District Court Confuses Analysis in Approving Magistrate's R&R Imposing FBAR Willful Penalty (9/26/19)

I previously reported on the Magistrate's Report and Recommendation in United States v. Rum (M.D. Fla. No. 8:17-cv-826-T-35AEP). See Magistrate Recommends Sustaining Imposition of FBAR Willful Penalty (Federal Tax Crimes Blog 8/28/19), here.  Rum objected before the district court.  By order dated 9/26/19, the district court has confirmed and adopted the Magistrate's Report and Recommendation as part of the district court's order.  See Order, here.

The district court's order is short and fairly perfunctory. But, I do think the district court confused its analysis of what the Magistrate did.  In relevant part, the Magistrate found that (i) the summary judgment evidence was sufficient to grant judgment for the Government on the issue of willfulness and (ii) the administrative record was adequate to show that the IRS had not acted arbitrarily and capriciously under the APA in exercising its discretion in setting the amount of the willful FBAR penalty.

The district court,  however, seems to conflate the two issues.  Here is the key paragraph (with footnotes):

For this reason, too, Mr. Rum’s challenge to the Magistrate Judge’s decision on the basis that the Judge “Did Not Apply the Correct Standard of Review for A Motion for Summary Judgment” also fails. (Dkt. 72 at 19) Mr. Rum seems to suggest that the Magistrate Judge improperly engaged in fact-finding at the summary judgement stage of the case. (Dkt. 72 at 20) This assertion is plainly wrong. The Magistrate Judge was not making a de novo determination that Mr. Rum’s testimony was not credible or deciding whether Mr. Rum acted willfully. Rather, the Magistrate Judge reviewed the administrative record, as he was constrained to do, n1 to determine whether the record supported the Agency’s decision that Mr. Rum acted willfully. His evaluation of that record was sound, and his conclusion was correct. n2 
   n1 This disposes of Objection VII in which Rum suggests the Magistrate Judge committed error in declining to go outside the administrative record to consider his challenges to the Agency’s decision. (Dkt. 72 at 17-18) The Magistrate Judge correctly observed that “a court shall only review the record before it to ensure that the agency engaged in reasoned decision-making.” (Dkt. 71 at 20). The Supreme Court’s decision in Dep’t of Commerce v. New York, 139 S. Ct. 2551 (2019), does not alter that longstanding precedent except in very limited circumstances not present on this record.
   n2 The remaining objections, not specifically addressed herein, are either bound up in the matters here discussed, or are just a rehash of arguments made in the summary judgment motion, which were thoroughly and correctly disposed of by the Magistrate Judge’s Report and Recommendation.

I have bold-faced the troubling analysis.  Under the Magistrate's R&R (and the law), the administrative record did not limit the scope of the inquiry on the issue of willfulness but rather only on the amount of the FBAR penalty over which the IRS had discretion.

For further information, I link here the Government's response brief on the objections to the R&R.

§ 7202 Convictions Reversed for Improper Bad Acts Evidence (9/23/19)

In United States v. Snyder, 2019 U.S. App. LEXIS 28326 (6th Cir. 9/19/19) (unpublished), here, Snyder fell into the not uncommon trap of using company (Attevo) withheld trust fund tax for purposes other than paying over to the IRS and went one step further by using funds that should have been deposited to employee 401(k) plans.  The company failed.  The trust fund tax was not paid.  Snyder was indicted "on seven counts of willfully failing to pay over taxes, see 26 U.S.C. § 7202, and one count of embezzling from an employee-benefit plan, see 18 U.S.C. § 664."  Snyder was acquitted on two § 7202 counts and convicted on the remaining counts.

On appeal, Snyder argued that the trial court abused its discretion in allowing the introduction and use of evidence in closing argument that Snyder had failed to file personal tax returns for some number of years.  That evidence is so-called "bad acts" evidence that must run the gamut of FRE 404(b), which limits the use of such evidence, and 403, which requires exclusion of relevant evidence if prejudicial or confusing.  The court generalized the law as follows:

“The government may not use evidence of prior bad acts to show that a defendant’s character made him more likely to commit the charged crime.” United States v. English, 785 F.3d 1052, 1055 (6th Cir. 2015); see Fed. R. Evid. 404(b)(1). However, such evidence “may be admissible for another purpose, such as proving . . . intent . . . [or] absence of mistake.” Fed. R. Evid. 404(b)(2). Even if the evidence is admissible under Rule 404(b), the district court may still exclude it “if its probative value is substantially outweighed by a danger of,” among other things, “unfair prejudice, confusing the issues, [or] misleading the jury.” Fed. R. Evid. 403. 

Because the tax charges against Snyder are specific-intent offenses, this is the kind of case in which evidence of prior bad acts might be admissible. See United States v. Johnson, 27 F.3d 1186, 1191–92 (6th Cir. 1994). But that does not mean such evidence “is automatically admissible.” Id. at 1192 (emphasis added).  

Under Rule 404(b), prior bad acts are inadmissible if they “are too unrelated” to the charged conduct or “too far apart in time to be probative of” the defendant’s specific intent. United States v. Clay, 667 F.3d 689, 696 (6th Cir. 2012). Likewise, dissimilar or long-ago bad acts are usually inadmissible under Rule 403, because they have “a powerful impact on a juror’s mind” despite their “slim probative value.” Ibid. There is “too much of a risk that the jury will generalize from prior examples of bad character.” Id. at 697.

Bottom-line, the Court felt that the failure to file tax returns was too dissimilar to the crime of willful failure to pay over trust fund tax charged under § 7202.

Of course, admission of such evidence is reversible only if not harmless, as is often the case.  The Court seemed particularly troubled about the prosecutor's use of the evidence in closing argument:

If Pizzola’s testimony had amounted only to an isolated blurt, the error likely would have been harmless (as Snyder conceded at oral argument). But Pizzola’s comment was not the only reference to Snyder’s personal tax troubles: Terry, the other IRS witness, also testified about them. And to make matters worse, the government’s closing argument expressly invited the jury to make the propensity inference Rule 404(b) exists to prevent: “[Y]ou heard testimony that the defendant wasn’t even paying his own taxes. He’d done it before, and he was doing it this time.” The government’s misuse of the testimony makes it impossible to dismiss the erroneous admission of this evidence as harmless.

While the district court gave a limiting instruction, this is not “a sure-fire panacea for the prejudice resulting from the needless admission of” propensity evidence. United States v. Haywood, 280 F.3d 715, 724 (6th Cir. 2002). “As empirical studies have shown, evidence of prior bad acts influences factfinders even when the court gives a limiting instruction.” Clay, 667 F.3d at 697. A limiting instruction may be “insufficient to mitigate these potential risks,” and it does not preclude a new trial. Id. at 700–01. See also United States v. Jenkins, 345 F.3d 928, 939 (6th Cir. 2003).

 Accordingly, the Court vacated the § 7202 convictions but affirmed the embezzlement conviction.

New IRS Relief Program for Expatriates Renouncing U.S. Citizenship (9/12/19)

The IRS recently announced a relief program for persons renouncing U.S. citizenship with respect to their tax compliance, including Section 877A, here, titled "Tax responsibilities of expatriation."  See IRS web page titled "Relief Procedures for Certain Former Citizens," here.

I have not practiced in the area of taxation involving U.S. citizenship renunciations.  I know the general rules and enough when presented with a need to either do some serious additional study or refer the client to someone who is an expert.  So, I have nothing personally to offer on the subject addressed in this new relief program.  The key point of this posting is to alert readers of the potential opportunity to take advantage of the relief program.

I do point readers to two articles written by attorneys who do practice in the area:

• Alan Winston Granwell, Andrea Darling de Cortes, William M. Sharp, New IRS Procedure Provides Favorable Path for Non-Compliant Expatriates to Become Tax Compliant (Holland & Knight Alert 9/11/19), here.
• Kevin Packman, Is the New IRS Expatriation Initiative Really Better than an Existing Program and Law? (Mondaq 9/10/19), here.
• Virginia La Torre Jeker, J.D., Ground-Breaking Development: IRS “Amnesty” Relief for Certain Expatriates! (US Tax Talk 9/6/19), here.

Interestingly, both articles are by attorneys in the same firm, Holland & Knight.

Here are the Highlights from the first article:

• New Procedure. On Sept. 6, 2019, the Internal Revenue Service (IRS) announced an important new procedure to enable certain non-compliant U.S. citizens who relinquish their U.S. citizenship to become U.S. tax compliant.
• Primary Targets. "Accidental Americans" who were unaware of their U.S. tax obligations.
• Eligibility and Filings. In general, 1) past compliance failures were non-willful, 2) past tax liability not in excess of $25,000 for the five years prior to, and the year of, expatriation and 3) less than $2 million in net assets as of expatriation date. Eligible taxpayers must file U.S. tax returns, including all required schedules, international information returns and Foreign Bank Account Reports (FBARs), for the five years preceding and the year of expatriation.
• Benefits and Takeaway. Qualifying taxpayers become compliant without having to pay any past due U.S. taxes, penalties or interest and avoid classification as a "covered expatriate," a designation that could result in extremely detrimental tax consequences. For qualifying expatriates, the new procedure provides a taxpayer-friendly pathway to U.S. tax compliance, thereby avoiding potentially detrimental U.S. tax consequences and adverse reputational risk.

The same article has the following Background (footnotes omitted):

U.S. citizens are subject to taxation on their worldwide income based on citizenship and not residency, which is the common standard globally. The U.S. worldwide taxation regime and associated tax compliance is complicated and burdensome for U.S. taxpayers, particularly those living abroad. Thus, for many "Accidental Americans," the enactment in 2010 of the Foreign Account Tax Compliance Act (FATCA), may have been the tipping point in their decision to expatriate. After FATCA was enacted, expatriations increased significantly.

Confusion Regarding the Cheek Willfully Element of Specific Intent to Violate a Known Legal Duty (9/8/19)

In United States v. Severino, 2019 U.S. App. LEXIS 26560 (11th Cir. 2019) (unpublished), here, the Eleventh Circuit affirmed Severino's "convictions and 65-month sentence for aiding and assisting in the preparation of false tax returns, wire fraud, and aggravated identity theft."  Severino was a return preparer, and, based on the convictions, an abusive preparer.  On appeal, Severino argued that the Court failed to give a proper willfulness instruction that he had requested for the aiding and assisting counts, § 7206(2).  Severino made other arguments on appeal, but I focus on the willfulness instruction issue which is framed by the Eleventh Circuit's pattern criminal jury instructions.

The Eleventh Circuit's pattern jury instructions for criminal cases are available, here.  Those pattern instructions (with annotations and comments) cover 747 pages.  In order to focus on the pattern jury instructions in issue here, I used the Eleventh Circuit's Pattern Jury Instruction Builder, here, which I have discussed previously.  I "built" the pattern jury instructions in question with Annotations and Comments here.

The relevant pattern jury instructions are:

• B9.1A On or About; Knowingly; Willfully – Generally
• B9.1B On or About; Knowingly; Willfully – Intentional Violation of a Known Legal Duty
• O109.2 Aiding or Assisting in Preparation of False Documents Under Internal Revenue Laws 26 U.S.C. § 7206(2)

The aiding and assisting, § 7206(2) counts, have the same willfully element as in most of the other commonly employed Title 26 tax crimes defined to mean specific intent to violate a known legal duty.  Thus, DOJ CTM 13.07 Willfulness, here, says:

Willfulness has the same meaning in Section 7206(2) cases as it has for other criminal tax violations: “the word ‘willfully’ in these statutes generally connotes a voluntary, intentional violation of a known legal duty.” United States v. Bishop, 412 U.S. 346, 360 (1973); see also Cheek v. United States, 498 U.S. 192, 200 (1991); United States v. Ervasti, 201 F.3d 1029, 1041 (8th Cir. 2000).

As readers of this blog know, many crimes have a willfully element but the element is not always interpreted the same.  As the Court said in Bryan v. United States, 524 U.S. 184, 191-192 (1998), here:

Houston Attorney Convicted of Klein Conspiracy and Tax Evasion (9/6/19)

DOJ Tax announced here that Jack Stephen Pursley, also known as Steve Pursley, was convicted of one count of defraud conspiracy, 18 USC § 371 (also called a Klein conspiracy) and three counts of tax evasion, § 7201.  I posted on the original indictment.  See Houston Attorney Charged With Tax Crimes Related to Offshore Accounts (9/21/18), here.

Key excerpts from the Press Release on the conviction are:

According to the evidence presented at trial, Jack Stephen Pursley, also known as Steve Pursley, conspired with a former client to repatriate more than $18 million in untaxed income that the client had earned through his company, Southeastern Shipping. Knowing that his client had never paid taxes on these funds, Pursley designed and implemented a scheme whereby the untaxed funds were transferred from Southeastern Shipping’s business bank account, located in the Isle of Man, to the United States. Pursley helped to conceal the movement of funds from the Internal Revenue Service (IRS) by disguising the transfers as stock purchases in United States corporations owned and controlled by Pursley and his client. 

At trial, the government proved that Pursley received more than $4.8 million and a 25% ownership interest in the co-conspirator’s ongoing business for his role in the fraudulent scheme. For tax years 2009 and 2010, Pursley evaded the assessment of and failed to pay the income taxes he owed on these payments by, among other means, withdrawing the funds as purported non-taxable loans and returns of capital. The government showed at trial that Pursley used the money he garnered from the fraudulent scheme for personal investments, and to purchase assets for himself, including a vacation home in Vail, Colorado and property in Houston, Texas.

The docket with links to many of the key documents is on Court Listener, here.