Thursday, March 21, 2019

TRAC Report on Sentencing Discretion and Disparity (3/21/19)

Transactional Records Access Clearinghouse ("TRAC"), a great resource for information about the federal government (see here), has this offering, here, from yesterday, titled Seeing Justice Done: The Impact of the Judge on Sentencing.  Key excerpt:
The recent sentencing of Paul Manafort by federal judges in two different district courts has renewed interest in the sentencing practices of individual judges. Countless studies over the years have documented a basic fact: while decisions should be determined by the law and the facts, in reality there is a third very important force at work. This ingredient is the identity of the judge assigned to a given case. Again and again, court records show that the particular predilections of individual judges influence the legal decisions that they reach, including those involving sentences.
The posting has further analysis for sentencing and some good lengths.

I do want to emphasize that "particular predilections of individual judges" do affect the range of legal decisions judges reach.  Judges do not simply call balls and strikes within a well-defined strike zone (as Justice Roberts famously claimed).  Judges often, with little review, define the strike zones in ways to permit them to call balls and strikes as they wish.

I do not mean this as an indictment of the judiciary.  I think it is inevitable that giving the judge the leeway to do justice rather than simply call balls and strikes within well previously defined strike zones will also give judges some ability to do great mischief.

As to sentencing in particular, the Sentencing Guidelines were intended to narrow the range of a judge's discretion and bring some nationwide uniformity in sentencing.  The TRAC posting says:
The existence of judge-to-judge differences in sentences of course is not synonymous with finding unwarranted disparity in sentencing practices. A key requirement for achieving justice is that the judges in a court system have sufficient discretion to consider the totality of circumstances in deciding that a sentence in a specific case is just. No set of rules, including the Federal Sentencing Guidelines, can substitute for this necessary flexibility. 
But a fair court system always seeks to provide equal justice under the law, working to ensure that  sentencing patterns of judges not be widely different when they are handling similar kinds of cases.
After Booker, though, we are essentially back in the pre-Guidelines world where a judge can do what he or she wants so long the Guidelines calculation is correct and the judge states rather minimal reasons for variance from the Guidelines sufficient to avoid abuse of discretion review on appeal (if appealed).  I think that there should be some strengthening of the role of the Guidelines because, simply, justice should not depend upon which judge imposes the sentence.

And, of course that does not address the predilections that affect the outcome of the other decisions a judge makes in a case.

Wednesday, March 20, 2019

Eighth Circuit Affirms Tax Obstruction Conviction without Proper Marinello Jury Instructions (3/20/19)

In United States v. Beckham, ___ F.3d ___, 2019 U.S. App. LEXIS 6964 (8th Cir. 2019), here, the Court affirmed Beckham's conviction for tax obstruction, § 7212(a).  Beckham had been charged also with three counts of aiding and assisting, § 7206(2), but was acquitted of those counts.  So the only count of conviction was tax obstruction.

The facts in chronological order are:
  • Beckham allegedly induced a taxpayer (Horseman) to participate in a tax loss scheme to offset the taxpayer's taxes.  Basically, the scheme was to generate false deductions by appearing to have a large investment in a business entity producing losses and to claim those losses as nonpassive losses despite not materially participating in the business.  The IRS began an audit.  Beckham filed power of attorney to represent the taxapyer, representing that he was a licensed  CPA but in fact he was not licensed because of a mail fraud conviction.
  • The agent asked Beckham for documents supporting the taxpayer's material participation in the business.  Beckham responded with the taxpayer's day planner showing hundred of hours work in the business. 
  • The agent then discovered that Beckham was not a licensed CPA as he had represented.  Beckham said that he was in the process of getting his license renewed.
  • The agent then discovered that the taxpayer had not made the claimed large investment in the business generating the losses that he claimed on the returns.
  • Suspecting fraud, the agent referred the taxpayer to IRS CI.  IRS CI then added Beckham as a target.  Beckham was then indicted for tax obstruction and aiding and assisting.
  • The Supreme Court granted certiorari in the Marinello case to resolve a circuit conflict as to whether tax obstruction required that, in committing alleged obstructive acts, the defendant know of nexus to a pending IRS investigation.
  • The case went to trial before the Supreme Court's decision in Marinello.  So, the jury instructions were framed without that decision.  But, at the Government's request, the trial court decided to use a special verdict form asking the jury whether the defendant had committed a corrupt act after becoming aware of the audit.  Here is the description of the instruction conference:
At the instruction conference, Beckham objected to Jury Instruction 9—the instruction on the § 7212(a) offense—because it did not require the jury to find that he knew about the IRS audit at the time that he committed a corrupt act. He also argued that the special verdict form—which directed the jurors, if they found Beckham guilty of that offense, to indicate whether Beckham committed "at least one corrupt act after becoming aware of the existence of an Internal Revenue Service audit or proceeding[,]" see Proposed Jury Instructions 25, Dist. Ct. Dkt. 96, and, if so, to identify which corrupt act they unanimously agreed Beckham committed after learning of the proceeding—did not cure the faulty instruction. Beckham did not, however, specifically object to the language of the special verdict form. The district court overruled his objection.
  • The instructions thus did not include the key element later required by Marinello.
  • The jury convicted of tax obstruction.  "On the special verdict form, the jury indicated that it found Beckham committed at least one corrupt act after learning of the audit and that it unanimously agreed Beckham committed the acts alleged in paragraph 10 of the Superseding Indictment—submitting Horseman's day planner to the IRS—after learning of the audit."
  • The Supreme Court then decided Marinello, holding, as described by the Court.  
Six months after Beckham's trial, the Supreme Court decided Marinello v. United States, 138 S. Ct. 1101, 200 L. Ed. 2d 356 (2018). The Court held that, for a § 7212(a) offense, "the Government must show . . . that there is a 'nexus' between the defendant's conduct and a particular administrative proceeding[.]" Marinello, 138 S. Ct. at 1109. Further, that proceeding must be "reasonably foreseeable by the defendant" at the time he acted. Id. at 1110. Because "[i]t is not enough for the Government to claim that the defendant knew the IRS may catch on to his unlawful scheme eventually[,]" if the proceeding is currently pending, the defendant must be aware of that proceeding. Id.
Based on Marinello, the Government conceded that the jury instruction omitting the element of nexus to a known audit was error, but "that the district court cured the instructional error through the use of a special verdict form and that, even if the special verdict form did not cure the error, the error was harmless."

Tuesday, March 19, 2019

Bank Hapaolim Increases Its Reserve for U.S. DOJ Tax Investigation (3/19/19)

Israel's Bank Hapoalim Q4 net profit sinks on U.S. tax probe provision (Reuters 3/18/19), here.  Excerpt:
The bank said earlier this month it would set aside an additional $246 million in the quarter to cover a possible future settlement regarding an investigation of the bank’s business with U.S. clients. This provision will bring its total provisions to $611 million.
The excerpt does not state specifically that the $611 million relates to the  investigation, but that is the inference.  (See also the relative numbers reported Bank Hapoalim 2018 results: profits dip on US probe provision (Retail Banker International 3/18/19), here.)

Thursday, March 14, 2019

DOJ Tax and Mizrahi-Tefahot Bank Ltd. (Israel) Reach DPA (3/13/19)

DOJ Tax announced here the DPA with Mizrahi-Tefahot Bank Ltd., (Mizrahi-Tefahot) and its subsidiaries.  I have not been able to find the underlying documents, but from the Press Release, I think the following are the key items:
  • "In the DPA and related court documents, Mizrahi-Tefahot admitted that from 2002 until 2012 the actions of its bankers, relationship managers, and other employees defrauded the United States and specifically the Internal Revenue Service (IRS) with respect to taxes by conspiring with U.S. taxpayer-customers and others. Mizrahi-Tefahot employees’ acts of opening and maintaining bank accounts in Israel and elsewhere around the world and violating Mizrahi-Tefahot’s Qualified Intermediary Agreement (QI Agreement) with the IRS enabled U.S. taxpayers to hide income and assets from the IRS."  [This apparently is the defraud / Klein conspiracy.]
  • Mizrahi admits the standard range of conduct by foreign banks playing in this field.
  • "The DPA also requires Mizrahi-Tefahot and its subsidiaries affirmatively to disclose certain material information it may later uncover regarding U.S.-related accounts, as well as to disclose certain information consistent with the Department’s Swiss Bank Program with respect to accounts closed between Jan. 1, 2009, and October 2017."  [For that reason, I have included Mizrahi in the Category 1 for the DOJ Swiss Bank Program; Mizrahi is not technically within the program but did have a Swiss subsidiary.]
  • Mizrahi will pay $195 million total, consisting of "1) restitution in the amount of $53 million, representing the approximate unpaid pecuniary loss to the United States as a result of the criminal conduct; 2) disgorgement in the amount of $24 million, representing the approximate gross fees paid to the bank by U.S. taxpayers with undeclared accounts at the bank from 2002 through 2012; and 3) a fine of $118 million."
DOJ Tax had previously offered $342 Million to settle:  Mizrahi-Tefahot Bank Rejects DOJ $342 Million Settlement Offer for NPA (Federal Tax Crimes Blog 8/10/18), here.

US DOJ Swiss Bank Program
Total Costs
   U.S. / Swiss Bank Initiative Category 1 (Criminal Inv.) *
   U.S. / Swiss Bank Initiative Category 2
   U.S. / Swiss Bank Initiative Category 3
   U.S. / Swiss Bank Initiative Category 4
Swiss Bank Program Results
* Number and Number Resolved may not be same as DOJ and IRS numbers because of how related entities were counted; the Total Costs Column should be consistent.
Recoveries from Swiss Financial and Related Institutions (per above)
Recoveries from NonSwiss Offshore Financial and Related Institutions
Recoveries from All Offshore Financial and Related Institutions

Wednesday, March 13, 2019

On the Manafort Sentences and Tax Crimes Sentencing (3/13/19)

I have hesitated to write on the Manafort sentencing principally because, although Manafort was convicted of tax crimes and FBAR crime that may related somewhat to tax crimes, the gravamen of the cases against him involved nontax offenses that most would consider more serious than the tax offenses.  His sentences in both cases reflected the more serious offenses.  So, I am not sure what I could  offer readers interested in criminal tax sentencing. 

I think both judges likely acted within the scope of their considerable discretion to sentence outside the advisory Sentencing Guidelines range. 

I post below some of the better discussions of which I am  aware:

  • Douglas A. Berman, Rounding up some of many thoughts about Paul Manafort's (first) federal sentence (Sentencing Law and Policy Blog 3/10/19), here.  (This posting has further links.)
  • Douglas A. Berman, Paul Manafort given (only?) 47 months in prison at first federal sentencing ((Sentencing Law and Policy Blog 3/7/19), here.

Now, on Tax Crimes sentencing specifically, I recommend Robert Horwitz's blog entry analyzing tax sentencing statistics:

  • Robert S. Horwitz, Sentencing in Criminal Tax Cases: It’s Not What You Think ( Blog 2/26/19), here.

Thursday, March 7, 2019

Court Affirms Defraud Conspiracy Conviction; Rejects Lesser Included Offense Argument (3/7/19)

In United States v. Bradley, ___ F.3d ___, 2019 U.S. App. LEXIS 6258 (6th Cir. 2019), here, the court affirmed Bradley's defraud conspiracy conviction.  Bradley made three arguments on appeal: (i) constructive amendment or variance to the indictment; (ii) improper argument by the prosecutor that misstated the Government's burden to prove guilt beyond a reasonable doubt; and (iii) failure to give a lesser included offense instruction.

I will not discuss the first two issues, but those with the time might want to look particularly at the improper argument issue where the Court found the arguments improper but not prejudicial.  The Court's discussion (including quotes from the argument) is on Slip Op. 12-16.

Now, looking at the lesser included offense issue, Bradley was convicted of the defraud conspiracy which, under the conspiracy statute (18 USC 371) is a felony.  Remember that the conspiracy statute has two types of conspiracy -- the offense conspiracy to commit a specific offense otherwise criminalize and the defraud conspiracy (also called Klein conspiracy) to impair or impede the functions of the IRS through fraud or deceit.  Bradley was charged with the felony defraud conspiracy.  He wanted an instruction on the offense conspiracy to commit a misdemeanor offense (§§ 7203 and 7204).  The felony statute says that a conspiracy to commit a misdemeanor is a misdemeanor rather than a felony.

The Sixth Circuit stated its lesser included offense requirements as requiring:
(1) a proper request is made; (2) the elements of the lesser offense are identical to part of the elements of the greater offense; (3) the evidence would support a conviction on the lesser offense; and (4) the proof on the element or elements differentiating the two crimes is sufficiently disputed so that a jury could consistently acquit on the greater offense and convict on the lesser.
The Court analyzed the 2d requirement (Slip. Op. 17, cleaned up):
The second criterion of the lesser-included offense analysis requires us to determine whether the elements of the lesser offense are identical to part of the elements of the greater offense. Bradley was charged and convicted for conspiring to defraud the United States—the proposed greater offense. The elements of conspiracy to defraud the United States that the district court charged to the jury are: (1) that two or more persons conspired, or agreed, to defraud the United States, or one of its agencies or departments, by dishonest means, (2) that the defendant knowingly and voluntarily joined the conspiracy, and (3) that a member of the conspiracy did one of the overt acts described in the indictment for the purpose of advancing or helping the conspiracy. The elements of the proposed lesser offense of conspiracy to fail to file W-2s would presumably be: (1) an agreement to fail to file W-2s; (2) one or more overt acts in furtherance of that illegal purpose; and (3) the intent to fail to file W-2s. Similarly, the elements of the lesser offense of conspiracy to fail to issue Form 1099s would be (1) an agreement to fail to issue Form 1099s; (2) one or more overt acts in furtherance of that illegal purpose; and (3) the intent to fail to issue Form 1099s.
Ultimately, though, the Court did not resolve the issue on the merits because Bradley had forfeited the argument because he had not properly presented or preserved the issue.

I think that this is a good reminder that when the Government charges a felony conspiracy (I don't recall it charging a misdemeanor conspiracy), counsel should think creatively about a lesser included offense charge that will permit a jury a way to compromise if the binary choice of guilty or not guilty is not palatable to the jury.  Of course, if the jury with only a binary choice would tilt toward not guilty, a defendant would not want the lesser included offense charge.  But, if the jury would tilt toward guilt, the defendant would want the charge to mitigate the damage.  And, reading the jury's mind on that can be vexing.

District Court Rejects Argument that Marinello Applies to Defraud / Klein Conspiracy (3/7/19)

In United States v. Parlato, 2019 U.S. Dist. LEXIS 33035 (W.D. NY 2019), here, the Court rejected Parato's argument that the Supreme Court's decision in Marinello v. United States, ___ U.S. ___, 138 S. Ct. 1101 (2018), limiting tax obstruction (§ 7212(a)) could similarly limit the defraud / Klein conspiracy.  The opinion is short so I do not further attempt to summarize it.  The underlying Magistrate report and recommendation is here.

Prior blog entries on this issue include the following (reverse chronological order):

  • Two Cases Involving Marinello (Federal Tax Crimes Blog 1/15/19), here.
  • What Are the Implications for Marinello on the Defraud / Klein Conspiracy? (Federal Tax Crimes Blog 3/24/18), here.
  • More on the Marinello Transcript of Oral Argument (Federal Tax Crimes Blog 12/9/17), here.
  • First Comments on the Marinello Oral Argument Transcript (Federal Tax Crimes Blog 12/6/17), here.

District Court Approves FBAR Willful Penalties Under Post 2004 Law; Rejects Colliot and Wadhan (3/7/19)

In United States v. Garrity, 2019 U.S. Dist. LEXIS 32404 (D. Conn. 2019), here, the Court rejected the argument that the FBAR willful penalty was subject to the pre-2004 statutory amendment maximum amount of $100,000 because the IRS had not changed the regulations.  In effect, the Court rejected the district court holdings in Colliot and Wadhan as have courts since those cases.  The Garrity opinion cites the decided cases in footnote 2 on page 2.

Other Comments:

1.  Judge Shea rejects the argument that the FBAR willful penalty was an excessive fine violating the Eighth Amendment (Slip Op. 11-20).  Judge Shea offers a very thoughtful and persuasive analysis, one of the better that I have seen.

2.  The only other parts of the opinion that particularly attracted my attention were the following:
Slip Op. p. 7 n. 4 
   n4 Thus, one of the premises of the decision in Colliot, on which the Defendants rely, is incorrect.  There, the court emphasized that Treasury was bound by the 1987 regulation because it had been promulgated through notice and comment and could only be repealed through notice and comment. Colliot, 2018 WL 2271381, at *2–3 (W.D. Tex. May 16, 2018). As noted above, the August 1986 notice of proposed rulemaking in the Federal Register makes no reference to  the civil penalty provision for account holders, which was not authorized by Congress until two months later. The penalty provision was added to the final rule without notice and comment procedures. The civil penalty provision in the 1987 regulation was at most an interpretive rule based on a now-obsolete version of the statute. 
Slip Op. 10-11: 
Ultimately, the Defendants' reliance on these regulatory actions (or inactions) is misplaced. As noted above, the civil FBAR penalty provision in the 1987 regulation was an interpretive rule that lacked the "force and effect of law." See Perez, 135 S. Ct. at 1203-04. It did not create or expand account holders' rights, and it merely parroted a statute that has now been amended. No amount of "reaffirming" references of the sort Defendants point to can make it an operative limit on the Secretary's current authority. If the Secretary wanted to categorically limit his discretion to impose FBAR penalties above $100,000 after Congress conferred such authority on him by statute, he could do so, if at all, only through notice and comment rulemaking under the Administrative Procedure Act, clearly indicating his intent to surrender by regulation some of the authority Congress has bestowed on him. See id. ("Rules issued through the notice-and-comment process are often referred to as legislative rules because they have the force and effect of law."); 5 U.S.C. § 553(b) (requiring notice of proposed rulemaking to include "either the terms or substance of the proposed rule or a description of the subjects and issues involved."). It is undisputed that he has not taken such a step.

Tenth Circuit Affirms Summons Enforcement Against Medical Marijuana Business Regarding Section 280E (3/7/19)

Section 280E, here, denies a deduction for expenses of a trade or business which "consists of trafficking in controlled substances (within the meaning of schedule I and II of the Controlled Substances Act) which is prohibited by Federal law or the law of any State in which such trade or business is conducted."  I wrote recently about the denial of such expenses in Feinberg v. Commissioner, 2019 U.S. App. LEXIS 5618 (10th Cir. 2019), here.  See Taxpayers Fail to Prove Expenses of Medical Marijuana Business Deductible; Burden of Proof Does Not Violate Fifth Amendment Privilege (Federal Tax Crimes Blog 3/2/19), here.

The Tenth Circuit has another significant opinion related to Section 280E.  In High Desert Relief v. United States, 2019 U.S. App. LEXIS 6609 (10th Cir. 2019), here, the Court addressed the issue in a contentious summons enforcement proceeding where HDR tried to thread the needle to duck the consequences of Section 280E.  The Court provides a good summary in the opening paragraphs:
This case arises out of the efforts of the Internal Revenue Service (“IRS”) to investigate the tax liability of High Desert Relief, Inc. (“HDR”), a medical marijuana dispensary in New Mexico. The IRS began an investigation into whether HDR had improperly paid its taxes, and specifically whether it had improperly taken deductions for business expenses that arose from a “trade or business” that “consists of trafficking in controlled substances.” 26 U.S.C. § 280E. Because HDR refused to furnish the IRS with requested audit information, the IRS issued four summonses to third parties in an attempt to obtain the relevant materials by other means. 
HDR filed separate petitions to quash these third-party summonses in federal district court in the District of New Mexico, and the government filed corresponding counterclaims seeking enforcement of the summonses. HDR argued that the summonses were issued for an improper purpose—specifically, that the IRS, in seeking to determine the applicability of 26 U.S.C. § 280E, was mounting a de facto criminal investigation pursuant to the Controlled Substances Act (“CSA”), 21 U.S.C. § 801, et seq.  
HDR also asserted that enforcement of § 280E was improper because an “official [federal] policy of non-enforcement” of the CSA against medical marijuana dispensaries had rendered that statute’s proscription on marijuana trafficking a “dead letter” incapable of engendering adverse tax consequences for HDR. Aplt.’s Opening Br. at 30. The petitions were resolved in proceedings before two different district court judges. Both judges ruled in favor of the United States on the petitions to quash, and separately granted the United States’ motions to enforce the summonses. HDR challenges these rulings on appeal. 
Exercising jurisdiction under 28 U.S.C. § 1291, we affirm.
As readers know, the IRS's summons power to investigate tax matters is very broad.  United States v. Powell, 379 U.S. 48 (1964).  So, most contests in summons cases are resolved in favor of the IRS.  (One recent victory for the taxpayers was in J.B. v. United States, --- F.3d ----, 2019 WL 923717 at *1 (9th Cir. 2019), here, dealing with the IRS's failure to satisfy the notice requirement for third party contacts.  See Leslie Book, Ninth Circuit Rejects IRS’s Approach to Notifying Taxpayers of Third Party Contacts (Procedurally Taxing Blog 3/4/19), here; in HDR, the Tenth Circuit rejects (Slip Op. pp. 46-47) HDR's similar argument that the IRS did not give the required notice.)

Key points in getting to the bottom line:

Saturday, March 2, 2019

Taxpayers Fail to Prove Expenses of Medical Marijuana Business Deductible; Burden of Proof Does Not Violate Fifth Amendment Privilege (3/2/19)

In Feinberg v. Commissioner, 2019 U.S. App. LEXIS 5618 (10th Cir. 2019), here, the taxpayers were shareholders in an LLC selling medical marijuana.  Their sales were legal under state law, but illegal under federal law.  The issue was whether they bore the burden of proving that they were entitled to deductions related to the business.  Section 280E provides:
No deduction or credit shall be allowed for any amount paid or incurred during the taxable year in carrying on any trade or business if such trade or business (or the activities which comprise such trade or business) consists of trafficking in controlled substances (within the meaning of schedule I and II of the Controlled Substances Act) which is prohibited by Federal law or the law of any State in which such trade or business is conducted.
The Court held that the taxpayers bore the burden of establish their entitlement to the deductions over the taxpayers objection that the assignment of the burden violated their Fifth Amendment privilege.  (There were some other procedures discussed such as substantiation burden shifted to the IRS because new matter, but this is the point I want to address.)

Here is the key part of the opinion (cleaned up and footnotes omitted)
The Taxpayers fail to explain how requiring them to bear the burden of proving the IRS erred in applying § 280E to calculate their civil tax liability is a form of compulsion equivalent to a statute that imposes criminal liability for failing to provide information subjecting the party to liability under another criminal statute. Here, the Taxpayers must choose between providing evidence that they are not engaged in the trafficking of a controlled substance or forgoing the tax deductions available by the grace of Congress. In the cases cited by the Taxpayers, the petitioners were faced with a choice of whether to be prosecuted criminally because they did not provide the information, or to be prosecuted criminally because they did. The circumstances are easily distinguishable. 
Nor can we adopt the Taxpayers' position without running afoul of Supreme Court precedent squarely rejecting the notion that a possible failure of proof on an issue where the defendant had the burden of proof is a form of compulsion which requires that the burden be shifted from the defendant's shoulders to that of the government. Such a concept would convert the Fifth Amendment privilege from the shield against compulsory self-incrimination which it was intended to be into a sword whereby a claimant asserting the privilege would be freed from adducing proof in support of a burden which would otherwise have been his. The Fifth Amendment privilege has never been thought to be in itself a substitute for evidence that would assist in meeting a burden of production.
To be sure, "by invoking the privilege and refusing to produce the materials that might support their deductions the Taxpayers no doubt made their task of proving the IRS erred in denying their deductions that much harder. But "a party who asserts the privilege against self-incrimination must bear the consequences of the lack of evidence. Rylander [United States v. Rylander, 460 U.S. 752 (1983)] teaches that the Taxpayers' possible failure of proof on an issue on which they bear the burden is not compulsion for purposes of the Fifth Amendment. Therefore, we reject the Taxpayers' contention that bearing the burden of proving the IRS erred in rejecting THC's business deduction under § 280E violated the Taxpayers' Fifth Amendment privilege.
The Court held that, since the taxpayers bore the burden of proof without the cover of the Fifth Amendment, the failure of proof required that they lose.

Tenth Circuit Affirms Tax Crimes Convictions and Sentencing (3/2/19)

In United States v. Stubbs (10th Cir. 2019), here, a nonprecedential decision, the Court affirmed Stubbs' convictions and sentencing for two counts of tax evasion and six counts of failure to file.

The activity giving rise to the tax obligations involved was a rebate program, run by his company National Energy Rebate Fund, Inc.  Basically, the scheme was to sell home-improvement companies the opportunity to market a potential 50% rebate to their customers, but the rebate was well into the future and very difficult to qualify for.  Here is the description:
NRF's profit allegedly came from the "slippage" between the total number of customers eligible for rebates and the much smaller number who successfully completed the requirements. The rebate opportunity carried extremely stringent rules: customers had to register the rebate within 17 days of receiving the form; they had to send forms by registered mail only; they had to claim the rebate within the 30 days after the 47th month from the purchase; and the rebate offer would be invalid if anyone other than NRF, such as the company from which they got the rebate forms, reminded them about the deadlines. NRF set aside only a small portion of the revenues it received to pay rebates. And although the rebate program ostensibly was administered by an independent third party, that administration company actually was connected to Stubbs. Apparently, some customers received rebates, but numerous customers who failed to strictly satisfy each and every condition were denied rebates. NRF and its activities were the subject of civil lawsuits brought by Wisconsin and Colorado on behalf of their citizens, which resulted in multi-million-dollar default judgments against Stubbs.
Stubbs failed to file returns at the S-corporation level and at the individual level.  He also failed to pay the tax that would have been due.

Indictments were obtained for tax evasion and failure to file.  Convictions were obtained.  Stubbs fled to Costa Rica, was arrested and returned to U.S.  He was sentenced to 88 months.  He appealed.  He lost..

The issues resolved against Stubbs on appeal were:

1.  The evidence was sufficient to convict for tax evasion.

2.  The district court did not plainly err in admitting evidence of prior acts.

3.  In its sentencing calculation, the district court did not err in applying the criminal activity and sophisticated means enhancements.

This is a nonprecedential case so there is nothing of major significance in the opinion.  The following, however, did catch my eye.

Wednesday, February 27, 2019

Default Judgment Entered Against Convicted Defendant Who Agreed to Penalty (2/27/19)

In  United States v. Sarshar, 2019 U.S. Dist. LEXIS 27845 (C.D.Cal.2019), the court rendered default judgment against Masud Sarshar in the Government's FBAR collection suit to recover a willful FBAR penalty of $18,242,537.65 plus interest.  (I don't provide a link because it is a straight default judgment after the defendant had already agreed to the penalty at sentencing (see below).)

Sarshar had previously pled for conspiracy and tax obstruction and was sentenced to 24 months in prison.  See my prior blogs (reverse chronological order):

  • Taxpayer with Israeli Bank Accounts Sentenced to 24 Months (Federal Tax Crimes Blog 3/13/17; 3/18/17), here.
  • Another Plea to Offshore Account Tax Crimes (Federal Tax Crimes Blog 8/1/16), here.

The sentencing blog entry notes from the DOJ Press Release:
 In addition to the term of prison imposed, Sarshar was ordered to serve three years of supervised release and to pay more than $8.3 million in restitution to the IRS, plus interest and penalties. Sarshar also agreed to pay an FBAR penalty of more than $18.2 million for failing to report his Israeli bank accounts.
Since Sarshar had already agreed to the FBAR penalty, the suit was just a formality required by the 2 year period to file the suit.

11th Circuit Holds Relevant Conduct Loss for Guideline Calculation Can Be Less Than Loss Within Scope of Criminal Conspiracy (2/27/19)

In United States v. Anor, 2019 U.S. App. LEXIS 4858 (11th Cir. 2019), here, Anor was a relatively low level employee in a tax preparation office which prepared and filed hundreds of false and fraudulent tax returns.  She pled guilty to conspiracy to conspiracy to commit wire fraud, in violation of 18 U.S.C. §§ 1343 and 1349.  In calculating the loss for Sentencing Guidelines purposes, the district court included all the losses related to conspiracy -- being all the losses involved.  The Court of Appeals reversed because the Guidelines' discussion of relevant conduct would be less than the losses within the scope of the criminal conspiracy.  Here is the discussion:
However, "[t]he limits of sentencing accountability are not coextensive with the scope of criminal liability." United States v. Hunter, 323 F.3d 1314, 1319 (11th Cir. 2003). Under the guidelines, liability for the reasonably foreseeable acts of others is limited by the scope of the criminal activity the defendant agreed to jointly undertake. See U.S.S.G. § 1B1.3, cmt. n.2. Therefore, "to determine a defendant's liability for the acts of others, the district court must first make individualized findings concerning the scope of criminal activity undertaken by a particular defendant." Hunter, 323 F.3d at 1319 (quotation marks omitted). "In determining the scope of the criminal activity, the district court may consider any explicit agreement or implicit agreement fairly inferred from the conduct of the defendant and others." United States v. Petrie, 302 F.3d 1280, 1290 (11th Cir. 2002). Once that individualized finding is made, the court can proceed to determine reasonable foreseeability. Hunter, 323 F.3d at 1319. 
Our decision in Hunter illustrates the limits of sentencing accountability for low-level defendants who are convicted of participating in a broader conspiracy. The defendants in Hunter were participants in a counterfeit corporate check-cashing ring that operated in South Florida. Id. at 1316. The ring was composed of three "levels" of participants—two individuals at the top who were responsible for printing the counterfeit checks; three individuals who were responsible for recruiting and occasionally driving the check-cashers (called "runners") to cash the checks; and, at the bottom, nineteen runners. Id. At sentencing, the district court held the three defendants, who were runners, responsible for the total loss of the entire conspiracy, stating that the losses associated with the broader conspiracy were reasonably foreseeable to them. Id. at 1318. 
On appeal, we held that reasonable foreseeability alone was not enough and that the district court erred by failing to "first determine the scope of the criminal activity [the defendants] agreed to jointly undertake." Id. at 1320 (quotation marks omitted). We explained that "the Guidelines establish that the fact that the defendant knows about the larger operation, and has agreed to perform a particular act, does not amount to acquiescence in the acts of the criminal enterprise as a whole." Id. Thus, the fact that the defendants cashed multiple checks, which made them responsible for those checks, did not "automatically" or "necessarily" support a finding that they knew the scale of the conspiracy, "let alone that [they] agreed to the full extent of that criminal activity." Id. at 1320-21. Similarly, the mere fact that one of the defendants identified other runners working for a mid-level operative was "not enough to make her accountable for their conduct" without some other evidence "from which an agreement can be inferred." Id. at 1320. Cautioning that the defendants' "involvement and agreement in the conspiracy may be limited to the checks each actually cashed," we vacated the application of a loss enhancement and remanded for the court to make individualized findings as to the scope of criminal activity each defendant agreed to undertake. Id. at 1322. 
Hunter further elaborated on the types of evidence showing agreement in a larger criminal scheme. See id. at 1321-22. One "relevant factor in determining whether an activity is jointly undertaken is whether the defendant assisted in designing and executing the scheme." Id. at 1321; cf. United States v. McCrimmon, 362 F.3d 725, 732-33 (11th Cir. 2004) (holding a defendant responsible for the entire amount of loss where the defendant, though he did not "design" the scheme, actively recruited investors to further the scheme and had a role equivalent to a higher-level operative). Another is "evidence of sharing or mutuality from which an agreement in the larger criminal scheme can be inferred." Hunter, 323 F.3d at 1322. For example, in United States v. Hall, we affirmed a court's determination that the defendant's relevant conduct included fraud losses caused by others in a telemarketing-type conspiracy where each of the participants knew each other and was aware of the others' activities, and they aided and abetted one another by sharing lead sheets of potential victims and sharing telephones. 996 F.2d 284, 285-86 (11th Cir. 1993).

Thursday, February 21, 2019

Willful Blindness - Is It An Inference of Knowledge or Intent or Is It a Substitute (2/21/19)

I am back on one of my pet peeves -- deliberate ignorance.  (Deliberate ignorance is also called willful blindness or conscious avoidance; in an instruction context it is also called the ostrich instruction.)  I just picked up United States v. Maitre, 898 F.3d 1151 (11th Cir. 2018), here. The Court rejected a claim that the trial court should not have given the deliberate ignorance instruction.  In the course of doing so, the Court said (p.1157):
This Court considers "deliberate ignorance of criminal activity as the equivalent of knowledge."
I just think that is wrong.  If the ultimate element of the crime is actual knowledge or specific intent, a defendant's willful blindness should do no more than permit a jury to infer the required knowledge or intent.  In other words, it is circumstantial evidence of the ultimate element of actual knowledge or specific intent.  A finding that the defendant was willfully blind should not compel a finding that the defendant has actual knowledge or specific intent element of the crime.  Congress has not said that when it requires actual knowledge or specific intent as an element of the crime, anything less will do.

I have written on this before, but just wanted to vent again.

Other blog entries on this:

  • Interesting NonTax Case on Willful Blindness (Federal Tax Crimes Blog 10/3/17), here.
  • The Willful Blindness Concept -- What Does It Do? (Federal Tax Crimes Blog 1/23/17), here.
  • Willful Blindness / Conscious Avoidance and Crimes Requiring Intent to Violate a Known Legal Duty (Federal Tax Crimes Blog 7/21/14), here.
  • More on Conscious Avoidance (Federal Tax Crimes Blog 1/21/13), here.
  • Third Circuit Decision in Stadtmauer - Willful Blindness (Conscious Avoidance) (Federal Tax Crimes Blog 9/10/10), here.

10th Circuit Reverses Tax Money Laundering Conviction For Lack of Sufficiency of Evidence (2/21/19)

In United States v. Christy, ___ F.3d ___, 2019 U.S. App. LEXIS 4594 (10th Cir. 2019), here, the Court opens with this summary:
On May 21, 2014, CNB auditors conducted a surprise audit of the Burlington, Kansas Central National Bank ("CNB" or "Bank") vault. The vault was missing $764,000. When they began to suspect Ms. Christy, she forged documents to purport that she had sent the missing cash to the Federal Reserve Bank of Kansas City ("FRB"). A grand jury indicted her on one count of bank embezzlement, six counts of making false bank entries, six counts of failing to report income on her taxes, and 10 counts of money laundering. After a six-day trial, a jury found Ms. Christy guilty of all charges except four money laundering counts. 
On appeal, Ms. Christy argues that (1) cumulative prosecutorial misconduct violated her due process rights, (2) the evidence was insufficient for her money laundering convictions, and (3) the jury instructions improperly omitted a "materiality" element for the false-bank-entry charges.
Of these three issues identified by the Court, I address on the second -- the money laundering because it is tax money laundering, not commonly encountered.  The prosecutorial misconduct issue is interesting but so long (from p. 9 to p. 39) that I did not delve deeply into it.

I also address an issue discussed by the majority in the first footnote (spanning from p. 2 to p. 3) regarding whether, even with counts of conviction reversed because the Guidelines calculations would be the same.

Tax Money Laundering.

The Court offers this additional procedural background (p. 40):
The jury found Ms. Christy not guilty of the four money laundering counts based on loan payments the Christys made before 2014 (Counts 14-17). The cash payments underlying Ms. Christy's six money laundering convictions (Counts 18-23) were made on two loans in the Christys' names at the Farmers State Bank in Aliceville, Kansas. 
Count 18 charged Ms. Christy with money laundering for making a $1,000 payment on March 17, 2014 on Loan 7521, a home loan that originated in 2011 and called for a minimum monthly payment of $600. With one exception, a payment of $1,848 that was not charged in the indictment, every one of the Christys' payments on Loan 7521 in 2013 and 2014 was $1,000. Counts 19-23 concerned cash payments on Loan 7962, a refinancing agreement for the Christys' home loan. n13 Ms. Christy was convicted based on five cash payments on this loan made between March 17, 2014 and May 12, 2014, ranging from $834.49 to $3,200 and averaging approximately $2,167. 
Ms. Christy filed a motion for acquittal on the money laundering counts at the close of the Government's case, arguing there was insufficient evidence to show that her loan payments were made with embezzled funds. She did not argue that [*45]  there was insufficient evidence of specific intent. She renewed her motion at the end of trial. The district court denied the motion, stating, 
A reasonable jury could infer from the circumstantial evidence presented at trial that the cash used to make these loan payments came from funds that Ms. Christy had embezzled from the vault at CNB and that Ms. Christy conducted the financial transactions with the intent to file a false income tax return in violation of 26 U.S.C. § 7206(1).
The issue was whether the evidence was sufficient to show that Christy had the required "intent to engage in conduct constituting a violation of section 7201 or 7206 of the Internal Revenue Code of 1986."  Section § 1956(a)(1)(A)(ii).  The Government argued that two types of acts were sufficient:

Wednesday, February 20, 2019

UBS Fined $4.2 Billion for Its French Foreign Account Escapades Raiding France of Taxes (2/20/19)

Liz Alderman, French Court Fines UBS $4.2 Billion for Helping Clients Evade Taxes (NYT 2/20/19), here.

The lavish spending caught up with UBS on Wednesday, when French judges ordered it to pay a record 3.7 billion euro fine, about $4.2 billion, for carrying out what prosecutors said was a long-running scheme to help French clients hide huge sums of money from the authorities. 
The penalty, the largest in French history, included €800 million to be paid to the government, which said it had lost revenue as a result of UBS’s helping French citizens evade taxes from 2004 to 2012. 
UBS said in a statement that it “strongly disagrees with the verdict” and that it planned to appeal. “The bank has consistently contested any criminal wrongdoing,” the statement said, adding that the judgment was “not supported by any concrete evidence.” 
The ruling coincides with crackdowns on tax evasion in France and other countries that have put Swiss banks in particular on the defensive. 
UBS paid a $780 million fine in the United States in 2009 to resolve accusations that it had helped rich clients dodge taxes, and pledged to divulge the names of over 4,450 people with Swiss bank accounts. Credit Suisse was fined $2.6 billion by the Justice Department in 2014, and €300 million by France in 2017 in similar cases

Federal Tax Procedure Book Update on Tax Crimes (2/20/19)

Today, I completed revisions to the Tax Crimes section of my Federal Tax Procedure Book so that I could circulate to Jim Malone's Tax Practice and Procedure class to UVA Law School where I will guest teach the subject next week.  I have  circulated it to class members.  Readers of this blog can download it here.  A related spreadsheet is available here.

As always, I would appreciate feedback from readers for improvement.

The next editions of the FTPB will be published in early August 2019.

Wednesday, January 23, 2019

D.C. Circuit Rejects Defendant's Post Conviction Claims of Selective Prosecution, Actual Innocence and Attorney Conflict (1/23/19)

In United States v. Bertram, 2019 U.S. App. LEXIS 1899 (D.C. Cir. 2019), here, the Court entered Judgment with an opinion immediately below the judgment.  Bertram pled guilty to a crime for failure to pay over trust fund tax.  See Sentencing for Failure to Pay Over Trust Fund Taxes (Federal Tax Crimes Blog 5/6/15), here.  Bertram moved to vacate his conviction  under 28 USC 2255. The district court denied the motion.  The Court of Appeals affirmed the district court.

Some interesting points:

1.  The Court rejects Bertram's selective prosecution claim based upon allegations that he was prosecuted because (i) he worked for Republican candidates and conservative organizations, (ii) that similarly situated Democrats were not prosecuted, and (iii) IRS agent audited him because he was among the "President's enemies" (the President would be Obama).

2.  The Court rejects his actual innocence claim (that might not even be cognizable with a knowing and voluntary plea), finding that the record forecloses the claim.

3. The Court rejects his final argument that an attorney representing Bertram before the plea agreement was conflicted.  That attorney was Cono Namorato, here, who is a giant in the criminal tax defense bar.  I found this the most interesting in the case, so I quote it in full:
Finally, Bertram's argument that one of his attorneys-Cono Namorato-had a conflict of interest gets him nowhere. Bertram alleges that Namorato developed a conflict of interest when he was considered for a position as Assistant Attorney General of the Department of Justice's Tax Division-the very Department that was prosecuting Bertram-and failed to alert Bertram to the conflict. Because Namorato served as outside counsel rather than counsel of record, Bertram has to show that Namorato had an "actual conflict" that "adversely affected" Bertram's decision to plead guilty. See United States v. Wright, 745 F.3d 1231, 1233 (D.C. Cir. 2014) (finding no evidence to support defendant's allegation that conflicted counsel had coerced him into pleading guilty). 
Bertram has not plausibly alleged that his decision to enter the guilty plea was adversely affected by Namorato's alleged conflict. As Bertram has admitted, Namorato did not advise him about the plea he ultimately accepted. Attorneys from Jenner & Block, including his counsel of record Jessie Liu, alone counseled him about that plea agreement. And Bertram said on the record that he was satisfied with Liu's performance. App'x 22. 
Bertram argues instead that Namorato failed to investigate several "exculpatory" witnesses. But the "exculpatory" witnesses to whom Bertram points are the same lawyers and IRS agent whose anticipated testimony he invoked in support of his actual innocence claim. Bertram was aware of those witnesses at the time of his plea, and the district court specifically advised Bertram that he had a right to present witnesses in his defense if he went to trial. He chose not to do so. And then his sentencing memorandum, (presumably) written by counsel of record, admitted that Bertram's actions taken pursuant to those same witnesses' advice did not negate the willfulness of his actions, but merely provided "[c]ontext." S.A. 10.  n1
   n1 The district court's holding that non-appearing counsel cannot be constitutionally ineffective was disputable. Other courts of appeals have recognized that, in rare instances, the actions, omissions, or conflicts of a non-appearing or secondary member of a defendant's team can so "taint" the defendant's representation as to constitute ineffective assistance. See Rubin v. Gee, 292 F.3d 396, 405 (4th Cir. 2002) (representation of two conflicted attorneys "ultimately tainted and adversely affected" defendant's representation by three trial lawyers); Stoia v. United States, 22 F.3d 766, 769 (7th Cir. 1994) (counsel need not have appeared in court to give rise to ineffective assistance of counsel claim); United States v. Tatum, 943 F.2d 370, 379 (4th Cir. 1991) (representation "tainted" by conflict of one of defendant's counsel who was relied upon heavily). But that issue is of no moment because Bertram has made no showing of taint, and the ineffective assistance claim fails on the merits. 
Bertram also argues that Namorato failed to investigate a selective prosecution claim or to explain to him the mens rea element of the offense under 26 U.S.C. § 7202. Because those arguments were made for the first time on appeal even though the relevant facts were fully known to Bertram when he was before the district court, we will not entertain them. See Chichakli v.Tillerson, 882 F.3d 229, 234 (D.C. Cir. 2018); United States v. Rice, 727 F. App'x 697, 702 (D.C. Cir. 2018). Bertram's separate argument that his plea was involuntary because of asserted shortfalls in his Rule 11 colloquy will not be addressed either because it is raised for the first time on appeal and is outside the scope of the certificate of appealability. See 28 U.S.C. § 2253(c)(1); Waters v. Lockett, 896 F.3d 559, 571-572 (D.C. Cir. 2018).

Court Applies Willful Blindness and Rejects Reliance on Friends Defense to FBAR Willful Penalty but Relieves Wife for One Year (1/23/19)

In United States v. Horowitz, 2019 U.S. Dist. LEXIS 9484 (D. Md. 2019), here, the district court granted summary judgment (i) sustaining the FBAR assessments against husband and wife but (ii) rejected the assessment against the wife for one year because she lacked a reportable relationship with respect to the account upon which the penalty was based.  The docket entries are here.

A quick overview of the facts:  The husband and wife had offshore accounts for a number of years (back to 1988) when he went to practice medicine in Saudi Arabia.  They alleged that "their friends told them they did not need to pay taxes on the interest in their foreign accounts."  Therefore, they did not.  In 1994 they created an account with Union Bank of Switzerland (the infamous, in this context, UBS) and moved some of the funds there.  After 2001, they solely had the UBS account, which the husband monitored by calling every year or two, but otherwise did not withdraw or deposit.  In 2008, after "reading troubling news articles concerning UBS," the husband traveled to Switzerland to transfer the funds to another Swiss bank, Finter, and close the UBS account.  The news, of course, was that the IRS and DOJ were cracking down on UBS' crimes in assisting U.S. taxpayers evade tax.  Readers of this blog should know that trajectory for UBS.  For the account at Finter Bank, husband tried to set up the account as a joint account, but Finter by then somewhat circumspect about helping U.S. taxpayers cheat would not do so without the wife's presence.  He then tried to give her authority over the account, filling out the paperwork but not having her sign (she was not present).  Hence, he was the person with sole power to deal with Finter until 2009 when she signed the documents to make her joint owner (although, it appeared to me she was the beneficial owner of one-half the account).  The Finter bank account was a numbered account with "hold mail" instructions.  The Horowitz's filed tax returns answering the Schedule B foreign account question "No" but did finally file their first FBAR for 2009 identifying the Finter account.

At some date (presumably before the due date for the 2009 FBAR), the Horowitz's joined OVDP and filed FBARs for 2003 through 2008 and 1040Xs for 2003 through 2008.  (The Court notes in a footnote, p. 9 n3 that "Curiously, in their Answers, the Horowitzes had denied that he participated in the program or even was aware of the program. P. Horowitz Ans. ¶ 25; S. Horowitz Ans. ¶ 25.")  There is no discussion, but I presume that the Horowitz then opted out of the OVDP penalty structure and underwent the opt out audit.

The IRS then asserted and assessed the willful FBAR penalties for two years--2007 and 2008.  There is some discussion of administrative commotion about whether the penalty was prematurely assessed while the Horowitz pursued an appeal.  Basically, the Horowitzes asserted untimely assessment because, they asserted, the IRS withdrew the timely assessments and then made a replacement assessments after the statute of limitations barred the assessments.  The Court rejected that argument, so I won't deal with it hear (the recitation of facts and conclusions suggest that it is one off and likely not to recur).

The Court then moved to the merits of the FBAR penalties.  Basically, the Court first relieved the wife of liability for the FBAR willful penalty for the Finter account in 2008 (apparently the only account for which there was an assessment presumably because the high amount occurred after the transfer from UBS to Finter and because the Finter account was the only account open on 6/30/09 when the 2008 FBAR was filed).  (That is an assumption.)  The Court held that the wife did not have a reportable relationship with the account until 2009 when she was formally put on the account.  (I am not sure about that holding.)

The Court next turned to the 2007 liabilities and husband's 2008 liability, holding consistent with the Fourth Circuit's Williams opinion that their "No" answers on Schedule B and other circumstances made them at least willfully blind as to the duty to file, hence establishing willfulness.  The key paragraph after reiterating the Fourth Circuit law (which most readers of this blog know by heart) is the final one immediately before the conclusion:
The Horowitzes argue that their friends told them they did not need to pay taxes on the interest in their foreign accounts. Maybe so, but their friends' credentials are not before the Court, nor is there any information from which I could assess whether it was reasonable for them to have accepted what their friends told them as legally correct. And, in any event, their friends' views would not override the clear instructions on Schedule B, which, as noted, requires a "Yes" answer if the taxpayer has an interest in a foreign account, regardless of whether the funds within it constituted taxable income. Moreover, the fact that the Horowitzes discussed their tax liabilities for their foreign accounts with their friends demonstrates their awareness that the income could be taxable. Their failure to have the same conversation with the accountants they entrusted with their taxes for years, notwithstanding the requirement that taxpayers with foreign accounts complete Part III of Schedule B, easily shows "a conscious effort to avoid learning about reporting requirements." Williams II, 489 Fed. App'x at 658 (quoting Sturman, 951 F.2d at 1476). On these facts, willful blindness may be inferred. See Poole, 640 F.3d at 122 ("[I]n a criminal tax prosecution, when the evidence supports an inference that a defendant was subjectively aware of a high probability of the existence of a tax liability, and purposefully avoided learning the facts pointing to such liability, the trier of fact may find that the defendant exhibited 'willful blindness' satisfying the scienter requirement of knowledge." (quoted in Williams II in the context of civil liability)). Thus, even without the additional evidence that was present in Williams II, I find based on these undisputed facts that the Horowitzes recklessly disregarded the FBAR filing requirement. See Williams II, 489 Fed App'x at 659. This suffices for a finding of willfulness. See id.; Safeco, 551 U.S. at 57.

Monday, January 21, 2019

Ex UBS Banker Who Sold Client Data to Germany Convicted of Money Laundering and Acquitted of Bank Secrecy Violation (1/21/19)

A former Swiss Banker has been convicted and sentenced to 40 months in prison for money laundering charges but was acquitted of bank secrecy violations.  I give some of the detail that I think interesting in the excerpts of the articles below.

  • John Miller, Ex-Swiss banker convicted for selling secret tax data to Germany (Federal Tax Crimes Blog 1/21/19), here.  Excerpts:
Rene S., as the 45-year-old ex-banker was called during court proceedings, was sentenced to 40 months in prison and must pay fines and court costs totaling more than 125,000 Swiss francs ($125,300) after being found guilty of charges that included spying and money laundering. 
Rene S., who according to court documents has moved to a small town in Germany just across the Rhine River from Switzerland, did not attend the proceedings in Bellinzona this month. 
He was acquitted of breaking Swiss banking secrecy laws. It was not immediately clear whether Switzerland would seek his extradition, with Swiss officials in Berne saying such a decision would come only after the appeals process had been exhausted and the judgment finalised. 
* * * * 
Prosecutors said that between 2005 and 2012, when Rene S. worked for UBS, he illegally collected data about Germans with accounts at the bank and sold the information for 1.15 million euros ($1.31 million) to tax authorities in North Rhine-Westphalia who were seeking to root out tax dodgers. 
* * * * 
Lawyers for UBS, which paid some $300 million in 2014 to settle claims it helped wealthy Germans evade taxes, had contended during the trial that its former employee’s actions had undermined Switzerland as a financial center. 
* * * * 
A decade ago, Germans were believed to be hiding about 150 billion francs in secret accounts in Switzerland and Liechtenstein. 
But thousands began declaring their assets after North Rhine-Westphalia, with the federal government’s blessing, started buying covertly collected data. 
North Rhine-Westphalia has spent some 17.9 million euros since 2010 on data that helped it recover nearly 7 billion euros ($7.97 billion) in tax revenue. 
In turn, Switzerland fought to protect its banking secrecy laws by prosecuting several people, including Rene S., in separate cases where it accused them of illegally handing over documents.
The dispute has included several twists, including the Swiss filing criminal charges in 2012 against three German tax collectors, accusing them of buying account information from informants. 
And in 2017, Germany arrested a Swiss man they accused of spying on North Rhine-Westphalia's tax authority, forcing Switzerland's spy agency to defend its practices against friendly neighboring countries. The accused Swiss spy got a suspended prison term.
  • Ex-UBS Worker Guilty of Money Laundering in Data Theft Case (SWI 1/21/19), here.  Excerpts:

Thursday, January 17, 2019

Reminder of Key Differences Between Civil Fraud Penalties (1/1719)

I picked up an offering, with a good reminder for Tax Crimes enthusiasts, from Procedurally Taxing Blog's regular reporting of Tax Court designated orders.  Samantha Galvin (Guest Blogger), The Tax Court’s Tenacious Stance on 280E: Designated Orders 12/17/2018 – 12/21/2018 (Procedurally Taxing Blog 1/17/19), here.

First a reminder on what the Designated Order category is.  The following is from the current working draft of my Federal Tax Procedure book that will be published in August 2019; it appears after discussing the usual Tax Court opinions, T.C.'s and T.C.M.'s (footnotes omitted):
Another Tax Court case document of potential importance is designated simply “Order.”  A court may resolve disputed issues by some type of order – either oral (such as bench opinions or written – in any number of ways short of what is formally designated as an opinion.  The “Orders” are available on the Tax Court’s web site in a searchable database, with a subset of orders published daily as “Designated Orders.” The designation status is determined by the judge issuing the order, presumably because the judge feels that there is something in the order that should be called to the attention of practitioners.  Although the Tax Court Rules say that Orders, including Designated Orders, are not precedential, sometimes, the Designated Orders offer practitioners insight into particular Judge’s thinking on substantive and procedural issues.
Now turning to the Designated Order (Durand v. Commissioner (T.C. Dkt., 16273-17 Order dated 12/18/18), here, in the Procedurally Taxing Blog, rather than recreate the wheel, I just cut and paste the discussion in the blog (although the order itself is almost as short so readers might just want to click the link to the order above):
Docket No. 16273-17, Roger H. Durand, II, v. CIR (here)
In a win for petitioner and lesson for respondent, the Court highlights the difference between a section 6663 penalty and a section 6651(f) penalty in this designated order.
This case was already tried in October of 2018 and the parties are in the process of preparing post-trial briefs. The Court addresses IRS’s motion to leave to amend its answer to conform to proof. Petitioner objects.
Petitioner is a reverend who did not timely file for several years beginning in 2006, but eventually filed all years in 2014 and 2015. The IRS issued a notice of deficiency which included a 75% fraud penalty for each tax year under section 6663. Petitioner petitioned the Court, and respondent answered detailing the allegations of fraud and praying that the 6663 penalties be approved.
Neither the deficiency notice nor respondent’s answer referenced the section 6651(f), the “fraudulent failure to file” penalty, but now the IRS wants to amend its answer to include the section 6651(f) penalty – after the trial has taken place and the case has been submitted.
Petitioner argues that different timeframes govern the analysis of whether the penalties should apply and respondent tries to minimize this argument, but the Court sides with petitioner. The Court implies that respondent may not understand the difference between a 6663 and 6651(f) penalty and cites its analysis Mohamed v. Commissioner, T.C. Memo. 2013-255, on this issue.
Section 6663 authorizes a penalty for filing a fraudulent return, and section 6651(f) authorizes a penalty for fraudulently failing to file a return.
Section 6663 can only be imposed if a return is filed, and on that return the taxpayer fraudulently misrepresents the amount of tax due. Under section 6663 the fraud occurs when a return is actually filed, not when it is due.
Section 6651(f) is imposed when a taxpayer deliberately fails to file a return to conceal the existence of income in order to evade tax. Under Section 6651(f) the fraud occurs when a return is due, not when it is actually filed.
The taxpayer’s intent at the appropriate times (date return was due and date of actual filing) is critical to determining if each penalty should be imposed. Because the trial has concluded and the IRS failed to include a section 6651(f) penalty, the reverend never had the opportunity to present facts about his intent at the time the returns were due, which is when the 6651(f) fraud would have occurred, so the Court denies respondent’s motion. 
JAT Comment:  Note that the civil fraud determination is important not only for these penalties but for the unlimited statute of limitations under § 6501(c)(1).  Of course, if no return has been filed, there is an unlimited statute of limitations under § 6501(c)(3).

Court Dismisses 7 of 8 Counts Because of a Tolling Agreement Ambiguity (1/17/19)

In United States v. Brattain, 2019 U.S. Dist. LEXIS 6494 (E.D. Mich. 2019), here, the defendant was charged in the superseding indictment, here, for with 7 counts of aiding and assisting, § 7206(2), and 1 count of the defraud / Klein conspiracy.  The Court dismissed the 7 counts of aiding and assisting because the tolling agreement, drafted by the Government, was ambiguous as to whether it covered aiding and assisting and therefore, since tolling agreements are construed against the drafter, it did not cover aiding and assisting.

The tolling agreement provided in relevant part that (i) the U.S. Attorney was prepared to seek an indictment alleging  "that defendant made or subscribed a false tax return in violation of Title 26, United States Code, Section 7206;" and (ii) that Brattain "agree[s] that the running of the statute of limitations applicable to the offenses described above will be tolled ..."

Tax crimes enthusiasts should spot the problem immediately.  The text refers to § 7206(1) (which I refer to as tax perjury) but the code section cited in the tolling agreement is § 7206 without limiting to § 7206(1), the provision for making or subscribing a false return.  The Government indicted for § 7206(2), which is for aiding and assisting of a false return.  That made the tolling agreement ambiguous.  Hence, the tolling agreement did not cover the charges and those counts are dismissed.

For those with access to Court Listener (free), the opinion docket entries are here where the superseding indictment and the opinion may be downloaded.

JAT Comments:

1.  The tolling agreement also covered allegations of FBAR violations -- failure "to report foreign bank and financial accounts in violation of Title 31, United States Code, Sections 5314 and 5322."  The superseding indictment does not cover those charges.  There is no indication why those charges are omitted.

2.  The dismissal of the 7 aiding and assisting counts leaves the sole count of the defraud / Klein conspiracy.

3.  The allegations in the complaint generally and particularly in the defraud / Klein conspiracy count seem to me to be fairly skinny.  There are no allegations about who the defendant is or as to venue.  More importantly, the overt acts are presented crisply, and included the filing of original and amended returns for some years.  In a conspiracy count, particularly for a defraud / Klein conspiracy, the allegations will give paint a detailed and damning picture of the overall conspiracy.  The picture is presented in a statement of the manner and means and the overt acts.  In the Brattain superseding indictment the indictment alleges the overt acts without manner and means allegations.

4.  If Brattain is convicted on the conspiracy count, his maximum sentencing exposure is 5 years which will likely be more than ample to cover his Guidelines sentence.  In this regard, the dismissed counts are likely related to the conspiracy and would be relevant conduct, the tax loss from which would be included in Brattain's guidelines calculations.  Hence, his Guidelines sentencing range would be the same as if he were convicted of all relevant conduct crimes (including the dismissed counts, counts beyond the statute of limitations).  The dismissal of the 7 counts will only help if the sentencing judge considers that dismissal favorably to the defendant in a Booker variance.

Tuesday, January 15, 2019

Two Cases Involving Marinello (1/15/19)

I report here on two Marinello related developments.

1.  In United States v. Adams (D. D.C. No. 15-44 (JEB) Dkt. 94), here, the district court vacated Adams' (called Heru-Bey in the opinion) conviction for tax obstruction, § 7212(a).  The case was at the district court level because the Court of Appeals remanded the case sua sponte after the Government conceded that "the jury instructions — which did not contain the nexus requirement or detail the nature of the requisite IRS proceeding — were error, and that error was plain at the time of appellate consideration.” (Cleaned up.)  In its opinion, the district court (Judge Boasberg) found that there was there was error, the error was plain, the error affected Adams substantial rights, and Adams had been prejudiced.  The Court accordingly vacated the conviction and permitted "the Government to retry the case if it so elects."

Some comments:

a.  Somewhat echoing Judge Kozinski's analysis in United States v. Caldwell, 989 F.2d 1056 (9th Cir. 1993) (answering no to the question "whether conspiring to make the government's job harder is, without more, a federal crime"?), it reasons that the Government's claim for nexus was overbroad and said:
Again, Marinello does not countenance such a broad understanding of § 7212. See 138 S. Ct. at 1107. The Court there specifically rejected as overbroad the argument the Government now presses — namely, it reasoned that § 7212 is “not . . . a ‘catchall’ for every violation that interferes with what the Government describes as the ‘continuous, ubiquitous, and universally known’ administration of the Internal Revenue Code.” Id. (citation omitted).
b.  The Court also poked the Government because it has declined a special instruction that might have solved the issue:
The Court notes, finally, that the Government declined a special unanimity instruction at trial. See 5 Tr. at 84. That is, it did not ask that the jury, to find Defendant guilty, be instructed that it must be unanimous as to which one or more of the Government’s three theories of obstruction was the basis. As a result, even were one of these theories valid, there would be no way for this Court to know that the jury meant to convict on that one and not the invalid others.
2.  In United States v. Flynn,  (D. Minn. 2018 No. 16-347 ADM/KMM), here, the Court denied Flynn's motion to withdraw his guilty plea to a defraud/Klein conspiracy count and a tax perjury count.  Among Flynn's arguments was that the Second Superseding Indictment to which he pled did not properly state a conspiracy to defraud because of the decision in Marinello v. United States, __ U.S. ___, 138 S. Ct. 1101 (2018).  The following is the pertinent portion of the opinion:

Thursday, January 10, 2019

Tax Crimes History -- The Fall of Vice-President Spiro Agnew and the Role of Tax Crimes (1/10/18)

I listened to this podcast covering a moment history where the President and Vice-President were each under separate unrelated criminal investigations.  This focuses on the Vice-President.  Everybody knows about the outcome of the President -- resignation and pardon by his sucdessor, Gerald Ford (I do summarize the key background below).  For most of us, if we know VP Spiro Agnew at all, it is as a footnote and most of us (like one famous Supreme Court Justice at least claimed) don't read footnotes.  We ought to.  Sometimes.  Terry Gross and her guests lift this footnote and brings it to general public attention because it is relevant to today.  Bad Behavior By People In High Office': Rachel Maddow On The Lessons Of Spiro Agnew (NPR Fresh Air 1/9/19), here.

And, not only is it history, there is a federal tax crime involved which is the excuse for this posting.

The Fresh Air presentation is a good summary podcast (43 minutes) of a larges podcast series called Bagman, here, a Rachel Maddow presentation (without blatant political rhetoric).  Bagman is a 6 episode series.  I listen to the larger series next on my daily walks, but I can highly recommend the Fresh Air presentation because Terry Gross is a good guide to get to the essentials in a single podcast of 43 minutes.  Many of you may not want to go into the details after the Fresh Air presentation.

But, I will give my own shorter summary of this event and its historic setting - Watergate (Wikipedia here).

The Watergate break-in had occurred.  It looked like some hacks of no consequence breaking into the Democratic National Committee headquarters.  But, as the facts dribbled out, it turned out to be a political operation orchestrated from the White House.  The ripples from that were slow to start.  But built to a crescendo that eventually led to President Nixon's resignation.  But before getting there, there was a grand jury investigation.  Some persons (including the infamous John Dean) pled guilty.  The grand jury indicted former White House aides, including Presidential top level assistants Haldeman and Ehrlichman, and the Attorney General, John Mitchell.  Nixon appointed Elliot Richardson to replace Mitchell as Attorney General.  Richardson then named Archibald Cox as special counsel to investigate the Watergate scandal.

The Senate Watergate Committee then uncovered Nixon's taping of Oval Office conversations.  Cox, as special counsel, was keenly interested in the tapes and issued a subpoena.  Nixon refused to produce and fought all the way to the Supreme Court.  The Supreme Court ordered him to produce.  Nixon ordered Cox to drop the subpoena.  Cox refused.  On October 20, 1973, Nixon ordered Richardson to fire Cox in order to stop the compulsion of the subpoena.  Richardson refused and resigned.  Nixon then ordered the next in line, the Deputy Attorney General, William Ruckelshaus, to fire Cox.  Ruckelshaus refused and resigned.  Nixon then ordered the next in line, Solicitor General Robert Bork (yes, that Robert Bork), to fire Cox.  Bork fired Cox.  That culminating event, happening on a weekend and now enshrined in history as the Saturday Night Massacre, shocked the country and led to Nixon's resignation.

A few days before the Saturday Night Massacre, the Vice-President, Spiro Agnew resigned and immediately thereafter pled nolo contender to a single tax crime.  A nolo contendere plea is sometimes accepted by courts for defendants who will take the punishment but do not want to formally admit that they committed the crime(s).  Agnew could have been indicted for a slew of other crimes, all unrelated to Watergate and stretching back to corruption before he was VP (but continuing while he was VP).  Because of the crisis the country was in, Richardson agreed (over the objection of the federal prosecutors involved) to permit Agnew to plead nolo contendere to a single count of tax evasion with an agreement that he would serve no time and be sentenced only to three years of unsupervised vacation.

The podcast discusses the events leading to the Spiro resignation and plea of nolo contendere to tax evasion in the midst of the Watergate crisis sweeping over Nixon's administration that would soon lead to Nixon's resignation.

Richardson and the prosecutors had to deal with such issues as to (i) whether a sitting VP could be indicted (sound familiar) and (ii) whether, since the evidence of mass corruption by Agnew seemed so strong, should DOJ insist on some jail time either by plea or after indictment and conviction or, on the other hand, was it important to the country to get his resignation which required the sweet deal nolo contendere plea.

I highly recommend the Fresh Air offering.  After listening to the full podcast series, I may offer more.

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