Monday, May 29, 2017

Yet Another Offshore Account Conviction But With DOJ Agreement of No Sophisticated Means (5/29/17)

DOJ Tax announced Friday here the guilty plea of Joyce Meads of College Station, TX.  Meads was charged in SD FL.  Meads pled to one count of the Klein / defraud conspiracy, a five-year felony.  I link the following document:  docket entries as of today here; the guilty plea here. and the Stipulated Facts here. Notice from the docket sheet that she was charged by information and that she waived indictment, which use indicate a plea agreement in the making.

The key items in the plea agreement are

1. Tax Loss:  Between $250,000 and $550,000.

2.  Sophisticated Means:  "[T]he defendant's efforts to defraud the United States did not involve sophisticated means' within the meaning of the Sentencing Guidelines."  (See my comment below.)

3.  No other factors that would increase the offense level.  Of course, she will get the acceptance of responsibility adjustment (2 or 3 level downward adjustment).

On the basis of the foregoing, my rough and ready calculation of the offense level is 15 with an indicated sentencing range of 18-24 months.  Based on the same calculation, if the sophisticated means adjustment were to apply, the offense level would be 15 with an indicated sentencing range of 24-30 months.

Key items in the stipulated facts, which are pretty much bare bones, are:

1. From 1997 to 2010, Meads "conspired with co-conspirators Marc Harris, Boyce Richard Griffin, and others to defraud the United States."  I will provide some additional information Harris and Griffin at the end of this blog.  One of the others is a person identified as "C.M." with Harris' entity, The Harris Organization in Panama City, Panama.

2. Meads sought to avoid tax on her income from U.S. oil royalties she had recently received from her parents as a gift and would receive as a gift.

3. Harris and the Harris Organization set up entities to implement the offshore structure.  The entities included a Delaware corporation and a Panama corporation.  Meads transferred her royalty interest to the Delaware corporation and he parents transferred to remaining interest to the Delaware corporation.  The royalty income apparently flowed through the Delaware corporation and then out to the Panama corporation.  In 1998, she caused the Panama corporation to distribute $25,000 to her disguised as a scholarship.

4.  In 1999, Meads shifted the operation from the Harris Organization to Griffin's Offshore Management Alliance Ltd., which, like the Harris Organization, assisted U.S. persons seeking to avoid U.S. tax.  Apparently, incident to that shift, Meads caused the royalty payor (Chesapeake Energy) to forward royalty checks to a private post box in Miami.  The royalty checks were forwarded by to Panama where Griffin deposited them in a Panamanian bank account for Meads' benefit.

5.  Meads failed to report the income on her 1997-2009 1040s and, as a result, filed false tax returns.

JAT Comments:

Sunday, May 28, 2017

Fifth Circuit Joins Majority Decisions that § 7212(a) Requires No Pending Investigation (5/28/17)

In United States v. Westbrooks, ___ F.3d ___, 2017 U.S. App. LEXIS 9073 (5th Cir. 2017), here, the Fifth Circuit held that (1) § 7212(a), here, tax obstruction, requires no pending investigation and (2) restitution for a tax crime based solely as a condition of supervised release cannot require restitution prior to the supervised release.

All the commotion was created by the Sixth Circuit's holding in See United States v. Kassouf, 144 F.3d 952, 955-58 (6th Cir. 1998), subsequently reaffirmed in United States v. Miner, 774 F.3d 336, 345 (6th Cir. 2014).  But, since Kassouf, every court other than the Sixth Circuit that has addressed the issue has disagreed with Kassouf.

There is nothing particularly newsworthy in the holding other than the Fifth Circuit joining the majority of courts which it lists as follows (bold face supplied by JAT):
United States v. Floyd, 740 F.3d 22, 32, 32 n.4 (1st Cir. 2014) ("A conviction for violation of section 7212(a) does not require proof of either a tax deficiency . . . or an ongoing audit," so "the filing of false tax documents" or "concealment of income or other assets from the IRS can form the basis for a violation of the statute"); United States v. Marinello, 839 F.3d 209, 222 (2d Cir. 2016) ("[S]ection 7212(a)'s omnibus clause criminalizes corrupt interference with an official effort to administer the tax code, and not merely a known IRS investigation."); United States v. Massey, 419 F.3d 1008, 1010 (9th Cir. 2005) ("[T]he government need not prove that the defendant was aware of an ongoing tax investigation to obtain a conviction under § 7212(a); it is sufficient that the defendant hoped 'to benefit financially' from [his] conduct."); United States v. Sorensen, 801 F.3d 1217, 1232 (10th Cir. 2015), cert. denied, 136 S. Ct. 1163, 194 L. Ed. 2d 176 (2016) ("7212(a) does not require an ongoing proceeding . . . .'").
The Court also rejected the argument that the holding rendered § 7212(a) unconstitutionally vague.  That was a concern that contributed to the Kassouf holding.  The Fifth Circuit rejected it, reasoning in part:
Westbrooks rightly argues that, after Johnson v. United States, 135 S. Ct. 2551, 192 L. Ed. 2d 569 (2015), section 7212(a) is not saved by the fact that some conduct clearly falls within a statute's prohibition. Id. at 2561. But as several circuits have held, Johnson did not change the rule that a defendant whose conduct is clearly prohibited cannot be the one making that challenge. See United States v. Bramer, 832 F.3d 908, 909 (8th Cir. 2016) ("Though Bramer need not prove that § 922(g)(3) is vague in all its applications, our case law still requires him to show that the statute is vague as applied to his particular conduct."); Arrigoni Enters., LLC v. Town of Durham, 629 F. App'x 23, 26 (2d Cir. 2015); Maages Auditorium v. Prince George's Cty., 2017 U.S. App. LEXIS 4532, 2017 WL 1019060, at *6 (4th Cir. Mar. 15, 2017); United States v. Huff, 630 F. App'x 471, 487 (6th Cir. 2015); United States v. Zagorovskaya, 628 F. App'x 503, 504 (9th Cir. 2015); Miranda v. U.S. Att'y Gen., 632 F. App'x 997, 1000 (11th Cir. 2015); Flytenow, Inc. v. FAA, 808 F.3d 882, 895 (D.C. Cir. 2015).
Finally, as to the restitution issue, the Court held that Title 26 tax crimes do not permit restitution unless agreed to in a plea agreement or as a condition for supervised release.  The sentencing court had ordered restitution as a condition of supervised release after incarceration but ordered restitution to commence while incarcerated.  The Fifth Circuit said that was not consistent with the condition.

Wells Fargo Wins Some, Loses Most in its Iteration of the Stars Bullshit Tax Shelter (5/28/17)

In Wells Fargo & Company v. United States, 2017 U.S. Dist. LEXIS 80401 (D MN 2017), here, the court held that yet a tax shelter -- the Stars variety often discussed on this blog --  was, well, bullshit.  Actually, the jury had previously held that the transaction was sham (a politically correct euphemism for the concept embodied in the concept of bullshit as I and Vinny use it (for Vinny's iteration, see here)).  In short, Wells Fargo reached for the Stars, but its reach exceeded its grasp (well, it got the Stars, it just did not get the  principal tax benefit).  Its loss of the principal substantive tax benefit is not particularly exceptional (the appellate courts addressing the gambit had denied the principal benefit, but even without the benefit of those decisions, a taxpayer considering the shelter should have known it was bullshit, which raises the penalty issue also resolved in the case, which, to me, is the more important issue.

The decision gives Wells Fargo, part of the loaf, although not nearly half, on the substantive tax benefits claimed from the overall transaction.  How so?  The credit gambit in the overall transaction was done via a trust that the jury declared sham.  So, Wells Fargo  lost that part of the transaction (although I suspect it will renew the almost inevitable quixotic appeal).  The part it won was the interest deduction part.  The Court found that there was a real loan transaction with economic substance.  This was consistent with the jury's partial verdict and consistent with the holdings in the other courts of appeals' cases.  In this regard, the Court complimented the jury as follows (fn 4):
   n4 The Court pauses to note that a jury of laypersons resolved this case in a manner that parallels the decisions of three separate federal appellate panels in similar cases—a credit to how seriously the jurors took their responsibilities and how hard they worked to understand the extremely complicated evidence.
As an aside, that has been my experience with juries -- both as an advocate and as a juror.  They don't necessarily always reach the right result, but they do always work very hard  and most of the time get the right -- or at least a fair -- result.

The Court then moved to the issue:
Notwithstanding the fact that all three courts of appeals to have considered its argument have rejected it, the government continues to insist that the loan is a sham and that Wells Fargo is not entitled to deduct its interest expenses. The government contends that, even if a transaction has objective economic substance, it must be treated as a sham unless the taxpayer actually had at least one subjective, non-tax business purpose. To resolve this issue, it is necessary to predict which approach to the sham-transaction doctrine the Eighth Circuit will choose to adopt. 
Having considered the parties' arguments, the Court concludes that the Eighth Circuit is likely to treat the objective and subjective components of the sham-transaction test as two factors in a single flexible analysis rather than as two separate, rigid tests. After all, courts created the sham-transaction doctrine in recognition of the fact that taxpayers display endless ingenuity in exploiting the tax code, making it impossible for Congress to anticipate and prevent all abuse. A doctrine that is intended to counter the creative and ever-evolving abuse of the tax code must necessarily be flexible. Reducing the sham-transaction doctrine to two mechanical, all-or-nothing tests would deprive the doctrine of the flexibility needed to accomplish its purpose. n5
   n5 The Court acknowledges that, after Wells Fargo's STARS transaction concluded, Congress codified what the government calls the "conjunctive" approach—that is, a requirement that a transaction have both objective economic substance and a subjective non-tax business purpose. See 26 U.S.C. § 7701(o)(1). Importantly, however, the statute states that it applies "[i]n the case of any transaction to which the economic substance doctrine is relevant," and goes on to say that "[t]he determination of whether the economic substance doctrine is relevant to a transaction shall be made in the same manner as if this subsection had never been enacted." 26 U.S.C. § 7701(o)(1), (o)(5)(C). This suggests some flexibility in determining a threshold requirement of relevance before applying the doctrine.

Sunday, May 21, 2017

Restitution Permits Double Assessments But Only One Collection (5/21/17)

In Muncy v. Commissioner, T.C. Memo. 2017-83, here, the Court updated its prior opinion in Muncy v. Commissioner, T.C. Memo 2014-251, because of a reversal and remand in Muncy v. Commissioner, 637 Fed. Appx. 276 (8th Cir. 2016).  Now that's a lot of commotion, and I don't intend here to get into the twists and turns.  Suffice it to say that the issue on remand was whether the IRS had shown that the person issuing the notice of deficiency had the proper delegated authority to do so.  For purposes of this blog (and my interest), the more important part of the current opinion was what it  repeats from its prior opinion that I had not previously paid sufficient attention to.  And, what I discuss here is all in the most recent opinion linked above, so I do not provide links to the prior opinions.

In high-level summary, the taxpayer had been convicted for tax crimes (which ones are not important here), with a punishment including restitution for tax.  The IRS summarily assessed the restitution as permitted by § 6201(a)(4) and §6213(b)(5), which avoids the necessity for a notice of deficiency and prevents the taxpayer form contesting the assessment.  Then, determining that the taxpayer owed more tax for the periods than reflected in the restitution award that had been assessed (this is not uncommon since the restitution amount is often less than the total tax deficiency), the IRS issued the taxpayer a notice of deficiency.  In issuing the notice of deficiency, however, the IRS reduced the amount of the deficiency by the restitution assessed, so that the amount of deficiency in the notice was for the net amount.  The taxpayer petitioned the Tax Court for redetermination.  The IRS moved to increase the deficiency to eliminate the reduction for the restitution assessment.

The problem with which the Court grappled, at bottom, was whether so increasing the deficiency amount to include the amount already assessed would permit the IRS to assess the increased amount if "redetermined" by the Court and thus have two assessments that, in part, are for the same tax liability.  Bottom line, without getting into the technical maze the Court navigated, the Court held that the deficiency was the gross amount rather than the net amount.  That will mean that the amount determined in the Tax Court's decision document that is then assessed will be doubled up, but the Court said (bold-face supplied by JAT):
This leaves us with the question of whether respondent should reduce his deficiency determinations by amounts of restitution previously ordered by the District Court. The restitution statute expressly contemplates that a civil claim may be brought after the criminal prosecution by providing that the amount paid under a restitution order "shall be reduced by any amount later recovered as compensatory damages for the same loss by the victim in * * * any Federal civil proceeding". 18 U.S.C. 3664(j)(2)(A) (2012). The reverse applies as well: Any amount paid to the IRS as restitution for taxes owed must be deducted from any civil judgment the IRS obtains to collect the same tax deficiency. United States v. Tucker, 217 F.3d 960, 962 (8th Cir. 2000). Accordingly, a civil judgment must be entered before the IRS reduces a taxpayer's tax liability by amounts of restitution paid.
So, bottom-line, the defendant will not have to pay twice for the same tax amounts due.

Saturday, May 20, 2017

Article on Justice Gorsuch's Approach to Criminal Tax Cases (5/20/2017)

I think readers will be interested in this excellent article by Jeremy Temkin:  Reading Tea Leaves: Justice Gorsuch and Criminal Tax Cases, 257 NYLJ (5/18/17), here.  The data set for the article is slim -- principally  United States v. Farr, 536 F.3d 1174 (10th Cir. 2008), here (note that the link is to the case on the UVA Law School website titled the Neil Gorsuch Project).  I have written before on the subsequent trajectory in Farr and provide the principal blog links at the end of this blog. Basically, in the 2008 case decided by then Judge Gorsuch, Farr argued successfully on the appeal that the charging document incorrectly charged her for evading "her" employment taxes (which were not her liability) rather than the trust fund penalty for which she was liable.

Here is an excerpt from Temkin's Lessons Learned:
It is, of course, necessary to exercise caution in reading tea leaves, and a narrow  sampling of cases is insufficient to conclude with confidence that Justice Gorsuch will show the same willingness as Justice Scalia to defend (certain) criminal rights. After all, Farr was a fairly unusually (sic) case, and Judge Gorsuch left open the possibility that the government could have avoided the constructive amendment problem that it had created by drafting a bare-bones indictment. That solution, of course, will not help criminal defendants who will be forced to rely on rarely granted bills of particulars to draw out the government’s case. 
In that way, Farr presents an interesting tension with Justice Scalia’s dissent in United States v. Resendiz-Ponce, 549 U.S. 102, 111 (2007). Resendiz-Ponce was convicted of illegally attempting to reenter the country based on an indictment that failed to allege that he had committed any overt act in connection with his reentry. An eight-justice majority concluded that the indictment was sufficient, reasoning that “attempt” necessarily connotes both intent and some overt act. Justice Scalia refused to give the government the benefit of that doubt. Instead he found the indictment faulty on the straightforward view that it failed to satisfy the requirement that it allege the two elements of  attempted reentry: both intent to commit the underlying crime and some act toward its commission. Thus, while both Judge Gorsuch in Farr and Justice Scalia in Resendiz-Ponce showed themselves  committed to construe indictments strictly, the former did so by encouraging the government to allege fewer particulars, while the latter concluded that more details were necessary.
JAT Note:  Of course, Farr could have been convicted of evading the employer's employment taxes (including even the employer's portion), but the charging document should not have said she evaded "her" taxes.

Prior blogs on Farr:

  • Charging Decisions for Trust Fund Tax Violations (Federal Tax Crimes Blog 11/17/16), here.
  • Charging Decisions for Trust Fund Tax Crimes - 7202 or 7201 (Federal Tax Crimes Blog 12/22/12), here.
  • Evasion of Trust Fund Taxes and Charging Decisions (Federal Tax Crimes Blog 1/23/2012), here.
  • Tenth Circuit Summarizes Double Jeopardy in Rejecting the Argument (Federal Tax Crimes Blog 1/16/10), here.


Monday, May 15, 2017

CCA on Application of Refund Statute of Limitations in OVDP (5/15/17)

In CCA 201719026 (4/12/17, released 5/12/17), here, an IRS Senior Technician Reviewer responds to the following:
Your office has received a number of questions from OVDP examining agents about taxpayers who report additional income and tax on their amended returns for most of the years in the disclosure period, but report an overpayment on their amended return for at least one of the years at issue. A typical fact pattern might involve a taxpayer for whom the disclosure period is tax years 2003 through 2010. For tax years 2003 through 2007 and 2009 and 2010, the taxpayer reports additional income and tax. But the amended return submitted for tax year 2008 includes a large loss, resulting in an overpayment for that tax year. After reviewing the amended return, the examining agent confirms the claimed loss and the resulting tax computations show an overpayment for tax year 2008. The taxpayer then requests that the overpayment for tax year 2008 be credited against increases in tax for the other tax years in the disclosure period or the miscellaneous offshore penalty. You have asked for advice regarding how I.R.C. §§ 6511 and 6514 affect the Service’s ability to credit the overpayment as requested by the taxpayer.
The author then discusses the law apply under certain possible scenarios.  Since the analysis is succinct, I will just refer readers to it.

A short summary of the answer to the "typical fact pattern" disclosed is that, assuming the original 2008 return was timely filed, the period for claiming a the refund expires 3 years after the date of the filing (or deemed filing).  Hence, if the amended return filed in OVDP was submitted on or before that 3 year period expired, then the refund is timely and the refund can be resolved in the OVDP proceeding (either by refund or credit against other years).  And, depending upon the facts, the filing of the claim for refund by amended return in the OVDP proceeding might be timely.

Although the author of the CCA does a very good job of discussing the rules, I offer the following from the current operating draft for the next edition of my Federal Tax Procedure book:
Just as there are statutes of limitation on assessment and collection taxes, there are also statutes of limitation on taxpayers claiming tax refunds from the Government.  There are two applicable rules. 
First, there is a statute of limitations for filing the claim for refund.  A claim for refund must be filed within three years from the date the return was filed or two years from the date the tax was paid, whichever is later, and, if no return is filed, within two years from the date of payment.  § 6511(a).  Read literally, this means that a taxpayer can file a return 40 years late and qualify under this first rule. I hope readers will instinctively say something must be missing here, for statutes of limitations do not normally allow such lengthy lapses before the claim must be pursued.  The answer to that concern is in the second rule to which I now turn. 
Second, there is a statute of limitations on the amount of tax that can be refunded if the claim is timely under the first rule.  The IRS may only refund the amount of tax paid within three years plus the period of any extension and, if the foregoing rule does not apply, then it may only refund the tax paid within two years of the date of the claim.  § 6511(b)(2).  This is called the “lookback” rule. 

Saturday, May 13, 2017

District Court Denies Sufficiency Motion for Tax Evasion and Tax Obstruction (5/13/17)

In United States v. Pflum, 2017 U.S. Dist. LEXIS 72422 (D KS 2017), here, Pflum had been convicted of two counts - evasion, § 7201, and tax obstruction, § 7212(a).  In a prior prosecution in 2004, Pflum had been convicted of "multiple tax code violations, including three counts of failing to file income tax returns for the tax years 1997 through 1999."  As a condition of supervised release on that conviction, the court ordered Pflum to file "truthful and complete federal and state income tax returns in a timely manner, according to law, and cooperate with the Internal Revenue Service and state tax authorities regarding any manner related to the defendant's past or present tax liability during the term of supervision."  As recounted in the facts in the current case, Pflum continued to misbehave.  Hence, Pflum was again indicted, this time for evasion and tax obstruction.  During the pretrial proceedings, Pflum thrashed around in various ways, including representing himself pro se at times. The jury convicted.  Pflum filed post-trial motions.  In the order linked above, the Court denied the post-trial motions.

The only part Memorandum and Order that I think worthy of comment is the denial of the Motion for Acquittal based on insufficiency of the evidence.  Before excerpting that portion of the Order, I first offer the following regarding the jury verdict from the factual background:
After the court submitted the case, the jury deliberated and returned guilty verdicts for both of the counts charged in the Indictment. Doc. 179. The jury completed a special verdict form for each charge. The jury agreed that Mr. Pflum had committed affirmative acts to evade the payment of income taxes by submitting false financial statements, instructing third parties to ignore IRS collection efforts, and threatening legal action against third parties who complied with the IRS's collection efforts. Id. at 2-3. The jury also agreed that Mr. Pflum committed affirmative acts to obstruct the due administration of the Internal Revenue laws by submitting false financial statements, filing a grant deed attempting to transfer ownership interest of property located at 500 MacDonald, San Juan, Washington, instructing third parties to ignore IRS collection efforts, and threatening legal action against third parties who complied with the IRS's collection efforts. Id. at 6-7.
Now, turning to the excerpt where the Court discusses and denies the Motion for Acquittal.
Mr. Pflum asserts that the government presented insufficient evidence for a rational jury to convict him beyond a reasonable doubt of the counts charged. The court addresses the two counts of conviction separately, below. 
1. Count 1: Attempting to Evade and Defeat the Payment of Income Tax 
Count 1 charged Mr. Pflum with attempting to evade and defeat the payment of income tax in violation of 26 U.S.C. § 7201. To secure a conviction under § 7201, the government must prove beyond a reasonable doubt that: (1) the defendant owed substantial income tax; (2) the defendant intended to evade and defeat the payment of that tax; (3) the defendant committed an affirmative act in furtherance of this intent; and (4) the defendant acted willfully, that is, with the voluntary intent to violate a known legal duty. See 10th Cir. Crim. Pattern Jury Instruction No. 2.92 (2011); see also United States v. Meek, 998 F.2d 776, 779 (10th Cir. 1993) ("To obtain a conviction for evasion, the government must prove three elements: 1) the existence of a substantial tax liability, 2) willfulness, and 3) an affirmative act constituting an evasion or attempted evasion of the tax.") 
For the first element, the government need not prove the exact amount of the tax due—just that the tax liability is substantial. See United States v. Mounkes, 204 F.3d 1024, 1028 (10th Cir. 2000) (holding that the government had proved substantial tax liability because the "evidence showed that the [defendants'] bank deposits and cash expenditures exceeded their reported income after adjustments for applicable exemptions and deductions. Such evidence supports an inference that defendants had unreported income."). "Whether the tax evaded was substantial is a jury question and generally not susceptible to a precise definition." 10th Cir. Crim. Pattern Jury Instruction No. 2.92 cmt. (2011); see also Canaday v. United States, 354 F.2d 849, 851-52 (8th Cir. 1966) ("The word 'substantial,' as applicable here, is necessarily a relative term and not susceptible of an exact meaning."). 
The third element—the requirement of an affirmative act—"distinguishes the offense of evasion from the misdemeanor offense of willful failure to file a tax return." Meek, 998 F.2d at 779. "An affirmative act requires more than the passive failure to file a tax return; rather, it requires a positive act of commission designed to mislead or conceal." Id. The misstatement of one's income is an affirmative act sufficient to sustain a jury's conviction for tax evasion. See United States v. Jones, 816 F.2d 1483, 1488 (10th Cir. 1987) ("Defendant's filing of his tax returns with the knowledge that he should have reported more income is sufficient to sustain the jury's conclusion that defendant willfully attempted to evade taxes." (citing Sansone v. United States, 380 U.S. 343, 351-52, 85 S. Ct. 1004, 13 L. Ed. 2d 882 (1965))). 
Here, the government presented evidence sufficient for a reasonable jury to find that the government proved each one of the elements essential to a tax evasion conviction under 26 U.S.C. § 7201. At trial, the government presented evidence that Mr. Pflum owed substantial income tax. The evidence included the federal income and employment tax returns that Mr. Pflum had filed for tax years 1997 through 2007. By his own admission, the tax returns reported Mr. Pflum's total income as $7,700,494.00 and claimed he owed $2,663,854.23 in federal income and employment taxes. The government also presented evidence that Mr. Pflum had earned income from the sale of his business in 2006. The government thus presented sufficient evidence of the first element. 
The government also presented sufficient evidence of the second, third, and fourth elements. The government presented evidence that Mr. Pflum committed affirmative acts in furtherance of his intent to evade and defeat the payment of the tax that he owed the government. And, the jury could infer from the circumstantial evidence that Mr. Pflum's conduct was willful. Indeed, the jury specifically found that the government had presented evidence of and proved beyond a reasonable doubt that Mr. Pflum committed certain affirmative acts. Specifically, this evidence included the affirmative acts of: (1) "submitting false financial statements claiming $472.75 in assets and $470.00 per month income, when in truth and in fact [Mr. Pflum] owned over $2 million in real estate and received monthly income of over $16,000;" (2) "instructing third parties, such as renters, potential buyers, and others indebted to [Mr. Pflum] to ignore collection efforts by the Internal Revenue Service;" and (3) "threatening legal action against third parties who complied with the Internal Revenue Service's collection efforts." Doc. 179 at 2-3. Viewing the evidence in the light applied to a Rule 29(c) motion, the court concludes that a rational jury could have reached the very same verdict that this jury reached. 
2. Count 2: Corruptly Endeavoring to Obstruct and Impede the Due Administration of the Internal Revenue Laws 

Friday, May 12, 2017

New DOJ Charging and Sentencing Recommendation Guidance (5/12/17)

AG Sessions has issued a new Memorandum, dated May 10, 2017, titled Department Charging and Sentencing Policy.  The memorandum is here, and the DOJ press release is here.

The memorandum is short, so readers might want to go directly to it.  My bullet points as to what is covers:

  • "[P]rosecutors should charge and pursue the most serious, readily provable offense."  That is stated as a general rule for which exceptions may be allowed if approved.
  • "[P]rosecutors must disclose to the sentencing court all facts that impact the sentencing guidelines or mandatory minimum sentences, and should in all cases seek a reasonable sentence under the factors in 18 U.S.C. § 3553."  Sentencing recommendations to the court within the guidelines range are appropriate, with recommendations for departures and variances requiring approvals.

From some of the early comment on the new guidance:

Joseph Tanfani, Sessions orders return to tough drug war policies that trigger mandatory minimum sentences (LA Times 5/12/17), here.
He [AG Sessions] rescinded two policy memos signed by a predecessor, former Atty. Gen. Eric H. Holder Jr., that told prosecutors to be cautious in their use of methods that can produce dramatically harsher jail terms. 
In a memo released Friday, Sessions instructed Justice Department lawyers to “charge and pursue the most serious, readily provable offense." 
By definition, he added, the most serious offenses “carry the most substantial guidelines sentence, including mandatory minimum sentences.” 
* * * * 
With the rise of federal mandatory sentencing laws in the 1980s and 1990s, judges were stripped of much of their discretion on how to sentence drug users. 
Decisions made by prosecutors often effectively determine how long offenders will spend in prison. 
For example, if federal prosecutors include the amount of drugs in their written charges, that can trigger a mandatory minimum sentence. 
They also have the discretion to file motions for so-called sentence “enhancements,” which can effectively double drug sentences for repeat offenders. 
Some prosecutors use these tough tools as a hammer in plea negotiations, or to force offenders to cooperate. 
Starting in 2013, Holder instructed federal prosecutors to use that power more sparingly and to reserve the toughest charges for high-level traffickers and violent criminals. 
“As a nation, we are coldly efficient in our incarceration efforts,” Holder said in a speech decrying the growth in America’s prison population. 
The Obama-era policies led to a sharp decline in the number of drug offenders hit with mandatory minimum sentences, from 62% in 2013 to 44% last year, according to U.S. Sentencing Commission data compiled by a sentencing reform group, Families Against Mandatory Minimums. 

Tuesday, May 9, 2017

Government FBAR Willful Penalty Suit Survives Motion to Dismiss (5/9/17)

In United States v. Toth, 2017 U.S. Dist. LEXIS 66664 (D MA 2017), here, the Court denied the defendant's motion to dismiss the Government suit for judgment on a FBAR willful penalty.  I attach the docket entries, here, which indicate that the Government filed the case in September 2015 and there have been many twists and turns to the date of the order.  Among those twists was a default judgment because Toth did not accept or avoided service of the complaint.  And, perhaps driving the twists and turns is that in this suit involving an FBAR willful penalty of $2,173,703, Toth is representing herself pro se. (I suppose there is redundancy there but I wanted it to be clear.)

According to the complaint, here:
  • Toth opened the UBS account in 1999 and it had remained open continuously since.  
  • At all times, Toth had control and a financial interest in the account.  
  • "The balance of the Account in calendar year 2007 was approximately $4,000,000."  
  • "As of June 30, 2008, the balance of the Account was at least $4,347,407."  
  • The FBAR penalty is $2,173,703, which is 50% of the amount on 6/30/08.  
  • The complaint contains two spare statements of the basis for liability:
21. Monica Toth failed to file an FBAR disclosing the existence of the Account for the 2007 calendar year on or before June 30, 2008.
22. Monica Toth voluntarily and intentionally violated a known duty to appropriately and timely disclose the existence of the Account to the Internal Revenue Service and the Department of the Treasury.
23. The failure of Monica Toth, to timely file the FBAR with regard to the 2007 calendar year was willful within the meaning of 31 U.S.C. § 5321(a)(5).
I don't think Toth filed an answer.  At least my search of the docket entries did not pick one up.  However, she did file the motion to dismiss which led to the order.

There is nothing in the order particularly important other than to the litigants.  Apparently in the mix, however, was whether the FBAR willful penalty violated the 8th Amendment's Excessive Fines prohibition.  On that issue, the court said:
Toth also argues that the fine imposed by the Government violates the [*12]  Excessive Fines Clause of the Eighth Amendment. "The Secretary of the Treasury may impose a civil money penalty on any person who violates, or causes any violation of, any provision of section 5314." 31 U.S.C. § 5321(a)(5)(A). The penalty may not exceed $10,000 unless the violation is willful. Id. § 5321(a)(5)(B)—(C). Whether Toth, in fact, violated § 5314, and, if so, whether that violation was willful is a question of fact that the Court cannot resolve at this stage. Accordingly, the Court does not address whether the fine to be imposed, if any, violates the Eighth Amendment.
For further context on the 8th Amendment, I attach the Government's Opposition, here, addressing the Eight Amendment issue.  The Opposition is dated December 14, 2016. The opening of that Opposition says:
By way of background, the United States alleged in the complaint that defendant Monica Toth willfully failed to file an FBAR as required by statute because she had a bank account in Switzerland which contained over $4 million. Ms. Toth moved to dismiss the action on several theories, from defective service of process, to delayed service, to failure to state a claim on which relief could be granted. These are meritless and were addressed in a prior brief filed by the United States. But Ms. Toth also argued in one or two sentences that the Excessive Fine Clause in the 8th Amendment to the U.S. Constitution precluded judgment from being entered. She cited no authority for her argument. 
Undersigned counsel recognized that a similar argument was pending before the Ninth Circuit and sought (and received) an extension of time to brief the issue until the briefs were filed in the Ninth Circuit to ensure that the Tax Division was taking a consistent position. The Ninth Circuit brief has now been filed and this brief thus responds to the 8th Amendment issue Ms. Toth raised. The remainder of the arguments presented by Ms. Toth were addressed in a prior filing by the United States. For the reasons set forth below, the Excessive Fines Clause of the U.S. Constitution does not preclude entry of judgment of approximately $2 million against Ms. Toth for willfully failing to file an FBAR.
The Opposition then sets forth the Government's detailed argument that on which the Court deferred action.

One issue that struck me was that the Government demanded a jury in its original complaint.  I just wonder whether, strategically, demanding a jury is a good idea in any penalty case and particularly where there is a pro se defendant.  At a minimum, with a jury, the demands of the case will go up and efficiency will be sacrificed.  Of course, the defendant could have demanded a jury if the Government did not and, in any event, the parties can waive the jury later.

Saturday, May 6, 2017

Lawyer, Alleged Offshore Account Enabler, Loses Motion to Dismiss Indictment (5/6/17)

I have previously written about Michael Little, a British and U.S. lawyer and U.S. permanent resident, who was indicted for enabling offshore evasion for U.S. taxpayers.  (I list at the end of this blog entry the principal prior blog entries mentioning Little.)  The superseding indictment is here; the extensive docket entries in the case are here.  The superseding indictment charges:
  • Count 1 Tax Obstruction, § 7212(a) (Pages 1-10)
  • Counts 2 through 7 Failure to File for 2005-2010, § 7203 (Page 11)
  • Count 8 Willful Failure to File FBAR, 31 USC § 5313 and 5322(a); Title 31 CFR §§ 103.24, 103.27(c,d) and 103.59(b); 18 USC § 2. (Page 12)
  • Count 9 Conspiracy (Pages 12-16
  • Counts 10-19 Aiding and Assisting the filing of false Forms 3520, § 7206(2) (Pages 16-18)
In United States v. Little, 2017 U.S. Dist. LEXIS 67580 (SD NY 2017), here, the Court denied Little's motion to dismiss.  The gravamen of the Court's action is stated in the opening paragraph:
Defendant Michael Little moves for partial dismissal of the Second Superseding Indictment on the grounds that his prosecution for failure to file individual income tax returns and Reports of Foreign Bank and Financial Accounts ("FBARs") would deprive him of due process of law in violation of the Fifth Amendment to the United States Constitution. Little asserts that at the time of the events charged in the indictment he was a U.K. citizen and a lawful permanent resident of the U.S. He argues that the statutes and regulations requiring U.K. citizens with permanent residence status under U.S. immigration law to file U.S. income tax returns and FBARs, when read in conjunction with the U.S./U.K. Tax Treaty (the "Treaty"), are ambiguous, such that a person of ordinary intelligence lacks notice as to what constitutes compliance with the law. The Court finds that none of the relevant statutes or regulations, whether read in isolation or together, or in conjunction with the Treaty, are so ambiguous that they could properly be found unconstitutionally vague as applied to the charged conduct. Defendant's motion for partial dismissal of the indictment is thus denied.
The standard for void for vagueness is stated:
"As generally stated, the void-for-vagueness doctrine requires that a penal statute define the criminal offense with sufficient definiteness that ordinary people can understand what conduct is prohibited and in a manner that does not encourage arbitrary and discriminatory enforcement." United States v. Rybicki, 354 F.3d 124, 129 (2d Cir. 2003) (quoting Kolender v. Lawson, 461 U.S. 352, 357, 103 S. Ct. 1855, 75 L. Ed. 2d 903 (1983)). Because the First Amendment is not implicated, the Court assesses Little's challenge as applied, i.e., "in light of the specific facts of the case at hand and not with regard to the statute's facial validity." Id. (quoting United States v. Nadi, 996 F.2d 548, 550 (2d Cir. 1993)). Courts examine as-applied vagueness claims in two steps: "a court must first determine whether the statute gives the person of ordinary intelligence a reasonable opportunity to know what is prohibited and then consider whether the law provides explicit standards for those who apply it." Rubin v. Garvin, 544 F.3d 461, 468 (2d Cir. 2008) (quoting Farrell v. Burke, 449 F.3d 470, 486 (2d Cir. 2006)). The "novelty" of a prosecution does not bolster a vagueness challenge, for the lack of a prior "litigated fact pattern" that is "precisely" on point is "immaterial." United States v. Kinzler, 55 F.3d 70, 74 (2d Cir. 1995). 
"A scienter requirement may mitigate a law's vagueness, especially where the defendant alleges inadequate notice." Rubin, 544 F.3d at 467 (citing Vill. of Hoffman Estates v. Flipside, Hoffman Estates, Inc., 455 U.S. 489, 499, 102 S. Ct. 1186, 71 L. Ed. 2d 362 (1982)). Where "the punishment imposed is only for an act knowingly done with the purpose of doing that which the statute prohibits, the accused cannot be said to suffer from lack of warning or knowledge that the act which he does is a violation of law." United States v. Tannenbaum, 934 F.2d 8, 12 (2d Cir. 1991) (quoting Screws v. United States, 325 U.S. 91, 102, 65 S. Ct. 1031, 89 L. Ed. 1495 (1945) (plurality opinion)) (Bank Secrecy Act provision requiring reporting by financial institutions not void for vagueness when applied to an individual because the Act defined financial institutions to include "[a] person who engages as a business in dealing in or exchanging currency" and defendant knew he was "committing a wrongful act.")

Tuesday, May 2, 2017

Fascinating Case on Jury Instructions on Definition of Element of the Crime Beyond the Statutory Definition (5/2/17)

Today's case, United States v. Hastie, ___ F.3d ___, 2017 U.S. App. LEXIS 7237 (11th Cir. 2017), here, is a criminal case, but is not a tax case.  I offer it because the most interesting holding in the case involved a prior tax crimes case and the setting of when a jury instruction might turn into  a directed verdict.

The Driver's Privacy Protection Act ("DPPA), 18 U.S.C. § 2721(a), here, provides that "A state department of motor vehicles and any officer, employee or contractor thereof, shall not knowingly disclose "personal information," which is defined as "information that identifies an individual."

Hastie was the License Commissioner of Mobile County, Alabama.  The License Commissions issues driver's licenses and auto titles for the county.  The Commission maintains a website for online transactions.  Use of the website requires the user to provide his or her email addresses.  In addition, the tellers in the office are instructed to obtain email addresses for in-office transactions.  Both the website and the policy manual for the Commission advise about the DPPA.

Hastie, asked the Commission's information technology guy to do a mass email with her endorsement for mayor.  That, of course, was not Commission business.  He refused to do so, but did provide her a flash drive with the email addresses.  Hastie provides the email address to the candidate's campaign and the campaign emailed the endorsement.

Hastie was indicted for 18 counts.  Count 17 charged violation of the DPPA.  (I don't know the other counts.)  The statute defines "personal information" as (18 U.S.C. § 2725(3)):
information that identifies an individual, including an individual's photograph, social security number, driver identification number, name, address (but not the 5-digit zip code), telephone number, and medical or disability information, but does not include information on vehicular accidents, driving violations, and driver's status.
Note that the statutory definition does not specify email addresses as personal information.  But, the district court instructed the jury as follows (bold-face supplied by JAT):
The term "personal information" means information that identifies an individual, including an individual's E-mail address, photographs, Social Security number, driver's license, name, address, telephone number, medical or disability information. Personal information does not include information on vehicular accidents, driving violations, and a driver's status.
The Jury then asked the judge whether "whether it had to follow the definition of "personal information" found in the DPPA or the definition set forth in the jury instructions."  This interesting fact is found in the dissent's opinion in a footnote (fn. 3 on p. 29, the end of the dissenting opinion).  There is no indication of the judge's answer to the jury.  (I am surprised that this fact was not mentioned by the majority and more prominently by the dissent.)

After first determining that the License Commission was a "State Department of Motor Vehicles" as used in the statute, the Court turned to the issue of whether email addresses are "personal information" under the statute.  In fairly straight-forward statutory interpretation, the Court held that "personal information" did or at least could include emails.  I urge readers to review that portion of the decision (pp. 9-15).

The Court then turned to the subtler issue of whether the wording of the specific instruction improperly directed a verdict on that question.  On that issue, the majority and the dissent turned to a tax case,  United States v. Goetz, 746 F.2d 705 (11th Cir. 1984), here, a tax case involving whether a crank return was a return requiring that it not be a return to support a failure to file conviction.  The majority discussed that issue as follows:

Monday, April 24, 2017

Three Offshore Account Holders Sentenced (4/24/17)

DOJ Tax announced here the sentencing of three related U.S. taxpayers, Dan Kalili, David Kalili and David Azarian, for FBAR violations to which they previously pled.  For my blog on their guilty pleas, see Additional Pleas to Offshore Account Tax Crimes (Federal Tax Crimes Blog 1/18/17), here.

Key excerpts from today's press release are:
Dan Farhad Kalili, 55, a resident of Irvine, California, was sentenced to serve 12 months and one day in prison; his brother, David Ramin Kalili, 52, a resident of Newport Coast, was sentenced to serve eight months in prison; and his brother-in-law, David Shahrokh Azarian, 67, also a resident of Newport Coast, was sentenced to serve eight months in prison. 
According to documents and information provided to the court, Dan Kalili, David Kalili and Azarian willfully failed to file with the Department of Treasury Reports of Foreign Bank and Financial Accounts (FBARs) regarding secret bank accounts in Switzerland and Israel that each maintained and controlled, many for well over a decade. These secret accounts held assets that reached into the millions of dollars. 
* * * * 
From May 1996 through at least 2009, Dan Kalili opened and maintained several undeclared offshore bank accounts at Credit Suisse Group (Credit Suisse) in Switzerland. He also opened and maintained several undeclared offshore bank accounts from at least 1998 through 2008 at UBS AG (UBS) in Switzerland. In July 2006, Dan Kalili opened an undeclared account at UBS in the name of the Colsa Foundation, an entity established under the laws of Liechtenstein. At the end of May 2008, the Colsa Foundation account held approximately $4,927,500 in assets. Similarly, David Kalili opened and maintained several undeclared accounts at Credit Suisse in Switzerland, from February 1999 through at least 2009, and at UBS in Switzerland, from October 1993 through at least 2008. Dan and David Kalili also maintained joint undeclared Swiss bank accounts at both UBS and Credit Suisse beginning in 2003 and 2004. Meanwhile, Azarian opened and maintained several of his own undeclared accounts at Credit Suisse in Switzerland from May 1994 through at least 2009, and at UBS in Switzerland from April 1997 through at least 2008. 
Dan Kalili, David Kalili and Azarian took affirmative steps to prevent their assets in UBS and Credit Suisse from being discovered. Dan Kalili opened an undeclared account at Swiss Bank A in the name of the Colsa Foundation and in May 2008, transferred his assets from the UBS Colsa Foundation account to Swiss Bank A. By this time, Bradley Birkenfeld, an American banker who worked for UBS, had been indicted, Martin Liechti, a UBS executive, had been detained and UBS had announced that the Justice Department and the SEC were investigating whether it helped clients avoid paying taxes between 2000 and 2007. Dan Kalili later made a partial disclosure of the Swiss Bank A Colsa account on his individual income tax returns. In 2009, he opened undeclared accounts at Israeli Bank A and at Bank Leumi, both in Israel. In June 2009, he closed the joint undeclared account at Credit Suisse he held with David Kalili, as well as his own undeclared account, and transferred the funds. Shortly before its closure, the undeclared joint account at Credit Suisse held approximately $2,561,508 in assets. As of December 2009, Dan Kalili’s undeclared account at Israeli Bank A held assets valued at approximately $1,569,973, and his undeclared account at Bank Leumi held assets valued at approximately $2,497,931. 

Sunday, April 16, 2017

Upward Variance Not Asserted by Government Sustained on Appeal (4/16/17)

In United States v. Nguyen, ___ F.3d ___, 2017 U.S. App. LEXIS 6390 (5th Cir. 2017), here, Nguyen was charged by information, here, with a single count of aiding and assisting a false corporate return and pled guilty to that single count.  The plea agreement is here.  The final Guidelines calculation indicated a range of 21-27 months.  The maximum sentence based on the sole count of conviction was 36 months.  The Probation Officer informed in the Court in PSR of apparent structuring conduct and recommended an upward departure based on Sentencing Guidelines § 4A1.3, here, for an underrepresented criminal history or under Sentencing Guidelines § 5K2.21, here, for uncharged conduct.  The district court did not accept the recommendation, but did consider the conduct in question in exercising its Booker discretion under 18 USC § 3553(a), here, to make an upward variance to the maximum allowable sentence of 36 months.

I cut and paste much of the opinion because, I think, I could not improve on it.  After that I offer some comments.
Nguyen, the owner of a wholesale salon equipment business, was charged with aiding and assisting in the preparation of a false and fraudulent corporate tax return. He pleaded guilty pursuant to a written plea agreement and entered into a settlement agreement with the Government, wherein he agreed to forfeit $1,100,000 in seized funds. In preparing the presentence report ("PSR"), the probation officer determined that Nguyen had a total offense level of 13 and a criminal history category of I, resulting in an advisory Guidelines range of 12-18 months. However, the probation officer also noted that Nguyen appeared to be involved in unlawful structuring activities n1: IRS agents found over $4,900,000 in structured deposits made by third parties to bank accounts registered to Nguyen or his family members. Moreover, during a raid of Nguyen's business, IRS investigators found $3,215,703 in currency- most of it separated into $10,000 bundles-whose source could not be determined. In paragraph 87 of the PSR, the probation officer suggested the structuring activities could warrant an upward departure under U.S.S.G. § 4A1.3 for an underrepresented criminal history or under U.S.S.G. § 5K2.21 for uncharged conduct.
   n1 A person "structures" a transaction if he, acting alone or in conjunction with others, "conducts or attempts to conduct one or more transactions in currency, in any amount, at one or more financial institutions, on one or more days, in any manner, for the purpose of evading . . . reporting requirements." 31 C.F.R. § 1010.100(xx) . Section 5324 makes it a crime to "structure or assist in structuring, or attempt to structure or assist in structuring," a transaction to avoid § 5313's requirement that financial institutions file a currency transaction report ("CTR") with the government for all cash transactions exceeding $10,000. 31 U.S.C. §§ 5313(a); 5324(a)(3); United States v. Rodriguez, 132 F.3d 208, 212 (5th Cir. 1997). 
Nguyen objected to the suggestion that an upward departure may be appropriate, and the Government agreed that there was insufficient evidence to prove that he had structured or directed the structuring of deposits into his bank accounts. The district court, however, entered an order tentatively concluding that Nguyen's objections to the upward departure were without merit. The district court suggested that it would reject the plea agreement, including the forfeiture settlement, and that Nguyen should receive a sentence above the advisory Guidelines range, given the probability that he knew of the structured deposits being made into his accounts and the Government's failure to prosecute him for that crime. 
At the first sentencing hearing, the district court conducted an evidentiary hearing to determine whether Nguyen had participated in illegal structuring activities. The district court questioned three witnesses. Oanh Nguyen, Defendant-Appellant's wife, testified that the new business bank accounts Nguyen had opened at Chase Bank ("Chase") and Wells Fargo were not an attempt to evade the law but rather a result of his decision to restructure the company after their son decided to leave the business. IRS Special Agent Alan Hampton and IRS Task Force Officer Alison Turner then testified about the investigation into Nguyen's financial activities. Afterwards, the district court accepted the plea agreement but expressed its belief that there was sufficient evidence to conclude that structuring activities occurred, that Nguyen was aware of the illegal transactions, and that he aided and abetted the deposits. The Government, while agreeing there was enough evidence to show that the funds were structured, expressed doubt that there was sufficient proof by a preponderance of the evidence to show that Nguyen himself assisted in the structuring. 
At the second sentencing hearing, the district court sustained Nguyen's objection to an upward departure as detailed in paragraph 87 of the PSR. The district court also concluded that Nguyen was not entitled to a reduction for acceptance of responsibility, which resulted in a newly applicable Guidelines range of 21-27 months. Taking into account the 18 U.S.C. § 3553(a) factors, the district court then sentenced Nguyen to 36 months in prison, to be followed by a one-year term of supervised release and payment of a $250,000 fine. The district court acknowledged the Government's doubt as to whether Nguyen participated in structuring activities, but explained that it had reached a different conclusion based on its examination of the evidence and provided a lengthy explanation as to why "it [was] more likely than not that [Nguyen] committed the offense of structuring." In support of its decision, the district court cited, inter alia, Nguyen's dishonesty in underreporting his taxable income for multiple years; the connection between the investigation into his structuring activities and the discovery of tax fraud; and that Nguyen was able to retain "millions of dollars" that could have been subject to forfeiture had the Government pursued forfeiture proceedings. The district court rejected Ms. Nguyen's explanation for why the new bank accounts were opened and noted that Defendant-Appellant gave conflicting explanations to IRS investigators as to whether funds seized from his business were bank withdrawals. In its thirteen-page Statement of Reasons ("SOR"), the district court reiterated these conclusions and detailed the factors that influenced it to impose an above-Guidelines sentence. Nguyen timely appealed.

Friday, April 14, 2017

Court Denies Motion to Dismiss Counts Against Tax Shelter Lawyer (4/14/17)

In United States v. Levine, 2017 U.S. Dist. LEXIS 54071 (SD NY 2017), here, the court (Judge Rakoff) denied Howard Levine's motion to dismiss.  I had missed the indictment when it was announced last year, so I will first go over the announcement which fairly summarizes the indictment. See USAO SDNY announcement: Tax Attorney And CPA Indicted For Tax Evasion And Diversion Of Tax Shelter Fees From Major Manhattan Law Firm, here, with link to the indictment, here.  The key excerpts are:
HAROLD LEVINE, a tax attorney and former head of the tax department at a major Manhattan Law Firm (the “Law Firm”), schemed with RONALD KATZ, a certified public accountant, to divert from the Law Firm over $3 million in fee income from tax shelter and related transactions that LEVINE worked on while serving as a partner of the New York Law Firm.  In addition, LEVINE failed to report that fee income to the IRS on his personal tax returns during the period 2005-2011.  For his involvement in this scheme, KATZ received and failed to report to the IRS over $1.2 million in fee income.   
As part of the fee diversion scheme, for example, LEVINE caused tax shelter fees paid by a Law Firm client to be routed to a partnership entity he co-owned with KATZ and thereafter used those fees – totaling approximately $500,000 – to be used to purchase a home in Levittown, New York.  LEVINE caused the home to be purchased as a residence for a Law Firm employee (the “Law Firm Employee”) with whom he carried on a close personal relationship.  Although LEVINE allowed the Law Firm Employee to reside in the Levittown house for over five years without paying rent, LEVINE and KATZ prepared tax returns for the entity through which the home was purchased to claim false deductions as a rental property. 
In or about 2013, LEVINE was questioned by IRS agents concerning his involvement in certain tax shelter transactions and the fees received for those transactions.  During that questioning, LEVINE falsely represented that the Law Firm Employee paid him $1,000 per month in rent while living in the Levittown home.  In addition, when the Law Firm Employee was contacted by the IRS and summoned to appear for testimony, LEVINE urged the employee to represent falsely to the IRS that she had paid $1,000 per month in rent to LEVINE.
The charged counts were (the numbering is for the count numbers in the indictment):
  1. Tax obstruction, § 7212(a), Levine & Katz, Count 1
  2. Conspiracy, 18 USC 371, Levine & Katz, Count 2
  3. Tax evasion, § 7201, 2008 Levine, Count 3
  4. Tax evasion, § 7201, 2009 Katz, Count 4
  5. Tax evasion, § 7201, 2010, Katz, Count 5
  6. False statements, 18 USC § 1001 and 1, Levine, Count 6
  7. False statements, 18 USC § 1001 and 2, Levine, Count 7
  8. Wire Fraud, 18 USC § 1343 and 2, Count 8
The following are the motion documents:
  • Motion to Dismiss (Dkt 20), here.
  • US Response (Dkt 22), here.
  • Reply (Dkt 24), here.
  • Docket Entries (as of 4/14/17), here.
The following are the key points from Judge Rakoff's Opinion and Order:

Count One - § 7212(a)

Basically, on this issue, the Court held that the indictment was sufficient.  Levine's defense went well beyond the allegations of the indictment and thus were not properly considered on motion to dismiss.  Judge Rakoff has some good discussion of when and how facts beyond the indictment may be considered on motion to dismiss.  I refer you to the opinion for that discussion.  I will cut and paste Judge Rakoff's discussion about § 7212(a) which I think offers good review for tax crimes lawyers:

Court Denies Cross Motions for Summary Judgment on FBAR Willful Penalty (4/13/17)

In Bedrosian v. United States, 2017 U.S. Dist. LEXIS 56535 (ED PA 2017), here, the Court denied the parties' cross-motions for summary judgment with regard to an FBAR willful penalty assessed against Bedrosian.  The order is relatively short -- 9 pages.  I will just provide (i) the key documents; (ii) a timeline mostly from the Court's Memo (referred to as Court Memo) but with some from the parties' submissions; (iii) a discussion of the issues discussed and decided in the Court Memo; and (iv) some miscellaneous comments at the end.

KEY DOCUMENTS
  • Bedrosian Complaint (Dkt 01), here.
  • US Answer (Dkt 05), here.
  • Bedrosian Reply (Dkt 07), here.
  • US Motion for Summary Judgment - Memo (Dkt 22), here.
  • US Motion for Summary Judgment - Statement of Facts (Dkt 22-3), here.
  • Bedrosian Motion for Summary Judgment - Memo (Dkt 25), here
  • Bedrosian Motion for Summary Judgment - Statement of Facts (Dkt 25-1), here.
  • Bedrosian Response to US Motion (Dkt 26), here.
  • Bedrosian Response to US Motion - Statement of Facts (Dkt 26-1), here.
  • US Response to Bedrosian Motion (Dkt 27), here.
  • US Reply to Bedrosian Answer to US Motion (Dkt 028), here.
  • Court Memo Denying Cross-Motions for Summary Judgment, here.
  • Bedrosian Docket Entries (as of 4/14/17), here.

TIMELINE

1.  Bedrosian is sophisticated and successful corporate executive (CEO of generic medication manufacturer).  "In this role, Bedrosian supervises approximately 100 employees, signs contracts and financial statements on behalf of Lannett, researches FDA regulations, and decides company policy with respect to FDA filings."  (Court Memo p. 1.)

2.  Bedrosian has had at least one Swiss account -- with UBS (actually a predecessor that transitioned into UBS before the year at issue) -- since the 1970s.  At the time here relevant (as of 2005 and after), he had two UBS accounts.  "Bedrosian avers that he always considered them one account." (Court Memo p. 2.)  The description in the Government's statement of facts is as follows:  "Each account had subaccounts and contained different assets, but the client numbers for each main account ended in 6167 and 5316."  (US Stmt of Facts par. 15, p. 3.)

3.  "Bedrosian would meet with his UBS banker annually to review his accounts and how well the accounts had performed over the year."  (US Stmt of Facts par. 18, p. 3.)

4.  Bedrosian was advised by a prior accountant some years prior to 2007 that he should be reporting his income from the account(s) but, so Bedrosian alleges, that accountant advised him not to correct and the matter would be worked out upon his death when the "the assets in the Swiss accounts would be repatriated as part of Bedrosian's estate and taxes would be paid on them then."  (Court Memo 2-3.)  That accountant died sometime before Bedrosian assigned the tax return work to a new preparer for the 2007 year.

Thursday, April 13, 2017

DOJ Tax Encourages Taxpayer to Avoid Willful Violation of the Tax Law (4/13/17)

We have seen the usual flurry of announcements of indictments for tax crimes, particularly with respect to return preparers.  Today's -- just 5 days from the filing deadline on April 18 (with the weekend/holiday extensions) -- DOJ Tax has a generic "encouragement" to avoid willful violations of Tax Laws: With the Individual Income Tax Filing Deadline Approaching, Justice Department Warns Willful Violations of Tax Laws Are Criminal, here.  The announcement does offer some examples of misbehavior.

For those who have previously filed returns that may be questionable, a superseding return can be filed by the filing deadline that will be treated as the return against which liability for civil and criminal penalties is tested.  So, the prudent thing to do with respect to a questionable tax return filed early is to file a new return by the filing deadline correcting the problems.

Court Rejects Dismissal of Superseding Indictment and Defraud Conspiracy Count As Substitute for Dismissed Tax Obstruction Count (4/13/17)

I previously wrote on a dismissal of a tax obstruction count in United States v. Ogbazion, 2016 U.S. Dist. LEXIS 143358 (SD OH 2016) for failure of the count to state that the defendant has intended to obstruct a pending investigation.  Opinion on Effect of Parallel Civil Proceedings, Statute of Limitations on Tax Crimes, and Kassouf (Again) (10/22/16), here.  The portion of that blog entry relevant to today's new blog is:
3. Failure to State an Offense.  The defendant moved to dismiss certain counts on the grounds that they failed to incorporate the necessary elements of the offense.  The most interesting holding on this issue relates to the Kassouf issue that I have mentioned several times in earlier blog entries, but I refer readers particularly to Second Circuit Rejects Aberrational Sixth Circuit Opinion in Kassouf on Requirements for § 7212(a) Tax Obstruction (Federal Tax Crimes Blog 10/15/16), here.  Briefly, Kassouf held that, based on analogy to the obstruction in 18 USC § 1503, here, tax obstruction under § 7212(a) requires an intent to obstruct a known IRS investigation.  Almost all courts other than the Sixth Circuit considering the issue have rejected rejected the Kassouf holding and even the Sixth Circuit has severely limited the holding.  But the holding, as limited, is still precedent in the Sixth Circuit.  The Ogbazion court is in the Sixth Circuit.  The Court thus held that, since the indictment failed to allege that critical element, as interpreted by the Sixth Circuit in Kassouf, the indictment was defective and the Count was dismissed.
After that earlier decision, there was an aborted appellate proceeding where authority to appeal the Kassouf-based dismissal was denied, the Government came back with a superseding indictment. In relevant part, the superseding indictment charged the defraud conspiracy, 18 USC § 371, here, which as readers know substantially overlap with tax obstruction, § 7212(a), here, except that the defraud conspiracy does not require a pending proceeding.  I should note that circuits other than the Sixth Circuit do not adopt the Kassouf limitation on tax obstruction, so in that sense, outside the Sixth Circuit, there is a complete overlap except that tax obstruction can be committed by a single actor (as well as multiple actors), whereas the defraud conspiracy requires two or more actors.  So, basically, what the Government did in the superseding indictment was to charge the same basic crime as the defraud conspiracy rather than as tax obstruction because it could no longer pursue the tax obstruction charge.  And, of course, the defraud conspiracy is a five-year felony, whereas tax obstruction is a three-year felony.  The defendant cried foul and moved in relevant part to dismiss the superseding indictment altogether, alleging foul as to the defraud conspiracy, or, failing that, the defraud conspiracy count.

In United States v. Ogbazion, 2017 U.S. Dist. LEXIS 54465 (SD OH 2017), here, the court denied the motion to dismiss.

As to the motion to dismiss the superseding indictment, the Court rejected the claim of vindictive prosecution.  That claim was based in part:

Wednesday, April 5, 2017

TIGTA Report on Civil Seizures for Structuring (4/5/17)

TIGTA has issued a report on civil forfeitures and seizures:  Criminal Investigation Enforced Structuring Laws Primarily Against Legal Source Funds and Compromised the Rights of Some Individuals and Businesses (Ref. 2017-30-025 3/20/17), here.

The highlights from the report are:
IMPACT ON TAXPAYERS 
The Currency and Foreign Transactions Reporting Act of 1970, referred to as the Bank Secrecy Act, requires U.S. financial institutions to file reports of currency transactions exceeding $10,000. Title 31 of U.S. Code Section 5324(a) states that no person shall, for the purpose of evading the reporting requirements, cause or attempt to cause a U.S. financial institution to fail to file a report required or structure. Whoever violates the structuring law can be fined, imprisoned, or both. Any property involved in violation of this law may be seized and forfeited. 
WHY TIGTA DID THE AUDIT 
In October 2014, a new policy was instituted by IRS Criminal Investigation (CI) that it would no longer pursue the seizure and forfeiture of funds related to legal source structuring. In the same month the policy changed, the New York Times reported that CI had been seizing funds in structuring investigations without filing a criminal complaint. Property owners were left to prove their innocence, and many gave up trying. This audit was initiated to evaluate the IRS’s use of seizures against property owners suspected of structuring transactions to avoid Bank Secrecy Act reporting requirements. 
WHAT TIGTA FOUND 
Most of the seizures for structuring violations involved legal source funds from businesses. While current law does not require that the funds have an illegal source (e.g., money laundering or criminal activity other than alleged structuring), the purpose of CI’s civil forfeiture program is to interdict criminal enterprises. As a result, $17.1 million was seized and forfeited to the Government in 231 legal source cases. CI primarily relied on patterns of banking transactions to establish probable cause to seize assets for structuring violations. 
In most instances, interviews with the property owners were conducted after the seizure to determine the reason for the pattern of banking transactions and if the property owner had knowledge of the banking law and had intent to structure. CI procedures required agents to give subjects advice of rights in Title 26 cases (i.e., Internal Revenue Code) but not in Title 31 cases. In only five of the 229 interviews conducted, noncustodial statements of rights, such as the right to remain silent, were provided. For 54 investigations, the property owners provided realistic defenses or explanations, and for 43 of those cases, there was no evidence they were considered by CI. In 202 interviews, the property owners were not adequately informed of important information, such as the purpose of the interview, by CI during the interview. The outcomes for legal source cases lacked consistency. In 37 investigations, the Government appeared to have bargained nonprosecution to resolve the civil case.  
CI also needs to improve its process for identifying grand jury information. 
WHAT TIGTA RECOMMENDED 
TIGTA recommended that the Chief, CI, establish controls to ensure that CI is selecting cases that meet the IRS’s goals and policies, return funds forfeited from legal source cases with no illegal activity, ensure that reasonable explanations are considered when interviews are conducted, ensure appropriate referrals to IRS’s Examination function, and improve the process for designating grand jury information. 
In response to the report, CI agreed with and implemented changes for five of the nine recommendations and partially agreed with another. CI disagreed with establishing guidance on bargaining nonprosecution and procedures that strive for fair and consistent outcomes, and did not agree to improve its grand jury information designation process.
Also helpful for readers are these excerpts from the background section of the report (footnotes omitted):

Monday, April 3, 2017

IRS Criminal Tax Statistics (4/3/17)

The IRS has issued its 2016 Data Book.  The pdf for the Databook is here.  I have extracted here the part under the heading "Collections, Penalties and Criminal Investigations."  In this extraction, there are two pages of graphics and information and then the next pages offer the following tables:

  • Table 16. Delinquent Collection Activities, Fiscal Years 2015 and 2016
  • Table 17. Civil Penalties Assessed and Abated, by Type of Tax and Type of Penalty, Fiscal Year 2016
  • Table 18. Criminal Investigation Program, by Status or Disposition, Fiscal Year 2016

IRS CI also offers its Fiscal Year 2016 statistics here and its cumulative statistics for the years 2007 - 2016, here.

I have been extracting tax crimes data from both the IRS Annual Data Book and annual report of statistics since 2005 and offer it here.  I have been keeping in a spreadsheet a subset of these statistics since 2005 (note that I have two years not included in the IRS offering linked above).  The spreadsheet is here.  Here are the cumulative statistics for 2005-2016 and for 2012-2016:

FROM THE IRS DATA BOOK
LEGAL SOURCE STATISTICS
2005-2016
2012-2016
1
Indictments
12,353
6,801
2
Convictions
10,850
6,093
3
Percentage Convicted (l. 2 / l. 1)
87.8%
89.6%
4
Sentenced
10,583
5,842
5
Incarcerated
8,396
4,642
6
Percentage Incarcerated (l. 4 / l. 5)
79.3%
79.5%
FROM THE IRS CI WEBSITE STATISTICS:
EXCLUDING FINANCIAL CRIMES
2005-2016
2012-2016
1
Indictments
17,072
8,695
2
Sentenced
15,012
7,544
3
Percentage Sentenced (l. 2 / l. 1)
87.9%
86.8%


I have not tried to reconcile these statistics (I am sure it is in differences in the data in each set.)  I infer, however, that, for the mainstream tax crime, the conviction rate is far less than the general conviction rate of 95% touted by DOJ Tax.  Of course, some tax crimes are charged without an IRS investigation, but DOJ Tax would have to have one hell of a conviction rate on those crimes to move the overall conviction rate up from the convictions obtained from CI investigations -- again, if only mainstream tax crimes are considered.  And, in any event, at least from my practice, the tax crimes cases that I have been involved with have involved CI investigations except in two prominent instances.  For most tax practitioners doing this type of work, the cases will generally progress from an IRS CI investigation (which would cause the ultimate results to be in the CI statistics), although they may stop for some investigation by the grand  jury (in which case they would also be in the CI statistics).

I would appreciate hearing by comment or email from those having more knowledge of how DOJ Tax calculates its statistics and the differences between the IRS statistics and the DOJ Tax statistics.