as to a critical component of the plea agreement (the tax loss which is the principal driver of the guidelines sentencing range in tax cases).  I also discuss a case where the judge withdrew a plea pursuant to a plea agreement because, in his mind, the parties' agreement did not establish the elements of the crime to which a plea was made.

The ABA's Tax Times for June 2016 has this article:  John Colvin and Claire H. Taylor, U.S. District Judge Rejects Tax Promoters’ Plea Agreement in United States v. Crithfield: A Rare Event, but a Warning to Defense Counsel (June 2016), here or, if that does not work, here.  I will try to summarize the case, hoping to do justice to the longer presentation by two very good attorneys.  The conduct involved in the criminal indictment involved promotion by two  defendants of an abusive captive insurance scheme, called a Business Protection Plan (BPP).  Essentially, the product they promoted was an investment scheme wrapped up in a package made to appear as insurance.  The indictment charged one count of conspiracy (defraud/Klein conspiracy under 18 USC 371, here, a five-year count), and two counts of aiding and assisting (26 USC 7206(2), here, each 3-year counts).  As is typical, the resulting plea agreement dropped two counts in return for the defendants plea to another count -- aiding and assisting, a 3-year count.  So, under the plea agreement, the defendants could not be incarcerated for more than 3 years, but they could be incarcerated for less, all the way down to no incarceration, depending upon the judge's Booker sentencing discretion after respectful consideration of the guidelines calculations.

As readers of this blog know, the principal driver in the advisory guidelines sentencing range is the tax loss.  The more tax loss (within certain brackets), the more the guidelines sentencing range.  Often the prosecutor and the defendant reaching a plea agreement will stipulate all or certain key factors, including tax loss.  See e.g., Fourth Circuit Holds Defendant to His Tax Loss Stipulated in the Plea Agreement (Federal Tax Crimes Blog 7/24/13), here. In this case, the parties did not stipulate as to the tax loss.  The sentencing court is required, in any event, in reaching the sentence to make the tax loss calculation to make the sentencing guidelines calculation and is not necessarily bound by the parties' agreements as to sentencing factors.  Where the parties do not agree, they essentially are leaving it up to the Court, with the assistance of the Probation Officer and the parties, by a sentencing hearing if necessary, to determine the sentencing factors.  But, provided the plea agreement or the agreed colloquy at the plea hearing is otherwise sufficient to justify the plea, even without agreement as to the sentencing factors, the plea should be accepted and should stand. Perhaps the only exception to that would be a plea that was a result of ineffective assistance of counsel. (That's a bigger subject than I can address right now, so just assume that that is not directly the issue in the case discussed in the linked blog, although it might be at heart of the court's decision to reject this plea.)

In the case, the defendants wanted to limit the tax loss at sentencing to the tax loss attributable to the conduct involved in the count of conviction.  But, as every lawyer representing criminal clients in financial crimes cases knows, the loss for sentencing guidelines purposes can include loss attributable to the count of conviction (in this case the single aiding and assistance count) and the loss from "relevant conduct."  Therein lies the rub.  The defendants here insisted that only the loss from the count of conviction was included in the tax loss calculation for sentencing guidelines purposes.  The prosecutor insisted that the relevant conduct tax loss -- and there was a lot of loss attributable to relevant conduct -- was includible in the calculation.  That would result in a high guidelines range calculation, limited to the three years maximum for the count of conviction pursuant to the plea.  The spat during the sentencing phase as to whether the relevant conduct was includible probably alerted the Court that an ineffective assistance of counsel issue was in the making, so that it just reversed its acceptance of the plea agreement and sent the parties back to square one.  As the authors of the blog entry note, that may or may not be good for the defendants, for if they go to trial and are convicted or all counts, the overall tax loss would be includible either directly as conspiracy tax loss or as relevant conduct tax loss.

I refer readers to the discussion by Colvin and Taylor for a lot more nuance.

Excellent Article on the Lobbying Attempts to Protect the Offshore Evasion Industry (6/10/16)

The Washington post has an excellent investigative journalism article on a U.S. lobbying firm that solicited Mossack  Fonseca, the Panama "law" firm at the center of the Panama Papers, and others to support its lobbying efforts to thwart the U.S. law enforcement, including IRS, efforts to force open the kimono on offshore evasion and other skullduggery.  Scott Higham, Ana Swanson and Debbie Cenziper, How an obscure nonprofit in Washington protects tax havens for the rich (WAPO 6/10/16), here.  Here are some excerpts that may get your interest in reading the whole article:
In May 2007, during a global crackdown on offshore tax havens, an obscure nonprofit lobbying group in Northern Virginia sent a fundraising pitch to a law firm in one of the biggest tax havens in the world — Panama. 
The Center for Freedom and Prosperity promised to persuade Congress, members of the George W. Bush administration and key policymakers to protect the players of the offshore world, where hundreds of thousands of shell companies had been created, often to hide money and evade taxes. 
To reach out to American officials and fund its U.S. operations, the center said it needed an infusion of cash for an eight-month campaign: at least $247,000. 
“We hope you can support this effort with a donation,” the center wrote in a document sent to Mossack Fonseca, the law firm at the heart of an international financial scandal known as the Panama Papers. 
* * * * 
In the eight-page fundraising document discovered by The Post, the Center for Freedom and Prosperity in Alexandria, Va., said that it had already persuaded the Bush administration to thwart an international effort to require more transparency from tax havens. Now the center was promising to derail similar reforms in legislation before Congress. 
Among those it planned to contact: lawmakers, key figures in the Bush White House, the Treasury Department, the State Department and the Office of Management and Budget.
At the time, the center was leading a coalition of Washington’s most vocal anti-tax groups seeking to defeat the reforms. 
The center said it counted “allies and friends in more than 50 countries” and had “a major impact on the international tax competition debate.” The document contained a contribution sheet with suggested gift levels ranging from $500 to $20,000, along with a routing number to the center’s Wachovia bank account in Northern Virginia. 
The pitch, emails and other documents reviewed by The Post offer an inside look at how a little-known nonprofit, listing its address as a post office box in Alexandria, became a persistent opponent of U.S. and global efforts to regulate the offshore world. Led by two U.S. citizens — one an economist, the other a tax expert for a Republican congressman — the center met again and again with government officials and members of the offshore industry around the world, while issuing hundreds of funding pleas and peddling its connections to Washington’s power brokers. 
The entire article is highly recommended for those wanting to dig into details and review good investigative journalism.
Follow the money.

Tuesday, June 7, 2016

Further on the Foregone Conclusion Exception to the Fifth Amendment Act of Production Doctrine (6/7/16; 6/8/16)

Professor Oren Kerr has this excellent posting today:  The Fifth Amendment limits on forced decryption and applying the ‘foregone conclusion’ doctrine (The Volokh Conspiracy 6/7/16), here.  He discusses a case on that issue that is teed up in the Third Circuit and perhaps in an off the record amicus brief fashion, points the Third Circuit in the direction that it should hold.

So, what is the issue?.  The issue is whether, after the Government obtains a search warrant for the contents of an encrypted hard disk drive that it is unable to decrypt without a password, the Government can require the person with the password, under penalty of contempt, to provide the password over his Fifth Amendment assertion.  (I suppose the same issue might be presented for any computer related storage that the Government is unable to supply the password for access.)  In Fifth Amendment analysis merely producing documents under some compulsory process (usually a subpoena) requires a testimonial act merely in the act of production.  This has given rise to the Act of Production doctrine whereby a party under compulsory process can claim the Fifth Amendment privilege not as to the documents under compulsion (there is no Fifth Amendment privilege for documents) but as to the testimony inherent in the act of production.  But, perhaps inconsistently with the Fifth Amendment privilege, the Supreme Court has recognized a concept that, if Government can establish that the testimony inherent in the compulsion is a "foregone conclusion" then the testimony in the act of production is irrelevant and the Act of Production doctrine does not apply,  (I think that the way I phrased the "foregone conclusion" concept tilts in favor of the argument Professor Kerr makes, but bear with me here.)  The issue is important for a number of criminal cases.  In the case at issue, it is pornography, but it easily presents itself in tax cases where the documents evidencing the crime may be in encrypted storage.

Professor Kerr sets it up by pointing out the error, a prior Eleventh Circuit opinion, in his opinion, is incorrect.  That opinion is:  In re: Grand Jury Subpoena Duces Tecum Dated March 25, 2011, 670 F.3d 1335 (11th Cir. 2012), here,  (I blogged that case Fifth Amendment Act of Production Privilege and Encrypted Data Files (2/25/12), here; but do not recommend that readers go there because Professor Kerr has a good discussion.)  Professor Kerr picks on the Eleventh Circuit for misapplying the "foregone conclusion" exception to the application of the Fifth Amendment in an Act of Production setting.  Basically (and I urge everyone to read his discussion of the Eleventh Circuit case), he says that the Eleventh Circuit focused its foregone conclusion analysis on the existence of the documents rather than on the testimony being compelled.  Professor Kerr excepts this quote:
[U]nder the “foregone conclusion” doctrine, an act of production is not testimonial — even if the act conveys a fact regarding the existence or location, possession, or authenticity of the subpoenaed materials — if the Government can show with “reasonable particularity” that, at the time it sought to compel the act of production, it already knew of the materials, thereby making any testimonial aspect a “foregone conclusion.”
Professor Kerr's argument, directed not just at criticizing the Eleventh Circuit, but to the Third Circuit in the pending case is that the Eleventh Circuit's analysis misses the point.  It is not the underlying documents that is the focus of the foregone conclusion analysis but the actual testimony being compelled.  When that compulsion is as to a password to a hard drive rather than as to the contents of the hard drive, the only compulsion in issue is the password so that all the foregone conclusion analysis need show is that the compelled party knows the password.  That is all he is compelled to tell.  The compelled person, so the reasoning goes, is giving no testimony beyond the password and the requirement that the Government show that he knows the password with reasonable particularity should satisfy the Fifth Amendment concerns under traditional foregone conclusion analysis.

I think it helpful to quote Professor Kerr's key reasoning:

Sunday, June 5, 2016

Excellent NYT Article on the Panama Papers Law Firm and Some of their U.S. Clients and How the System Worked (6/5/16)

Eric Lipton & Julie Creswell, Panama Papers Reveal How Wealthy Americans Hid Millions Overseas (NYT 6/5/16), here.

The article opens with an explanation of the relationship between a wealthy U.S. person and the Panama law firm, Mossack Fonseca, at the center of the Panama Papers phenomenon.
Thus began a relationship that would last at least through 2015 as Mossack Fonseca managed eight shell companies and a foundation on the family’s behalf, moving at least $134 million through seven banks in six countries — little of which could be traced directly to Mr. Ponsoldt or his children. 
These transactions and others like them for a stable of wealthy clients from the United States are outlined in extraordinary detail in the trove of internal Mossack Fonseca documents known as the Panama Papers. The materials were obtained by the German newspaper S├╝ddeutsche Zeitung and the International Consortium of Investigative Journalists, and have now been shared with The New York Times.
The article has a link to a graphic page titled How Mossack Fonseca Helped Clients Skirt Or Break U.S. Tax Laws With Offshore Accounts (NYT 6/5/16), here, authored by Guilbert Gates.  This page is highly recommended.
The Times’s examination of the files found that Mossack Fonseca also had at least 2,400 United States-based clients over the past decade, and set up at least 2,800 companies on their behalf in the British Virgin Islands, Panama, the Seychelles and other jurisdictions that specialize in helping hide wealth. 
But the documents — confidential emails, copies of passports, ledgers of bank transactions and even the various code names used to refer to clients — show that the firm did much more than simply create offshore shell companies and accounts. For many of its American clients, Mossack Fonseca offered a how-to guide of sorts on skirting or evading United States tax and financial disclosure laws. 
If the compliance department at one foreign bank contacted by Mossack Fonseca on behalf of its clients started to ask too many questions about who owned the account, the firm simply turned to other, less inquisitive banks. 
And even though the law firm said publicly that it would not work with clients convicted of crimes or whose financial activities raised “red flags,” several individuals in the United States with criminal records were able to turn to Mossack Fonseca to open new companies offshore, the documents show. 

Friday, June 3, 2016

Important Decision of Felony Conviction Collateral Consequences for Sentencing and Systemic Consideration (6/3/16)

Judge Frederick Block of DENY (Court web here; Wikipedia here) has issue a very thoughtful opinion in a nontax case that holds, in determining an appropriate sentence under 18 USC 3553(a), here, the Court may consider the collateral consequences that attend a felony conviction.  See United States v. Nesbeth, 2016 U.S. Dist. LEXIS 68731 (ED NY 2016), here.  Some of the collateral consequences effectively treat the felon as if she were no longer a citizen -- i.e., she may not vote or participate in jury duty.  There are many other collateral consequences of felony conviction which Judge Block notes in his opinion and which are noted in the authorities cited in his decision.  Moreover, Judge Block reminds all involved in the process -- government and defense counsel, the Probation Department and others that as to their responsibilities with respect to those collateral consequences:

I review certain portions of the opinion that I think are worthy of note:

Collateral Consequences

Being a history major, I love it when opinions dig into the history of the issues being discussed.  Here is Judge Block's introduction and short version of the history of collateral consequences (some footnotes omitted):
I am writing this opinion because from my research and experience over two decades as a district judge, sufficient attention has not been paid at sentencing by me and lawyers—both prosecutors and defense counsel—as well as by the Probation Department in rendering its pre-sentence reports, to the collateral consequences facing a convicted defendant. And I believe that judges should consider such consequences in rendering a lawful sentence. 
There is a broad range of collateral consequences that serve no useful function other than to further punish criminal defendants after they have completed their court-imposed sentences. Many—under both federal and state law—attach automatically upon a defendant's conviction. 
The effects of these collateral consequences can be devastating. As Professor Michelle Alexander has explained, "[m]yriad laws, rules, and regulations operate to discriminate against ex-offenders and effectively prevent their reintegration into the mainstream society and economy. These restrictions amount to a form of 'civi[l] death' and send the unequivocal message that 'they' are no longer part of 'us.'" n2
   n2 Michelle Alexander, The New Jim Crow 142 (2010). 
* * * *
I. The History of Collateral Consequences 
   A. From Past to Present 
The notion of "civil death"—or "the loss of rights . . . by a person who has been outlawed or convicted of a serious crime" n3 —appeared in American penal systems in the colonial era, derived from the heritage of English common law. n4 As explained by the New York Court of Appeals in 1888, a convicted felon in old England was
   n3 Civil Death, Black's Law Dictionary (10th ed. 2014).
   n4 The Collateral Consequences of a Criminal Conviction, 23 Vand. L. Rev. 929, 942-949 (1970); Margaret Colgate Love, Jenny Roberts & Cecelia Klingele, Collateral Consequences of Criminal Convictions: Law, Policy and Practice 8 (2013 ed.). 
placed in a state of attainder. There were three principal incidents consequent [4]  upon an attainder for treason or felony, forfeiture, corruption of blood, and an extinction of civil rights, more or less complete, which was denominated civil death. Forfeiture was a part of the punishment of the crime . . . by which the goods and chattels, lands and tenements of the attainted felon were forfeited to the king . . . . The blood of the attainted person was deemed to be corrupt, so that neither could he transmit his estate to his heirs, nor could they take by descent from the ancestor . . . . The incident of civil death attended every attainder of treason or felony, whereby, in the language of Lord Coke, the attainted person "is disabled to bring any action, for he is extra legem positus, and is accounted in law civiliter mortuus," or, as stated by Chitty, "he is disqualified from being a witness, can bring no action, nor perform any legal function; he is in short regarded as dead in law."

Thursday, June 2, 2016

Seizure of Hard Drive Computer Data by Mirroring and the Fourth Amendment (6/2/16)

In United States v. Ganias, ___ F.3d ___, 2016 U.S. App. LEXIS 9706 (2d Cir. 2016) (en banc), here, the Second Circuit held (from the opening of the opinion):
Defendant-Appellant Stavros Ganias appeals from a judgment of the United States District Court for the District of Connecticut (Thompson, J.) convicting him, after a jury trial, of two counts of tax evasion in violation of 26 U.S.C. § 7201. He challenges his conviction on the ground that the Government violated his Fourth Amendment rights when, after lawfully copying three of his hard drives for off-site review pursuant to a 2003 search warrant, it retained these full forensic copies (or “mirrors”), which included data both responsive and non-responsive to the 2003 warrant, while its investigation continued, and ultimately searched the non-responsive data pursuant to a second warrant in 2006. Ganias contends that the Government had successfully sorted the data on the mirrors responsive to the 2003 warrant from the non-responsive data by January 2005, and that the retention of the mirrors thereafter (and, by extension, the 2006 search, which would not have been possible but for that retention) violated the Fourth Amendment. He argues that evidence obtained in executing the 2006 search warrant should therefore have been suppressed. 
We conclude that the Government relied in good faith on the 2006 warrant, and that this reliance was objectively reasonable. Accordingly, we need not decide whether retention of the forensic mirrors violated the Fourth Amendment, and we AFFIRM the judgment of the district court.
Although the issue arose in a tax evasion case, it is an issue that pervades the criminal law given that computers are ubiquitous and can be a mother lode in a criminal investigation.  The opinion is very long and, with respect to computer data, somewhat complex.  So, I will try to summarize, in my own words, the trajectory of reasoning.  In some of my summary, I add some minor spin of my own to connect the reasoning.

First, at the outset, this is an en banc opinion of the Second Circuit.  Two judges concurred with the holding in the case.

Second, the only holding in the case was that any Fourth Amendment violation was irrelevant because the Government agents had acted reasonably in obtaining and executing the search warrants and then in access the computer data.

Third, the Court did not decide the Fourth Amendment issue as to whether the computer data had been illegally seized and retained in violation of the Fourth Amendment.  The computer data in question had been seized from the office of Ganias, a CPA, incident to a nontax investigation of two of Ganias' clients.  The data was seized pursuant to search warrant by taking a "mirror image" of Ganias' computers.  That mirror image was an exact copy of the computer hard drives.  As had the hard drives, the mirror image contained information within the scope of the search warrant (related to the two clients being investigated) and information outside the scope of the search warrant (for Ganias personally and other clients).  Since it is generally not practical in seizing such computer data to separate immediately the data within the scope of the search warrant and data outside its scope, all of the data is seized via the mirroring; the separation process occurs later.  In separating out the data outside the scope of the search warrant, a rough index will be prepared stating generally the type of the information separated out.  More detailed review of the data within the scope of the search warrant can then occur as the needs of the investigation require, with such indices and analyses as appropriate.  But the information outside the scope of the search warrant is not supposed to be reviewed beyond the requirement of preparing a broad index.

To use a hard copy document analogy, say that the search warrant authorizes seizure of documents in the CPA's possession related to clients A and B and, because of impracticality of making the separation of documents upon the initial seizure, the officers executing the search warrant seize too much.  Assume that, under the circumstances, the seizure of too much was reasonable and in good faith simply because the officers did not have time to separate while on the premises.  After the separation occurs, the usual drill is to return the documents outside the scope of the search warrant to the person whose premises were searched.  There will often be some generic description of the documents to show why outside the scope of the search warrant -- e.g., documents related to other clients or to the CPA himself -- but review of the documents is not permitted.  Then, if the Government's criminal attention turns to the CPA, it will have the generic description of the documents outside the scope of the search warrant but will not have those documents and will have to obtain those documents through the normal means -- subpoena the CPA or search premises of the CPA where the documents might be.  This is standard fare for Fourth Amendment analysis of overseizures.

The problem is that the hard copy document and document file analogy is an imperfect analogy for computer data.  From the computer user's standpoint, the data may look like it is separated into directories on computers, often called files, because, to the computer user, they seem to function much like hardcopy files containing documents.  But, as the majority notes at length the hardcopy file analogy is inexact in the case of computers.  The problem is that computer data may appear to the computer user to be in discrete segments of the hard drive, but that is not how the computer actually stores the data.  (See the excerpt below.)