Thursday, July 13, 2017

Bench Trial Convictions on Offshore Business Insurance Scams (7/13/17)

Duane Crithfield and Stephen Donaldson, Sr., promoters of a bogus insurance tax evasion scheme commonly referred to as BPP, have been convicted after a bench trial in Florida.  I attach here the order of the judge's Foreword, Findings of Fact and Conclusions of Law.

I have previously written on this prosecution in Two Tax Crimes Cases on Plea Rejections After Previously Accepted (Federal Tax Crimes Blog 6/10/16), here.  That describes a detour in the case as the parties dispute the components of the tax loss based on the guilty plea to one count.  The defendants' lawyers apparently did not understand the notion of relevant conduct, which includes all relevant conduct whether from a convicted count or not.  So the plea was rejected and the parties went to trial.

I will not get into the details of the scam they promoted, because the judge lays all of that out in the order.  I do think it helpful to for flavor to offer the judge's Foreword:

The United States accuses two men, along with several unindicted conspirators, of hatching and implementing a plot to convert into an intoxicating profit for themselves the aspirations of their high-income customers to protect that high income from federal taxation. So far as the evidence shows, the taxpayers in this venture were mostly honest, educated, and experienced professionals and entrepreneurs, who retained lawyers, accountants, and other skilled advisers to ensure both the effectiveness and the lawfulness of the taxpayers’ management of money. Consistent with the considered judgment of their advisers, these taxpayers purchased at a steep cost a set of fantastical and superfluous “insurance” policies and in return re-captured control of cash equal to about 85% of the premium paid for each policy. In other words, the taxpayers accepted the notion that they could reduce the effective, maximum, marginal-income tax rate from about 40% to about 15% by signing a few papers and moving money from here to there, from there to who knows where, and then back again. 
That these mostly honest, educated, and experienced taxpayers and their savvy advisers believed in, and committed money to, this criminal scam presents an irrefutable and deafening reminder of the extent of the public’s cynicism toward the federal income tax code — a bloated and opaque monstrosity. In other words, as the present episode evidences, almost no financial scheme is so suspicious or so implausible that a good salesman cannot convince an honest and vigilant taxpayer that the Internal Revenue Service is prepared to award tax relief to a participant. But for the adulteration of the public’s regard for the Internal Revenue Code, the charged crime might have been impractical for the compelling reason that no fair-minded and honorable person would have thought for a moment that the scheme would succeed.  
Apparently, when the subject under consideration is the federal income tax code, no enormity is unthinkable and no promise is unutterable.
JAT Comments:

1.  From my prior blog linked above, it appears clear the defendants through their counsel made, in hindsight, a bad call to spat about whether relevant conduct is included in the Guidelines tax loss calculation.  The Guidelines loss for all relevant counts of conviction is not provided, but the maximum sentence for the counts of conviction is 11 years -- 5 years for conspiracy and 6 years for aiding and assisting (two counts for 3 year felonies).  My sense is that the tax loss including relevant conduct may be pretty high and will likely exceed three years, so that the sentencing exposure almost surely will exceed the maximum three years they could have achieved under the negotiated plea.  But, the defendants and their lawyers chose to assert -- inadvisedly, against the clear law -- that relevant conduct could not be included in the Guidelines calculation.  (Students and practitioners should note that this the inclusion of unconvicted relevant conduct is the reason the Government will sometimes agree to drop counts in a plea bargain.)
2.  There is an interesting discussion of the legal opinions received by the promoters of the scheme.  The opinions relied upon factual assertions that were questionable and caused one firm to decline to issue a second opinion and withdraw the first.

3.  Basically, the BPP was a scam with no business purpose or economic effect as insurance.  The court summarized:
In practice, the BPP sold phony insurance acquired through a jury-rigged premium and designed to offer illusory protection against an implausible risk and to result in an extraordinary and unnecessary business expense that, nonetheless, was deducted entirely and 85% of which was repaid promptly.
4.  There is the following which suggests some frustration to the way the defense presented its case:
Although a detailed refutation of each purported “fact” in each defendant’s proposed findings and conclusions is unnecessary and adds little or nothing, one specific statement warrants attention because the underlying issue has generated much animosity and many papers during this action. This issue appears, among other places, in Donaldson’s proposed findings at paragraph 70 (Doc. 360 at 26):  
The government asserts that the crime in this case is either making misrepresentations to a law firm (Lord Bissell) upon which [Lord Bissell] based their opinion, or failure to properly implement an opinion of a second law firm (HTD). 
The defense has persisted in this incoherent and indefensible contention throughout this action, despite numerous attempts by the United States and the presiding judge to penetrate the defense’s impenetrable shell of resistence to the plain and simple facts. As early as January 2014, an order (Doc. 89) attempts to explain that neither defendant is charged with misstating to a law firm or failing to “properly implement [a legal] opinion.” As repeatedly explained to defense counsel, the United States’ interest in the issuance and withdrawal of the earlier opinion letter and the issuance of a later opinion letter is primarily to evidence that the defendants’ acts, on which the three charged crimes are based, were knowingly and willfully committed. In other words, the issuance and withdrawal of the earlier opinion letter and the issuance of the later opinion letter show that the defendants knew exactly the lies they needed to tell the lawyers (or knew, at least, what the lawyers needed to hear) in order to achieve a favorable legal opinion (necessary to successful marketing of the BPP); that the defendants told the lawyers the necessary lies and achieved the desired opinion (which the lawyers refused to renew upon discovering the lies); and that the lawyers told the defendants exactly what was impermissible in the design and operation of the BPP. Despite the tax lawyers’ repeated warnings, the defendants marketed and operated the BPP and the associated enterprises in a manner inconsistent with the representations the defendants believed were necessary to the lawyers’ opinion that participation in the BPP “more likely than not” resulted in an ordinary and necessary business expense. 
If and to the extent that either defendant has raised the defense of “advice of counsel,” the evidence defeats the defense by showing that the opinion letters — even if legally correct based on the stated facts — include assumptions of fact that vary dramatically and decisively from pertinent history, as Crithfield and Donaldson well knew and as they agreed and planned. Already the source of much confusion, pettifogging, and misdirection in this action, the thrust of paragraph 70 (Doc. 360 at 26) deserves no more paper.
My only comment to this is that, by devoting even this much attention to the proferred paragraph 70, the judge probably gave it too much paper, but I think he wanted to express some frustration with counsel.

5.  This is one of those rare cases in which a defendant waives his right to trial by jury.  I have no idea whether that was a good choice or not, except that in hind sight, they could not have fared worse under a jury.

6.  My final comment relates to the Foreword.  I think the judge gives too much credit to the taxpayers buying into the scheme as being honest taxpayers without the guile to navigate the complex tax code.  This deal was sold as at least a tax avoidance scheme and with the premiums that would be substantially returned through a fog without really offering any insurance they needed.  Regardless of how many legal opinions were flashed before them, could they really have thought that they were buying insurance for their businesses?  For any other business expenses they can legitimately claim are the costs returned to them?  So, I am suspicious as to whether they are as innocent as the judge portrays.  It is true that we have a complex tax Code, but there are at the end of the day some simple concepts -- such as that you really have to incur expense for the tax deductions you claim.  They knew they were not incurring such expenses.

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