Article with Predictions, Properly Hedged, on Outcome in Marinello (12/28/17)

Accounting Today has an article on Marinello reflecting some observations on oral argument and predictions as to the Supreme Court's final result in the case.  See Andrew Harrer/Bloomberg,, The ‘one-man conspiracy’ statute (Accounting Today 12/27/17), here.  I have covered the oral argument in Marinello.  See More on the Marinello Transcript of Oral Argument (Federal Tax Crimes Blog 12/9/17), here; and First Comments on the Marinello Oral Argument Transcript (Federal Tax Crimes Blog 12/6/17), here.  I am not able to make the type of predictions made in the Accounting Today article.

Here was some key excerpts from the Accounting Today article:

"Justice Sotomayor and Justice Gorsuch offered a reading of the tax obstruction statute that is likely to carry the day,” said Jeffrey Green, a partner at Sidley Austin. “That is, that the IRS must be engaged in some type of active proceeding, even if that is not a full-blown audit or investigation. The assistant to the solicitor general ably withstood withering questioning from the bench, but his appeal to the DOJ’s charging discretion was undone by the DOJ’s new policy requiring that the most severe charge be made in all cases.” 

* * * *\ 

“Not filing a tax return is a misdemeanor, not a felony,” Green noted. “But the government’s interpretation would make a felony obstruction charge automatic, because the IRS can’t do its job if they can’t look to see if you’ve reported all of your income.”
Green anticipates that the Court will reverse and remand to the Second Circuit to apply a new standard to the facts of Marinello’s case. 

“It’s almost certain that they will reverse,” he said. “It will be interesting to see where they will land. It will probably be a bit short of what the petitioner is asking for — that there needs to be a pending proceeding. Justices Sotomayor and Gorsuch offered a reading a bit broader than that. On remand, it could potentially be a danger for Mr. Marinello depending on how the Supreme Court writes the case.” 

“Quite likely it will be a 9-0 decision, and the opinion will be written by Justice Sotomayor,” he said. 

“My sense is that it will be reversed,” agreed Don Falk, an appellate litigation partner at Mayer Brown. “But the court won’t adopt either the petitioner’s or the government’s position.” 

“The court may decide based on the mens rea [knowledge of wrongdoing] component, or it may focus on the ‘administration of this title’ element. My best guess is that they would require some kind of affirmative action by the taxpayer that occurs after any contact by the IRS. A letter or phone call would be enough — it would not have to be a formal proceeding.” 

“It’s rare to hear a justice described a statute in such terms as ‘ungodly broad’ and still find it constitutional,” observed Hochman. “The reason is that the due process clause requires a statute to alert someone as to when they’re crossing a line in order to find them criminally responsible for their action. What they seemed [at oral argument] to be suggesting is that the statute covers many actions that they don’t believe to be potentially criminal.” 

“The indications seem to be that they will reverse,” he said. “It looks like Mr. Marinello found a right collection of justices to hear his case.”

One other point discussed in the article is that the tax obstruction crime, § 7212(a) Omnibus Clause, is a " one-man conspiracy statute."  The parallels between the defraud/Klein conspiracy and tax obstruction are striking.  Hence, as I have suggested before, whatever the Supreme Court does may affect the defraud/Klein conspiracy.

Procedurally Taxing Blog Discussion of Two Designated Orders (12/28/17)

I write today on two Tax Court designated orders regarding cases of interest to enthusiasts of tax crimes.  In addition to writing opinions as T.C.'s or T.C.M.'s, the Tax Court issues orders in cases that are published on its web site.  The Tax Court's explanation, here,

The Tax Court provides two tools to assist the public in locating orders of interest: Today’s Designated Orders and Orders Search. Users of both of these tools are reminded that Tax Court Orders shall not be treated as precedent. Rule 50(f). 

Orders appearing on Today’s Designated Orders are designated by the individual Judges, Senior Judges, and Special Trial Judges who issued the orders. Designated orders may exclude routine, nonsubstantive orders such as scheduling orders or rulings on motions for extension of time. Designated orders are not a complete inventory of all orders of the Court nor are these versions official documents of record. Designation practices of Judges vary; some select more of their orders for posting here than others. 

In contrast, the Orders Search function contains all orders issued after June 17, 2011 by all Judges, Senior Judges, and Special Trial Judges of the Court, except it does not include computer-generated mailings of form orders, such as standing pretrial orders, standing pretrial notices, orders for amended petition & filing fee, orders for filing fee or waiver, and orders for ownership disclosure statement.

The Procedurally Taxing Blog, here, regularly writes on designated orders of general interest to tax procedure enthusiasts.  The PT Blog is an important resource for tax practitioners generally, but its discussion of designated orders is particularly helpful to identify items of interest in the designated orders.

Today, the PT Blog discusses, here, two designated orders of interest for criminal tax enthusiasts.  I won't write on these two orders because the author of the Blog entry does that well.  I will add, where I think appropriate, some information for context./

In Dicker v. Commissioner (Dkt 12007-16L Order dated 12/12/17), here, the Court denied the IRS summary judgment in a CDP proceeding involving restitution based assessment ("RBA") under the procedures whereby the IRS may assess criminal restitution "as if such amount were such tax" without further ado after the restitution award becomes final.  § 6201(a)(4)(A),here.  In this case, Dicker had been convicted for promoting a bull shit shelter for his work with BDO and Daugerdas.  See BDO Seidman Personnel Sentenced for Bullshit Tax Shelter Promotion (Federal Tax Crimes Blog 6/11/14), here.  Presumably the RBA was for the taxes of the tax shelter investors.  The issue addressed in the order is the adequacy of the CDP proceeding.  Specifically, there was some breakdown in the communications between the Appeals Settlement Officer ("SO") and the taxpayer's representative, who had represented the taxpayer in the criminal case.

The PT Blog discussion of Dicker ends with this conclusion

My advice to criminal tax counsel would be to appropriately limit a Form 2848 to that criminal representation—if that’s even necessary, as one could simply enter an appearance in the criminal tax case. I think a Form 8821 may have been more useful here, as that allows for information flow between the Service and another individual, without suggesting to the Service that the individual represents the taxpayer. If Ms. Gavioli’s role was limited to providing useful information, this would have been a safer option. If it wasn’t, then Mr. Dicker is in trouble.

In Soleimani v. Commissioner (Dkt. 8884-13 Order dated 12/12/17), here, which the PT author describes as a "page turner," the taxpayer sought to prove a foreign seizure loss (Iran) with forged Iranian documents.  After this skullduggery turned up in the course of the Tax Court case, "At the end of trial, respondent orally moved under Rule 41(b)(1) to conform the pleadings to the evidence, such that a fraud penalty under section 6663(b) could be asserted."  The Court denied the IRS's attempt to assert the civil fraud penalty.  I refer for the rest to the PT blog and the opinion.

Agostino & Associates Monthly Journal of Tax Controversy Articles of Interest to Tax Crimes Enthusiasts (12/27/17)

Tax Crimes enthusiasts should regularly read Agostino & Associates Monthly Journal of Tax Controversy.  The December 2010 edition, here, has the following articles of interest:

• Frank Agostino and Edward Mazlish, Protecting the Taxpayer Facing Passport Revocation (Agostino & Associates Monthly Journal of Tax Controversy December 2010)
• Frank Agostino and Valerie Vlasenko, Fifth Amendment Privilege in Tax:  How to Keep the Case Moving While Protecting the Taxpayer (Agostino & Associates Monthly Journal of Tax Controversy December 2010)

Article on Points in the Indictment of Manafort and Gates Obtained by the Special Counsel (12/27/17)

This article offers some good information that white collar crimes (including tax crimes) lawyers should know.  Betsy Woodruff, Robert Mueller May Indict Paul Manafort Again (Daily Beast 12/26/17), here.  The background is the Paul Manafort indictment obtained by the Special Counsel's office.  Key excerpts and comments:

1.  "[T]here’s a broad expectation that Mueller will file what’s called a superseding indictment of Manafort and Rick Gate."  I offer at the bottom of this blog excerpts from my now discontinued Federal Tax Crimes Book.  I think the discussion is still good.  On the effect of superseding indictments, the article quotes Jonathan Turley, the frequent pundit, as saying that there is a tactical reason for superseding indictments in that they "tend to grind defendants a bit more over time."  While superseding indictments may have that effect, I don't think the federal prosecutors stage superseding indictments for that purpose.  In my experience and observation, there is some need for the timing of the original indictment and the state of the investigation does not make the additional matters in the superseding indictments ready for indictment at the time of the original indictment.  The article later describes use of superseding indictments as:

“Superseding indictments are frequently brought in financial investigations due to defendant recalcitrance to cooperate and also because they take so long to be put together,” said Martin Sheil, a retired supervisory special agent for the IRS’ criminal investigations unit.

The article speculates that the superseding indictment may charge tax crimes.  There has been speculation that the Special Counsel's team had not yet obtained the required Tax Division approval to charge tax crimes and that, when and if that approval is obtained, tax crimes counts would be included in a superseding indictment.  The article says that obtaining Tax Division approval "can be time-consuming, and the would-be defendant’s attorneys often can petition Tax Division lawyers against authorizing the charges."  I assume that all readers of this blog are familiar with the process for a putative defendant to invoke a conference with Tax Division Criminal Enforcement Section attorneys to attempt to dissuade CES from obtaining an indictment.

2.  The article quotes an unnamed former Tax Division prosecutor as describing the original indictment as a

“speaking indictment"—in other words, an indictment that contains more information than necessary. 

“It’s a way of dirtying up a defendant without having to actually prove the conduct,” he said. “I think, in fairness to them, they probably rushed it because they didn’t want to wait for the tax division approval on those tax counts. That, I assume, would be working its way through the system.”

I found a good discussion of speaking indictments.  Ronald Levine, Talk Is Cheap: The Misuse of ‘Speaking’ Indictments (Law Journal Newsletters Nov. 1916), here.

I would note that speaking indictments, like briefs, are intended to state the prosecutors' view that its audience will find persuasive.  The audience is often the audience of public opinion.  Levine says:

In other words, by design, the government’s speaking indictments advocate a story — one usually reserved for opening and closing jury arguments, but now intended for the news media, the jury pool and the trial jury. See Crafting Helpful Indictments, United States Attorneys’ USA Bulletin at 9, 18 (July 1998)  (“An indictment … is an advocacy tool … ‘Speaking indictments’ are more effective because they help notify the defense, court and jury of the Government’s theory.”).

Levine notes another benefit:

At the back-end of prosecutions that go to trial, “advocacy” speaking indictments may afford the government a second, and this time ex parte, closing argument to the jury. This occurs if and when the trial court reads from the indictment or sends it back with the jury during its deliberations.

Levine then offers guidance as to responses.

IRS CI Annual Report for Fiscal Year 2017 (12/26/17)

Prefatory Note:  I have some built up inventory of topics for this blog.  I hope to get to them at least by next week.  As with many of you, the holidays have demanded that I focus attention elsewhere.

I offer a link to IRS CI's annual report.  I will do some analysis later and do a further posting if there is something I think the readers might be interested in.  In the meantime, I cut and paste the formal notice, IR-2017-208, with the link to the report provided as a link in the cut and paste:

IR-2017-208, December 20, 2017

WASHINGTON — The Internal Revenue Service today announced the release of the Criminal Investigation Division’s (CI) annual report, reflecting significant accomplishments and criminal enforcement actions taken in fiscal year 2017.

Focusing on employment tax, refund fraud, international tax enforcement, tax-related identity theft, public corruption, cybercrime, terrorist financing and money laundering, CI initiated 3,019 cases in FY 2017.  The number of cases initiated is directly tied to the number of special agents that CI has.

“We have the same number of special agents—around 2,200—as we did 50 years ago,” said Don Fort, Chief, CI.  “Financial crime has not diminished during that time– in fact, it has proliferated in the age of the Internet, international financial crimes and virtual currency. Despite these challenges, we continue to do amazing work, investigating some of the most complicated cases in the agency’s history.  Criminals would be foolish to mistake declining resources for a lack of commitment in this area.”

The annual report is released each year for the purpose of highlighting the agency’s successes while providing a historical snapshot of the make-up and priorities of the organization. The very first Chief of IRS CI, Elmer Lincoln Irey, served from 1919 to 1946 and envisioned releasing such a document each year to showcase the agency’s investigative work.

CI is the only federal law enforcement agency with jurisdiction over federal tax crimes. This year, CI again boasted a conviction rate rivaling all federal law enforcement at 91.5% while spending more than 72% of their investigative time working tax cases. That conviction rate speaks to the thoroughness of the investigations and CI is routinely called upon by prosecutors across the country to lead financial investigations on a wide variety of financial crimes including international tax evasion, identity theft, terrorist financing and transnational organized crime.

CI investigates potential criminal violations of the Internal Revenue Code and related financial crimes in a manner to foster confidence in the tax system and compliance with the law. The interactive report summarizes a wide variety of CI activity throughout the fiscal year and includes case examples from each field office on a wide range of financial crimes.

“Since taking over as the Chief of CI this summer, I could not be prouder to lead the men and women of this organization,” said Fort. As financial crimes—and the way we investigate them—continue to evolve, CI continues to set the standard for financial investigations worldwide.”

On Judge Kozinski's Retirement and Tax Crimes Opinion in Caldwell (12/18/17)

Judge Kozinski retired from the Ninth Circuit Court of Appeals.  See here.  He retired under a cloud of allegedly inappropriate conduct.  I can't speak to his inappropriate conduct other than to say that, if it occurred, as seems somewhat likely given the number of accusers, it was wrong and his leaving the federal bench is well-earned.

I do remind readers of this blog that Judge Kozinski has penned some great opinions in many areas of the law, including tax and tax crimes.  My favorite Judge Kozinski opinion on tax crimes is United States v. Caldwell, 989 F.2d 1056 (9th Cir. 1993), here.  He famously opens the opinion with:

We consider whether conspiring to make the government's job harder is, without more, a federal crime.

The federal crime in issue was the defraud / Klein conspiracy in 18 USC § 371, here, which has a common formulation of being conspiratorial conduct to impair or impede the lawful function of the IRS (or the administration of the tax law by the IRS).  Judge Kozinski's opinion emphasizes the need that the conduct must include "deceit, craft or trickery, or at least by means that are dishonest." as required by Hammerschmidt v. United States, 265 U.S. 182 1924), here.  (The terms fraud and defraud normally connote in the federal criminal law that the defendant acquire another's property by intentional misrepresentations, but the words in § 371 have been interpreted more broadly, but still require that the conduct must be deceitful or dishonest.

I hope readers will recognize from the way he frames the issue projects what his answer is.  (Appellate lawyers always try to frame appellate issues in a way that projects the conclusion they wish to reach, and judges do that as well.)

I urge students and lawyers to read the opinion both on its own and for the resonances with the tax obstruction crime in § 7212(a) (the Omnibus Clause), now before the Supreme Court in Marinello v. United States, 839 F.3d 209, 218 (2d Cir. 2016), cert. pending..  For myself, I wrote an article some time back on tax obstruction crimes and used Judge Kozinski's opinion on Caldwell to frame the issues.  John A. Townsend, Tax Obstruction Crimes: Is Making the IRS's Job Harder Enough, 9 Hous. Bus. & Tax. L.J. 255 (2009), here and in an online appendix with examples, Tax Obstruction Crimes: Is Making the IRS's Job Harder Enough? Online Appendix, 9 Hous. Bus. & Tax L.J. A-1 (2009), here.

Court Holds that Foreign Law Not Proved and Applies U.S. Law (12/11/17)

In Nineveh Investments Ltd. v. United States, 2017 U.S. Dist. LEXIS 199486 (E.D. Penn. 2017),  here, the Government assessed tax against one Gary Kaplan and then, in collection of the tax, levied on assets nominally owned by either Nineveh Investments, Ltd. ("Nineveh") or the Kaplan Family Trust ("KFT"); Nineveh brought a wrongful levy suit.  (Related Documents are (i) the docket entries as of today, here, the complaint, here, the answer, here, and the Government response on the motion, here.)  

The underlying liability for Gary Kaplan was litigated in Kaplan v. Commissioner, T.C. Memo. 2014-43, here, where the Court stated the issues and its bottom-line holding in the introduction:

 Petitioner did not file Federal income tax returns nor make any tax payments for 2004 and 2005, the years at issue. Pursuant to his authority under section 6020(b) , respondent prepared substitutes for returns for both years.
 In a notice of deficiency, respondent determined the following income tax deficiencies and additions to tax:

Year	Tax	Sec. 6654	Additions to Sec. 6651(a)(1)	tax Sec. 6651(a)(2)
2004	$16,944,855	$485,572	$3,812,592	$4,236,214
2005	7,424,638	297,514	1,670,544	1,856,160

 Petitioner resided in Missouri when he timely petitioned this Court. The issues before us are:
(1) whether for the years at issue petitioner is liable for self-employment tax on his income as a consultant for BetOnSports, PLC, and capital gains tax from the sale of shares of BetOnSports, PLC. We hold that he is; and
(2) whether for the years at issue petitioner is liable for additions to tax under section 6651(a)(1) for failure to file timely, under section 6651(a)(2) for failure to pay tax timely, and under section 6654 for failure to make estimated tax payments. We hold that he is.

The Nineveh Court states the facts succinctly, so I just offer them here:

II. BACKGROUND 

This lawsuit arises out of tax levies by defendant United States on the claimed assets of terminated third-party defendant Gary Kaplan to satisfy Kaplan's outstanding tax obligations. Kaplan's tax obligations stem from the sale of his shares in BetOnSports, PLC, an overseas gambling operation, in public offerings in 2004 and 2005. Doc. No. 37 at 3. In anticipation of the public offerings, Kaplan settled two trusts based in the Isle of Jersey, to which he transferred his shares in BetOnSports. Doc. No. 38 at 2. During the public offerings, the trusts sold Kaplan's shares in BetOnSports for approximately $97 million, which Kaplan invested in bank accounts in Switzerland and the Isle of Jersey. Id. at 3. In 2010, Kaplan settled the Kaplan Family Trust ("KFT") under the laws of the Bahamas as a successor to the two trusts based in the Isle of Jersey. Doc. No. 37 at 4. Plaintiff Nineveh Investments Limited is a Bahamian corporation that serves "as the underlying company for KFT's financial assets." Id. In 2014, the United States Tax Court ruled that Kaplan earned taxable income from the 2004 and 2005 sales of his shares in BetOnSports. Doc. No. 38 at 3. Consequently, on February 24, 2016, the Internal Revenue Service ("IRS") placed levies on assets transferred by Kaplan to plaintiff. Doc. No. 37 at 4. 

On March 4, 2016, plaintiff Nineveh Investments Limited filed suit in this Court, alleging that the levied assets were not taxable property belonging to Mr. Kaplan, but only to plaintiff and KFT. The Complaint set forth a single count, for wrongful levy, and sought return of the levied assets, with interest and costs. Plaintiff also filed suit in the Bahamian Supreme Court, a trial-level tribunal, against Kaplan for determination of "the rights of the discretionary beneficiaries" of KFT. Doc. No. 37, exh. B ¶ 5. The United States was invited to "participate" in the Bahamian proceedings, but declined to do so. Doc. No. 37 at 3. On July 6, 2017, the Bahamian Supreme Court issued an Order ("July 6, 2017 Order"), ruling that the levied assets "do not form a part of the personal assets of Gary Kaplan." Doc. No. 37, exh. C. Plaintiff now asks this Court to adopt the July 6, 2017 Order.

Questions About New DOJ Tax Policy on FBAR Sentencing Guidelines (12/11/17)

I recently posted on the new DOJ Tax position as to the Sentencing Guidelines calculations for FBAR crimes.  See More on New DOJ Tax Position on FBAR Sentencing Guidelines (Federal Tax Crimes Blog 11/9/17), here; and Another FBAR Plea And Notice of Government Change of Position on Applicable Guidelines (Federal Tax Crimes Blog 10/27/17), here.  I am preparing an  update for the next supplement of FBAR plea Guidelines in my chapter 12, titled Criminal Penalties and the Investigation Function, in Michael Saltzman and Leslie Book, IRS Practice and Procedure (Thomsen Reuters 2015).  I have hit upon some issues for which I don't know the answers.

Assume that the taxpayer had an FBAR violation for 4 years -- years 01 - 04 -- involving unreported account of $1,000,000 in each of the 4 years.  The taxpayer also had a tax loss in each of the 4 years related to the account of $13,333 per year resulting from the omission of $40,000 interest income per year (aggregating $53,333 tax loss for all 4 years).  The taxpayer pleads to a one year FBAR count for year 04.

Under SG § 2S1.3(a), the Base Offense Level is 6 plus the incrementing levels in the Theft Loss table in § 2B1.1.  The question is whether the 3 years to which the taxpayer did not plead (i.e., years 01 - 03 at amounts of $1,000,000 in each year) is relevant conduct that must be considered in applying the table in § 2B1.1?  If so, the number for the table is $4,000,000 (including 01 - 04) and the Base Offense Level is 24.  If not, the number for the table is $1,000,000 (only 01, the year of conviction) and the Base Offense level is 20.

The nonconviction years (Years 01 - 03) seem to fit the requirements for relevant conduct in § 1B1.3.  Relevant conduct includes:

(2)       solely with respect to offenses of a character for which §3D1.2(d) would require grouping of multiple counts, all acts and omissions described in subdivisions (1)(A) and (1)(B) above that were part of the same course of conduct or common scheme or plan as the offense of conviction.

I won't work through the grouping rules, but I am sure that they would require grouping.  (For example, if the count of the plea had been to tax evasion, the tax loss in the nonconviction years 01 - 03 would be included as relevant conduct.)

So, it looks like the nonconviction years would be relevant conduct for the conviction year and the FBAR amounts would be included in the § 2B1.1 calculation.

This raises the second question.  Are the tax loss amounts relevant conduct for the FBAR violation?

And the third question.  If the plea had been to a tax violation (e.g., single year tax evasion), would the Base Offense Level under § 2T1.1 include the FBAR violations?  If so, how would they be considered (the tables increment on different bases, thus like comparing apples to oranges).

I would appreciate hearing from anyone knows the answers or has any thoughts as to these questions.  Please let me know either  by comment or by email to jack@tjtaxlaw.com.

In this regard, the JD Supra article said that DOJ Tax would be issuing some type of guidance soon, so we may have to await that.

Case with Good Discussion of Venue for Tax Evasion Charges (12/10/17)

In United States v. Michael Sang Han, 2017 U.S. Dist. LEXIS 198609 (D. D.C. 12/1/17) (Criminal Action No. 15-142 (JEB)), which I do not link because I provide everything relevant to this post in the post), the Court starts the opinion with this introduction:

Defendant Michael Han allegedly promised investors that his company Envion would usher in a black gold rush by turning plastic back into oil. According to the Government, although that concept never materialized, it did not stop Han from stringing along his financers, ultimately defrauding them out of nearly $40 million. With trial a couple of months away, Defendant now brings several Motions challenging the validity of the Indictment. Specifically, he asks the Court to: (1) require the Government to provide a bill of particulars; (2) dismiss Counts 10 and 11 as lacking venue [for the tax evasion counts]; (3) dismiss Count 12 for first-degree fraud as duplicative of the wire-fraud charges (Counts 1 and 2); and (4) dismiss Count 3 for securities fraud as failing to state an offense. Finding no merit in any of these positions, the Court will deny all of the Motions.

I offer here the Court's discussion of the disposition of the tax evasion venue motion.  Students of tax crimes should find it useful.  I think the Court's discussion is pretty good.  However, for those who want more background and context, I offer here the venue chapter from the latest working draft of my Federal Tax Crimes book which is good through about 2015 and is still good on venue.  (That book is now discontinued because I offer a substantially overlapping Chapter on tax crimes in Michael Saltzman and Leslie Book, IRS Practice and Procedure (Thomsen Reuters 2015).)

The Court's tax evasion venue discussion in Han is as follows:

B. Venue (Counts 10 and 11) 

Han next moves to dismiss the tax-evasion counts (10 and 11) on the ground that venue is not proper in the District. See ECF No. 45. The Government has a choice of forum in which to prosecute but still ultimately bears the burden of establishing proper venue by a preponderance of the evidence. See United States v. Lam Kwong-Wah, 924 F.2d 298, 301 (D.C. Cir. 1991). The Court views such evidence in the light most favorable to the Government when determining whether it has done so. Id. 

The Indictment charges Han with violations of 26 U.S.C. § 7201, the prosecution of which requires a willful "affirmative act constituting an evasion or attempted evasion of" a tax deficiency. Sansone v. United States, 380 U.S. 343, 351 (1965). Tax evasion is a continuing offense, meaning that it may be prosecuted in any jurisdiction "through which a process of wrongdoing moves." United States v. Johnson, 323 U.S. 273, 276 (1944); see also 18 U.S.C. § 3237(a) (allowing for "any offense against the United States [that is] begun in one district and completed in another, or committed in more than one district" to be "prosecuted in any district in which such offense was begun, continued, or completed"). The offense is not completed until the person's tax return is filed, signed, and mailed, but it begins whenever the defendant makes a "willful attempt to defeat and evade" tax liability. Spies v. United States, 317 U.S. 492, 499 (1943). Venue is thus proper in any district where the defendant "beg[a]n, continued, or completed" an affirmative act with a "tax evasion motive." United States v. Strawberry, 892 F. Supp. 519, 521 (S.D.N.Y. 1995). 

Here, Han argues that § 7201 requires that he commit an act while actually present in the District, which he believes the Government has not sufficiently alleged. Defendant is correct that the Indictment does not state that Han committed any act with a tax-evasion motive while in D.C. Instead, it alleges that he (1) "cause[d]" a fax to be transmitted "from the District directing the transfer of $20 million to" his personal bank account, see Indictment, ¶ 46, and (2) provided false information to Envion bookkeepers who were located in D.C., which resulted in the creation of false business records. Id., ¶¶ 52, 54. Han acknowledges that the Indictment contains information that he interacted with individuals within the District but contends that he "cannot be subject to venue in the District of Columbia due to the alleged acts of a third party." ECF No. 57 (Reply) at 4; see Mot. at 2 (noting that Indictment "claims that [he] concealed information from, or misled, unnamed Envion employees who were allegedly located in the District of Columbia for some period of time").

More on the Marinello Transcript of Oral Argument (12/9/17)

On Wednesday, I posted First Comments on the Marinello Oral Argument Transcript (Federal Tax Crimes Blog 12/6/17), here.  I had then anticipated a later offering a more detailed analysis of the transcript, here.  After reading the transcript through more I decided to offer some general comments rather a comprehensive discussion or try to predict the outcome.  In these comments, I often add my own thoughts and these thoughts may or may not be correct or may or may not be known to the Justices having to decide the case.  I will try to indicate the part that reflects my own thoughts.

1.  There was some discussion as to the role of the tax obstruction crime, § 7212(a)'s Omnibus Clause, in relation to other lesser or greater tax crimes.  Most pertinent was the concern expressed by Marinello's lawyer that a crime defined as a misdemeanor (such as failure to file a return, § 7203, or filing a false W-4 to lessen the withholding, § 7205) could be charged as felony tax obstruction at the discretion or whim of the prosecutor.  See e.g., Tr. 8-10 & 63-64.  The related concern is that Congress, by providing for the lesser misdemeanor for the described conduct, could not have meant to have the conduct charged as felony tax obstruction.  JAT Comment:  This genre of concern, however, is baked into the criminal laws and tax crimes specifically.  Conduct is often described in more than one criminal law with different punishments (maximum sentences).  Specifically, in the tax context, the prosecutor often has the discretion to charge particular conduct as either tax evasion, a five year felony under § 7201, or tax perjury, a three-year felony under § 7206(1).  Yet, that does not compel the prosecutor to charge the greater crime rather than the lesser crime or the lesser crime rather than the greater.  (By lesser crime, I do not mean the same as the concept of the lesser included offense, for tax perjury is not a lesser included offense to tax evasion.)

2.  In a related vein, there was discussion (Tr. 46-47; 55-56) of the general DOJ policy to charge the more serious offense. The question was whether this guidance would require or tilt in favor of charging the more serious crime, tax obstruction, rather than a misdemeanor crime that more precisely describes the conduct.  JAT Comment: The provision referenced, I presume, is USAM 9-27.300 - Selecting Charges—Charging Most Serious Offenses, here. (Note that the table of contents says this section is titled Selecting Charges—Conducting an Individualized Assessment, but the section itself is titled as indicated).  That provision directs the prosecuting attorney to make an individualized assessment which "will generally conclude that he or she should charge, or should recommend that the grand jury charge, the most serious offense that is consistent with the nature of the defendant's conduct, and that will probably be sufficient to sustain a conviction."  The most serious offense is one that "yields the highest range under the Sentencing Guidelines."  However, SG Appendix A - Statutory Index directs that the Sentencing ranges are calculated under either § 2J1.2 (obstruction  of justice) or § 2T1.1 (the tax guidelines).  In most cases, the sentencing is under § 2T1.1, so that the range is calculated the same as tax crimes, including the misdemeanor failure to file.  Since failure to file is rarely prosecuted for a single year, in all failure to file cases that get prosecuted, the indicated guidelines sentence would be the same and would not be limited by the counts of conviction cap.  (In other words, if the Guidelines range exceeded a single year, the prosecutor would not accept a plea for a single year which would otherwise limit the sentence to one year.)  Finally, I am fairly confident that where failure to file, even for multiple years, was the only conduct, the failure to file crime would be charged even if theoretically the obstruction crime could be charged.  Marinello's concern, echoed by some Justices, was that the obstruction crime if described broadly enough could make the same conduct either a misdemeanor or felony when Congress described the specific conduct as a misdemeanor.

3.  Also, in a related vein, the Government attorney said (Tr. 61) that

[Mr. Parker] The government would have brought a tax evasion charge in this case but for the fact that Mr. Marinello so destroyed his records that it was unable to prove beyond a reasonable doubt that there was an actual tax deficiency.

And so what I think Petitioner's proposed construction would do is it would effectively allow individuals to evade their taxes and then obstruct their way down to a misdemeanor charge, or if they are particularly good at it, maybe obstruct their way out of criminal penalties at all. 

And the government could do nothing about it, unless the individual actually happened to be obstructing a pending audit or investigation.

More on New DOJ Tax Position on FBAR Sentencing Guidelines (11/9/17)

At the 34th Annual National Institute on Criminal Tax Fraud in Las Vegas, a senior DOJ Tax CES attorney, Mark Daly, discussed DOJ Tax's new policy to seek sentencing under the Part 2S Guidelines rather than under the Part 2T Guidelines.  See DOJ Announces Major New Shift in Criminal Sentencing in Offshore Tax Matters (JD Supra 12/8/17), here.

I had previously discussed that shift in Another FBAR Plea And Notice of Government Change of Position on Applicable Guidelines (Federal Tax Crimes Blog 10/27/17), here.  The JD Supra article provides more detail on the consequences of that shift.

First, since the SG § 2S1.3 Guideline range is based on the value of the offshore account rather than the tax loss associated with the account, the dollar amount and resulting Guideline range is likely to be multiples of the Guideline range that would have been calculated under 2T1.1.  The JD Supra article says:

Daly gave the example of his United States v. Kim case in the Eastern District of Virginia, where the Part 2T tax loss was on the order of $150,000, but the Part 2S1.3 value was $28 million. Depending upon the circumstances, that could be a ten-fold increase in the sentence. In Kim, the DOJ asserted that Part 2S1.3 was the correct guideline, but due to a prior agreement with the defendant, the DOJ would in that case agree to sentencing based on Part 2T. Daly stated that the DOJ intended its language asserting that Part 2S1.3 was the correct guideline as a warning to the defense bar in other such cases.

In addition, the JD Supra article says:

The second problem is that Part 2S1.3 allows for a 2-level enhancement where a defendant has also been convicted of an offense under subchapter II of chapter 53 of title 31–which includes filing a false or misleading FBAR. Because an FBAR must be filed each year along with the tax return, the DOJ will now seek to add charges under title 31 chapter 53 to obtain a 2-level enhancement at sentencing.

To trace this through the Guidelines, SG § 2S1.3(b)(2) provides:

(2)       If the defendant (A) was convicted of an offense under subchapter II of chapter 53 of title 31, United States Code; and (B) committed the offense as part of a pattern of unlawful activity involving more than $100,000 in a 12-month period, increase by 2 levels.

Application Note 3 says:

3.      Enhancement for Pattern of Unlawful Activity.—For purposes of subsection (b)(2), "pattern of unlawful activity" means at least two separate occasions of unlawful activity involving a total amount of more than $100,000 in a 12-month period, without regard to whether any such occasion occurred during the course of the offense or resulted in a conviction for the conduct that occurred on that occasion.

The inference of the article is that if the contemporaneous filing of the false FBAR or failure to file the FBAR occurs at the same time that the tax return willfully failing to report the income is filed, this two level enhancement will automatically apply.

The question is whether, in any event, courts will continue the pattern of Booker downward variances consistent with the level of sentencing under Booker variances when they applied the tax Guidelines.  I would expect criminal defense attorneys to submit detailed charts or spreadsheets showing the pattern of sentencing in the past and urging that the sentences be consistent with that pattern.  That was done in the Warner case, apparently to good effect, and I am sure in other cases as well.  I expect that to occur in the future.  I am not sure how the Courts will react to the Government's Eureka moment as to the appropriate Guidelines calculation.  I suspect that Courts will continue to apply Booker variances, and that, at the end of the day, even if the § 2S1.3 Guidelines are applied, the final Booker sentence will be the roughly same as the Booker sentence would have been had the tax Guidelines applied.  That is just my speculation.

And, I expect that, if available, a Government offer as to a plea deal for either a tax crime (evasion or tax perjury) or FBAR crime, a defendant should seriously consider the tax crime.

The article reports that Daly said that DOJ Tax policy guidance on the new position would be "forthcoming."

First Comments on the Marinello Oral Argument Transcript (12/6/17)

I perused the transcript, here, for the oral argument in Marinello v. United States, 839 F.3d 209, 218 (2d Cir. 2016), cert. pending.  I did not try to parse the give and take, but did have some general impressions that I will comment on here.  I may add some more if I have time to dig deeper in the transcript.

1.  Some of the Justices seemed particularly concerned about the seeming scope of § 7212(a)'s Omnibus Clause.  Under what they viewed as the Government's construction, they were concerned that seemingly innocuous conduct might be a felony under that provision and wondered whether there might be some limitation so that it applied only to conduct worthy of a felony crime.  The Government's position is that the mens rea is such a limitation.  I discussed the Government position in Marinello Tax Obstruction 7212(a) Oral Argument is Wednesday (Federal Tax Crimes 12/3/17), here.  In view of the concern expressed by some of the Justices, I thought it might be helpful to again consider the relationship of the Omnibus Clause and the defraud / Klein conspiracy which has been a frequent topic on this blog.  I collect my principal prior blog entries on this subject at the end of this blog entry.

Here is a typical Omnibus Clause jury instruction (from United States v. Sorensen, 801 F.3d 1217, 1229 (10th Cir. 2015), but paralleling the DOJ CTM instructions No. 7212(a)-1 through 7212(a)-4,  here; I bold-face the particularly pertinent text:

First: The defendant in any way corruptly;
Second: Endeavored to;
Third: Obstruct or impede the due administration of the internal revenue laws.
“Endeavor” means to knowingly and intentionally make any effort which has a reasonable tendency to bring about the desired result. It is not necessary for the government to prove that the “endeavor” was successful.
To act “corruptly” is to act knowingly and dishonestly, with the specific intent to gain an unlawful advantage or benefit either for oneself or for another by subverting or undermining the due administration of the internal revenue laws.

Now, here is a defraud conspiracy instruction from the DOJ Tax CTM.

the defendant[s], [names], came to some type of agreement or understanding to [defraud the United States for the purpose of impairing, impeding, obstructing, or defeating the lawful functions of the Internal Revenue Service of the Treasury Department in the ascertainment, computation, assessment, and collection of income (or other relevant, e.g., excise) taxes]

Note the overlap object of the Omnibus Clause and the defraud conspiracy -- to impair, impede obstruct, etc.  Indeed, there was a time when the DOJ Tax CTM described the Omnibus Clause as a one person conspiracy and a charge that could be brought when there is insufficient evidence of a conspiracy.  See CTM 17.02 (2001 ed.).  I guess the point here is that, although the text in the two statutes is not the same, the interpretation and application of the text appears to be the same except without the common element of a conspiracy.  If that is right, any limitation needed for the Omnibus Clause should also be needed for the defraud conspiracy.

NPR Fresh Air Interview of Bernstein About His Book Secrecy World (12/4/17)

On my daily walk today, I listened to this podcast.  Journalist Explains How Panama Papers Opened Up The World's Illicit Money Networks (NPR Fresh Air 11/20/17), here.  In the podcast, Terry Gross interviews Jake Bernstein who has recently written a book titled "Secrecy World" which has a chapter on the Panama Papers.  That book is now a best seller on Amazon, here.  He is also familiar with the Paradise Papers, the follow-up on the Panama Papers.  The link is to the podcast and to a transcription of the podcast for those who prefer to read (or just do a search of the transcription).

Some excerpts so that you get the flavor:

[GROSS:] Jake Bernstein, welcome to FRESH AIR. Let's start by just pulling back a little bit. What's the purpose of the offshore accounts that have been revealed in the Paradise and Panama Papers? 

JAKE BERNSTEIN: I mean, ultimately the purpose is secrecy. The purpose is to hide your activities or your money and to take advantage of certain benefits that you get from having stuff offshore, having anonymous companies. These are - there are tax benefits. There are benefits that one gets from being able to move money around in sort of secret ways. And so that's - ultimately, it's about tax avoidance or tax evasion and keeping your activities - your business activities - secret. 

GROSS: Especially if they're illegal activities. 

BERNSTEIN: Yes - very helpful to keep those secret. 

* * * * 

You know, the United States loses something like $70 billion a year due to the shifting of corporate taxes to tax havens. And that's money that could go to schools that could go to infrastructure. I could go to police. It could go to health care. But it's not. Instead, it's disappearing in the Caymans or the Bahamas or Bermuda or places like that. 

* * * * 

GROSS: So now we've been reading about the Paradise Papers. These are the papers that were leaked from another law firm that created a lot of shell companies, not nearly as many as MossFon did. But what's the difference between the Paradise Papers and the Panama Papers? 

BERNSTEIN: Well, at the firm that's at the center of the Paradise Papers is a firm called Appleby Global. It's based in the Bahamas. And they were a little bit more professional than MossFon. Their client was a little bit more high-end. They were more sophisticated. And they didn't skirt the law quite as much as Mossack Fonseca did. So there's a lot more Americans who used Appleby in part because Appleby is based in Bermuda, which is sort of culturally more acceptable, I think, to the Americans than Panama was - which is where Mossack Fonseca was based. But essentially, they're doing the same thing, you know? They're using the offshore world to hide money, to move it around, to avoid taxes. You know, it's the same MO.

And it goes on from there.  There is considerable discussion of Russian oligarch use of these offshore entities and Donald Trump's business dealings with them.

Marinello Tax Obstruction 7212(a) Oral Argument is Wednesday (12/3/17)

I have previously posted on Marinello v. United States, 839 F.3d 209, 218 (2d Cir. 2016), cert. pending. Supreme Court Grants Certiorari in Marinello Involving Whether § 7212(a)'s Omnibus Clause Requires Knowledge of Pending Investigation (6/27/17), here; and On Conflicts, Certiorari and Marinello (Federal Tax Crimes Blog 7/1/17), here.  The oral argument is scheduled for Wednesday, December 6, 2017.  I thought I would offer some resources for those interested in the oral argument.

• Scotusblog docket entries, here.
• Susan C. Morse, Argument preview: What limits tax law obstruction-of-justice charges? (Scotusblog 11/28/17), here.
• Oral Argument (recorded audio only; when it is available), here. (The Supreme Court website says here that oral argument voice recordings are available by the end of the week of the oral argument.)
• Transcripts of oral argument, here. (Available now.)

Although every attorney practicing in the criminal tax area will find some of the issues particularly interesting, the one I do not find the direct issue in the case -- whether the omnibus clause of § 7212(a) requires a known pending IRS investigation that the person's conduct is intended to obstruct -- particularly interesting.  Rather, I find the supporting issue of the mens rea requirement in § 7212(a) more interesting.  Most crimes in the Internal Revenue Code require that the conduct (the actus reus) be willful.  Section 7212(a)'s omnibus clause does not have a willful element but does have an element requiring that the defendant have acted corruptly.

Marinello argues that there is no limiting principle to the corruptly mens rea requirement, so that it is appropriate to constrict the scope of § 7212(a) to conduct intended to obstruct a pending investigation.  That is a simplified version of the argument as I understand it.  The Government argues in its brief, here, as follows.

From Summary of the Argument:

II.

* * * * 

C. A defendant’s endeavor does not violate Section 7212(a) unless he acts “corruptly” and intends to obstruct the due administration of the tax code. Those mens rea requirements ensure that a defendant is aware that his obstructive acts are directed at the IRS’s administration of the tax code, that he intends to obstruct those functions, and that he does so with the specific intent of obtaining a benefit or advantage that he knows to be illegal. The mens rea elements of Section 7212(a) readily distinguish purposeful tax violators from those who lack a culpable intent to obstruct and ensure that the provision is not a trap for the unwary.  

From the Argument (pp. 18-21):

Crimes Requiring Materiality -- Scope of the Targets to Test Materiality (12/3/17)

In United States v. Raza, ___ F.3d ___, 2017 U.S. App. LEXIS 23431 (4th Cir. 2017), here, the defendants were convicted of wire fraud and conspiracy to commit wire fraud predicated on a fraudulent mortgage lending scheme.  18 USC §§ 1343 & 1349, respectively.  Both crimes had a materiality element.  See Neder v. United States, 527 U.S. 1 (1999).  The question presented in the case was whether materiality is judged by reference to some "reasonable lender" or had to be material to the specific lender that was the target of the conduct.  The Court summarized the instructions given and the defendant's argument as:

• The government was obliged to prove that "the scheme or artifice to defraud, or the pretenses, representations, or promises, were material; that is, they would reasonably influence a person to part with money or property." See J.A. 1313.
• A particular fact is material if it "may be of importance to a reasonable person in making a decision about a particular matter or transaction." Id. at 1315.
• "A statement or representation is material if it has a natural tendency to influence or is capable of influencing a decision or action." Id. at 1318.

Based on those instructions, the defendants argue that the jury could have convicted them on the basis of false statements that an objective, reasonable lender might have considered material, but that SunTrust [the target of the conduct] itself did not deem to be material in the circumstances. 

The defendants support their contention of error with several court decisions that assess materiality in the fraud context. For example, in Neder, the Supreme Court concluded — in the context of a tax fraud prosecution — that to be material a false statement must be "capable of influencing[] the decision of the decisionmaking body to which it is addressed." See 527 U.S. at 16. In a similar vein, we have determined, in the context of fraud against a county government, that "[t]he test for materiality of a false statement is whether the statement has a natural tendency to influence, or is capable of influencing its target." See Wynn, 684 F.3d at 479. The defendants contend on appeal — and argued at trial — that those decisions required that the jury be instructed on a subjective standard of materiality.

Bottom-line, in a private lending context, the Court concluded that the reasonable lender test was the proper test rather than a test based on the specific lender to which the conduct was directed.  The Court distinguished Neder and other cases involving public agencies which requires that the test be what is material to the specific agency targeted.  This distinction makes sense because private lenders are numerous and thus some objective reasonable lender standard can be applied and is appropriate.  Government agencies -- and particularly the IRS -- tend to be one-off, whose activities and decisions are directed to their scope of responsibility and thus not shared with other agencies.  Some reasonable Government agency standard would not work if the fraud were directed to the IRS; thus the question is whether the conduct was material to the IRS, not some other class of reasonable Government agencies.  The Court contrasted these two approaches as "objective" -- looking to the reasonable lender rather than the specific lender -- and "subjective" -- looking to the specific agency.

Tax crimes in which there is a materiality requirement either textually or as interpreted include:  tax evasion (§ 7201); tax perjury (§ 7206(1));  aiding or assisting (§ 7206(2)); and false returns (§ 7207); false claims (18 USC 286 imported by use of the word fraud).

I think, also, that a materiality requirement is implicit in tax obstruction (§ 7212(a), the Omnibus Clause) via the requirement that the endeavor “must have the natural and probable effect of interfering with the due administration" of the IRS.  Cf. United States v. Aguilar, 515 U.S. 593, 509 & 601 (1995) (dealing with the Title 18 obstruction provision which parallels the Omnibus Clause).

Default Judgment Granted in Multi-Year FBAR Willful Penalty Case (12/2/17)

In United States v. Forbes, 2017 U.S. Dist. LEXIS 193856 (E.D. Va. 8/24/17), here, the Magistrate Judge entered a report and recommendation for default judgment on willful FBAR penalties against George Forbes.  The District Court subsequently sustained the recommendation, here, and entered judgment, here.  The complaint on which the default judgment is based is here.

Forbes did not appear or contest the default judgment, although he had been properly served.  So I draw the facts from the complaint which contains more facts than the Magistrate Judge's report and recommendation..

The key facts are that:

1. Forbes worked as an engineering consultant in the oil and gas industry in Qatar from 2004 to 2011.

2. Forbes had foreign accounts exceeding $10,000 in each of the years 2004 through 2011.

3.  Forbes filed FBARs through 2007 and then picked up filing FBARs in 2011. 

4.  FBARs did not file FBARs for 2008-2010.  He did not report the income in excess of $3,100,000 from the unreported accounts in 2008-2010.  In two of the years, he omitted Schedule B and in the third, he answered the foreign account question no.

5.  On 11/28/11, Forbes was accepted into the 2011 OVDP.   "Forbes entered the OVDP with the agreement that his FBAR disclosure would be certified for tax years 2008, 2009, and 2010."

5.  Forbes apparently submitted the OVDP package, including amended income tax returns.  "Forbes failed to make acceptable arrangements with the IRS for payment of the taxes owed, plus, interest, accuracy penalties, and a miscellaneous offshore penalty. As a consequence, Forbes was removed from the program on May 8, 2014.

6.  After exiting the OVDP, Forbes was audited.  "The audits found that, for the years 2008 through 2010, Forbes had failed to report income in excess of $3,100,000.  The audit also found that Forbes had omitted approximately $1,750,000 of income from the tax returns he had submitted in connection with his participating in the 2011 OVDP.

Michael Flynn Plea Documents, Analysis and Comments (12/1/17; 12/4/17)

This is a federal tax crimes blog.  However, I thought it might be a good teaching experience for at least some readers and a learning experience for me to go through Michael Flynn's plea documents filed today.  I assume that everyone knows by now the Flynn did plead to one count for false statement under 18 USC § 1001(a)(2), here.  The relevant crime is:

whoever, in any matter within the jurisdiction of the executive, legislative, or judicial branch of the Government of the United States, knowingly and willfully * * * makes any materially false, fictitious, or fraudulent statement or representation.

This has been analogized to a perjury crime except the speaker is not under oath with penalty of perjury.  Like most tax crimes, this is an obstruction crime.

The plea documents are

1. The criminal information, here.
2. The plea agreement, here.
3. The Statement of the Offense, here (which should give the judge sufficient facts to assure himself that the crime to which Flynn pled is proper.)

The false statement crime is used in many tax prosecutions.  I have discussed its application in tax crimes in my Federal Tax Crimes Publication 2013 edition, as updated, which may be downloaded here.

I won't delve into the false statements crime here except that it is a 5-year felony.  Suffice it to say that Flynn lied and the lies were material to the FBI investigation.

I turn to the plea agreement.  The plea is to FRCrP 11(c)(1)(B), here.  This means that the parties can recommend particular plea factors or calculations.  This is a recommendation only.  The sentencing judge makes the final decision.

The parties recommend the following:

SG §2B1.1(a)(2) with a base offense level of 6.  

I am curious as to this stipulation because Part B of the Guidelines including this section is for "Basic Economic Offenses."  The introductory comment says:

1.      THEFT, EMBEZZLEMENT, RECEIPT OF STOLEN PROPERTY, PROPERTY DESTRUCTION, AND OFFENSES INVOLVING FRAUD OR DECEIT

Introductory Commentary 

These sections address basic forms of property offenses: theft, embezzlement, fraud, forgery, counterfeiting (other than offenses involving altered or counterfeit bearer obligations of the United States), insider trading, transactions in stolen goods, and simple property damage or destruction.  (Arson is dealt with separately in Chapter Two, Part K (Offenses Involving Public Safety)).  These guidelines apply to offenses prosecuted under a wide variety of federal statutes, as well as offenses that arise under the Assimilative Crimes Act.

The offenses covered by § 2B1.1, the stipulated provision, are:

§2B1.1.     Larceny, Embezzlement, and Other Forms of Theft; Offenses Involving Stolen Property; Property Damage or Destruction; Fraud and Deceit; Forgery; Offenses Involving Altered or Counterfeit Instruments Other than Counterfeit Bearer Obligations of the United States

Federal Tax Crimes are economic crimes as well, but sentenced under the tax guidelines that parallel these economic crimes Guidelines.  As with economic crimes generally, the guidelines are primarily influenced by the amount of the economic crime the defendant committed or intended to commit.  The smallest amounts get the smallest base offense level in both cases of 6.  Then, higher offense levels apply as to the economic object of the offense goes up.

In this case, the plea agreement does not state the amount of the economic crime effected or intended but just pronounces that the level is the base offense level of 6.  I think this is odd.

Court Orders Enforcement of John Doe Summons Against Bitcoin Firm (12/1/17)

I have previously written on the IRS's John Doe Summons to Coinbase, a leading Bitcoin firm.  IRS seeks John Doe Summons to Bitcoin Firm (Federal Tax Crimes Blog 11/23/16; 11/30/16), here. In United States v. Coinbase, Inc. 2017 U.S. Dist. LEXIS 196306 (N.D. Cal. 11/28/2017), here, the U.S. Magistrate Judge ordered compliance with respect to most but not all of the information requested by the Government in a narrowed scope for the summons.  The Magistrate Judge's judgment is here; the docket entries as of today is here.

The Court did the standard summons analysis under the Powell standards.

The Court's key holdings, based on its conclusions as to relevance to IRS's legitimate need for information and documents, are in the following excerpts:

The Court agrees that the Coinbase account holder's identity and transaction records will permit the Government to investigate whether the holder had taxable gains that were not properly declared. But the Government seeks more than that information; it also seeks account opening records, copies of passports or driver's licenses, all wallet addresses, all public keys for all accounts/wallets/vaults, records of Know-Your-Customer diligence, agreements or instructions granting a third-party access, control, or transaction approval authority, and correspondence between Coinbase and the account holder. The Government claims to need these records to verify an account holder's identity and determine if the holder used others to make transactions on the account holder's behalf. However, at this stage, where the Government is seeking records on over 10,000 account holders, these requests seek information than is "broader than necessary." See Bisceglia, 420 U.S. at 151. The first question for the IRS is whether an account holder had a taxable gain. If the account holder did not, then correspondence between Coinbase and a user is not even potentially relevant. Similarly, while the Government needs an account holder's name, date of birth, taxpayer identification and address to determine if a taxable gain was reported, it only needs additional identity information such as copies of passports and driver' licenses or "Know Your Customer" due diligence if there is potentially a taxable gain and if there is some doubt as to the taxpayer's identity. If there is not, these additional records will not shed any light on a legitimate investigation. 

At oral argument the Government explained that it included such broad swaths of records in its summons so that it will not need to return to court to ask for them if and when needed. The Court is unpersuaded. Especially where, as here, the Government seeks records for thousands of account holders through a John Doe summons, the courts must ensure that the Government is not collecting thousands and thousands of personal records unnecessarily. Moreover, if the Government later determines that it needs more detailed records on a taxpayer, it can issue the summons directly to the taxpayer or to Coinbase with notice to a named user—a process preferable to a John Doe summons. 

The Court therefore finds that the relevant documents as identified in Request 1 are: (1) the taxpayer ID number, (2) name, (3) date of birth, and (4) address. The remaining items in Request 1 are not relevant at this stage: account opening records, copies of passports or driver's licenses, all wallet addresses, and all public keys for all accounts/wallets/vaults. 

The Court also finds that transaction history, as identified in Requests 4 and 6, is relevant to the Government's legitimate purpose. Coinbase must produce records of account activity including transaction logs or other records identifying the date, amount, and type of transaction (purchase/sale/exchange), the post transaction balance, and the names of counterparties to the transaction. The remaining information sought by Request 4 is not relevant at this time: requests or instructions to send or receive bitcoin and information identifying the users of such accounts where counterparties transact through their own Coinbase accounts/wallets/vaults and their contact information. 

The Court likewise finds the following documents are not necessary to achieve the Government's legitimate purpose at this stage: 

• Request 2: Records of Know-Your-Customer diligence,
• Request 3: Agreements or instructions granting a third-party access, control, or transaction approval authority, and
• Request 5: Correspondence between Coinbase and the user or any third party with access to the account/wallet/vault pertaining to the account/wallet/vault opening, closing, or transaction activity. 

These records may become necessary for a specific account holder once the IRS reviews the relevant records; but for many or even most of the account holders they may never be relevant and thus the Court will not order their production. Accordingly, the 

Government's Petition to Enforce Requests 1, 4 and 6 is GRANTED as set forth above; in all other respects the Petition to Enforce is DENIED.

Based on this analysis, the Court's order is:

Coinbase is ORDERED to produce the following documents for accounts with at least the equivalent of $20,000 in any one transaction type (buy, sell, send, or receive) in any one year during the 2013 to 2015 period:
(1) the taxpayer ID number,
(2) name,
(3) birth date,
(3) address,
(4) records of account activity including transaction logs or other records identifying the date, amount, and type of transaction (purchase/sale/exchange), the post transaction balance, and the names of counterparties to the transaction, and
(5) all periodic statements of account or invoices (or the equivalent).
In all other respects the Petition to Enforce is DENIED. The Court GRANTS John Doe 4's request for judicial notice.

A good article is Joel Rosenblatt, Coinbase Loses Bid to Block U.S. Tax Probe of Bitcoin Gains (Bloomberg Technology 11/29/17), here.  Key excerpts from that article are:

The company said it’s glad that the government and the court narrowed the scope of the summons.

“Coinbase started this process more than 12 months ago, and while today’s result is not the complete victory we hoped for, it does represent a substantial and unprecedented victory for the industry and the hundreds of thousands of customers that would have been unfairly targeted if it weren’t for our action,” the company said in a statement posted on its blog. 

Last year, analysts said similar demands could be made of other digital-currency companies if the IRS widens its investigation. 

“The government has sensed a windfall -- any company that has a plethora of wealthy users might be in the sights,” Charles Hayter, chief executive officer of market tracker CryptoCompare, said in an email. “If there is tax to be paid the government is going to go after it if it makes an example” or a return on investment.

JAT Comments:

Court of Federal Claims Sustains Nonwillful FBAR Penalty (12/1/17)

In Jarnagin v. United States, 2017 U.S. Claims LEXIS 1483 (2017), here, the Court granted summary judgment sustaining the nonwillful multi-year FBAR penalties in 31 USC § 5321(a)(5).  The only issue was whether the Jarnagins had reasonable cause which is a defense to the nonwillful FBAR penalty and the Court held that they did not have reasonable cause.

The IRS assessed the penalty of $10,000 for each of them for four years.  The penalty aggregated to $80,000.  The Jarnagins paid the assessed penalties and "filed a Form 843, seeking an abatement and refund of the penalty amounts paid."

The facts were essentially that (i) the Jarnagins were successful business people; (ii) the Jarnagins had a Canadian account; (iii) they had return preparers over the relevant years but did not tell them about the Canadian account; and (iv) the Jarnagins claimed they did not know of the FBAR filing obligation and feel that their preparers had enough information to raise the issue but did not.

The Courts holding proceeded in the following steps:

1.  Jurisdiction.  The Court held that it was a suit to recover for an illegal exaction, thus giving the Court jurisdiction under the Tucker Act, 28 U.S.C. § 1491(a).

2. Reasonable Cause Standard.  The Court found sparse authority of the meaning of reasonable cause in the statute (31 USC § 5321(a)(5)(B)(ii)) but found the meaning of reasonable cause in the tax statutes (§§ 6651(a) and 6664(c)(1)) to offer guidance.  The Court cited Moore v. United States, No. C13-2063RAJ, 2015 WL 1510007, at *4 (W.D. Wash. Apr. 1, 2015) (concluding that "[t]here is no reason to think that Congress intended the meaning of 'reasonable cause' in the Bank Secrecy Act to differ from the meaning ascribed to it in tax statutes").

3.  Application of the Reasonable Cause Standard.  The Court then reasoned:

In light of the foregoing, the Court concludes that in order to show reasonable cause under 31 U.S.C. § 5321(a)(5)(B)(ii), the Jarnagins must establish that they exercised "ordinary business care and prudence" with respect to their obligation to file FBARs for tax years 2006 through 2009. As noted, they assert that they have met their burden of proving their entitlement to the defense by showing that 1) "they hired a competent CPA to prepare all required forms"; 2) "the CPA was aware of the CIBC account in Canada through the financial statements provided to him by Plaintiffs before he filed the returns"; and 3) "Plaintiffs actually relied in good faith on the CPA." Pls.' Br. at 6. 

For purposes of ruling on the cross-motions for summary judgment, the Court assumes that the accountants the Jarnagins hired were "competent . . . to prepare all required forms" and were aware that the Jarnagins had a bank account in Canada. Nonetheless, the Court concludes that, as a matter of law, the Jarnagins did not exercise ordinary business care and prudence in the handling of their reporting obligations.

The basic reasoning for its fact finding of absence of reasonable cause was (i) the Jarnagins' business sophistication with multiple interests and significant wealth; (2) their signing of the tax returns stating under penalty of perjury that it was true, correct and complete and their failure to read the returns which would have alerted them via the foreign account question on Schedule B (relying on United States v. Williams, 489 F. App'x 655, 659 (4th Cir. 2012) which was a willful FBAR case and United States v. Sturman, 951 F.2d 1466, 1476-77 (6th Cir. 1991)); and (3) the mere fact that the returns were prepared by professionals does not constitute reasonable cause.

In making these holdings, the Court relied heavily on United States v. Boyle, 469 U.S. 241 (1985) where the Court held that a reasonably prudent business person should have known about the estate tax return filing date.  The Court said in concluding its holding:

In fact, in Boyle, the Supreme Court rejected a similar argument by an estate that it had reasonable cause for the untimely filing of its tax return because it had relied upon the estate's tax attorney to prepare and file the return. 469 U.S. at 249-52. The Court reasoned that the duty to promptly file is "fixed and clear" and placed directly on the taxpayer, "not on some agent or employee of the [taxpayer]." Id. at 249; see also Baccei v. United States, 632 F.3d 1140, 1148 (9th Cir. 2011) (noting that "a taxpayer cannot rely on its employee or agent to escape responsibility for the nonperformance of nondelegable tax duties" and that "reliance upon [a professional advisor] to competently file a payment extension request does not constitute reasonable cause excusing [the taxpayer's] failure to timely pay the estate taxes owed" (quotation omitted)). The Court acknowledged that "[w]hen an accountant or attorney advises a taxpayer on a matter of tax law, such as whether a liability exists, it is reasonable for the taxpayer to rely on that advice." Boyle, 469 U.S. at 251 (emphasis in original). Such "reliance" however, "cannot function as a substitute for compliance with an unambiguous statute." Id. The Court thus held that "failure to make a timely filing of a tax return is not excused by the taxpayer's reliance on an agent, and such reliance is not 'reasonable cause.'" Id. at 252.

JAT Comments: