tag:blogger.com,1999:blog-15199695021869245262024-03-27T18:12:52.729-05:00Federal Tax CrimesJack Townsend offers this blog on Federal Tax Crimes principally for tax professionals and tax students. It is not directed to lay readers -- such as persons who are potentially subject to U.S. civil and criminal tax or related consequences. LAY READERS SHOULD READ THE PAGE IN THE RIGHT HAND COLUMN TITLE "INTENDED AUDIENCE FOR BLOG; CAUTIONARY NOTE TO LAY READERS." Thank you.Jack Townsendhttp://www.blogger.com/profile/14469823736335455874noreply@blogger.comBlogger2703125tag:blogger.com,1999:blog-1519969502186924526.post-86569004449702791742017-03-06T12:56:00.003-06:002024-03-20T09:55:14.672-05:00Search Warrant Executed Against Caterpillar HQ, Apparently Related to Tax (3/6/17; 3/20/24)I have not written on the alleged Caterpillar tax manipulations that were prominently the subject of an investigation by the Senate Permanent Subcommittee on Investigations. The hearings page is <a href="https://www.hsgac.senate.gov/subcommittees/investigations/hearings/caterpillars-offshore-tax-strategy" target="_blank">here</a>. There is a link to the report titled <u>Caterpillar's Offshore Tax Strategy</u> (which has the hearing date of 4/1/14 but was finalized 8/28/14 per page 2). In very broad overview, the Senate investigation focused on Caterpillar's alleged shifting of profit attributable to U.S. operations from the U.S. tax base to a Swiss tax base where Caterpillar conducted essentially no meaningful operations related to the profits in issue and had negotiated a very low tax rate (essentially free-money for the Swiss government). Tax geeks often refer to this as a transfer pricing issue; the relevant code section for the substantive tax issues is § 482, <a href="http://www.law.cornell.edu/uscode/text/26/482" target="_blank">here</a>. I am told, however, that, according to the SEC filings, the IRS used a substance over form/assignment of income type argument rather than a transfer pricing argument (presumably because, to have a legitimate transfer pricing argument, the entity to which income is shifted must have some reality -- meaning real costs associated with the creation of the income). Too aggressive positions in this area can have significant civil and criminal penalties. I refer readers to the Senate report that outlines what the Senate thought was objectionable.<br />
<br />
It has been known for some time that there has been a grand jury investigation in the Central District of Illinois, which encompasses Caterpillar's home offices. The precise nature and scope of the grand jury investigation is not known, although the assumption was that it was related to Caterpillar's tax issues discussed in the Senate report. On Thursday, March 2, federal agents executed a search warrant on certain Caterpillar premises. According to the news sources, the search warrant execution was led by the US Attorney and carried out by three agencies -- IRS Criminal Investigation ("CI"), the FDIC Office of Inspector General, and the Department of Commerce Office of Export Enforcement. (I list some news sources at the bottom of this blog.) <br />
<br />
Rule 6(e), FRCrP, requires secrecy about grand jury activity, including search warrants, so the Government is extremely limited as to what it can say publicly. Caterpillar, a public company, had to say more. Caterpillar issued a cryptic press release, <a href="http://www.caterpillar.com/en/news/corporate-press-releases/h/caterpillar-continues-to-cooperate-with-law-enforcement.html" target="_blank">here</a>:<br />
<blockquote class="tr_bq">
<b>Caterpillar Continues to Cooperate with Law Enforcement</b> </blockquote>
<blockquote class="tr_bq">
PEORIA, Ill. – On March 2, 2017, law enforcement authorities entered three Peoria-area Caterpillar Inc. (NYSE: CAT) facilities, including the corporate headquarters, to execute a search and seizure warrant. The warrant is focused on the collection of documents and electronic information. Caterpillar is cooperating with law enforcement. </blockquote>
<blockquote class="tr_bq">
While the warrant is broadly drafted, we believe the execution of this search warrant is regarding, among other things, export filings that relate to the CSARL matter first disclosed in Caterpillar’s Form 10-K filed on February 17, 2015, and updated in Caterpillar’s most recent Form 10-K filed with the SEC on February 15, 2017. </blockquote>
The two 10-Ks referenced are the 2015, <a href="http://phx.corporate-ir.net/phoenix.zhtml?c=92466&p=irol-SECText&TEXT=aHR0cDovL2FwaS50ZW5rd2l6YXJkLmNvbS9maWxpbmcueG1sP2lwYWdlPTEwMDgwODg0JkRTRVE9MCZTRVE9MCZTUURFU0M9U0VDVElPTl9FTlRJUkUmc3Vic2lkPTU3" target="_blank">here</a>, and the 2017, <a href="http://phx.corporate-ir.net/phoenix.zhtml?c=92466&p=irol-SECText&TEXT=aHR0cDovL2FwaS50ZW5rd2l6YXJkLmNvbS9maWxpbmcueG1sP2lwYWdlPTExNDAxMDcwJkRTRVE9MCZTRVE9MCZTUURFU0M9U0VDVElPTl9FTlRJUkUmc3Vic2lkPTU3" target="_blank">here</a>. Excerpts from the 10-Ks are:<br />
<br />
<b>2017</b><br />
<blockquote class="tr_bq">
On January 8, 2015, the Company received a grand jury subpoena from the U.S. District Court for the Central District of Illinois. The subpoena requests documents and information from the Company relating to, among other things, financial information concerning U.S. and non-U.S. Caterpillar subsidiaries (including undistributed profits of non-U.S. subsidiaries and the movement of cash among U.S. and non-U.S. subsidiaries). The Company has received additional subpoenas relating to this investigation requesting additional documents and information relating to, among other things, the purchase and resale of replacement parts by Caterpillar Inc. and non-U.S. Caterpillar subsidiaries, dividend distributions of certain non-U.S. Caterpillar subsidiaries, and Caterpillar SARL and related structures. The Company is cooperating with this investigation. The Company is unable to predict the outcome or reasonably estimate any potential loss; however, we currently believe that this matter will not have a material adverse effect on the Company’s consolidated results of operations, financial position or liquidity.</blockquote>
<b>2015</b><br />
<blockquote class="tr_bq">
On January 8, 2015, the Company received a grand jury subpoena from the U.S. District Court for the Central District of Illinois. The subpoena requests documents and information from the Company relating to, among other things, financial information concerning U.S. and non-U.S. Caterpillar subsidiaries (including undistributed profits of non-U.S. subsidiaries and the movement of cash among U.S. and non-U.S. subsidiaries). The Company is cooperating with this investigation. The Company is unable to predict the outcome or reasonably estimate any potential loss; however, we currently believe that this matter will not have a material adverse effect on the Company’s consolidated results of operations, financial position or liquidity.</blockquote>
Notice that the company claims in each of these reports is cooperating with the investigation. If that is true, I wonder why the need for a search warrant. A simple request or a grand jury subpoena should have been sufficient. Background on this issue may be gleaned from the 1991 edition of the DOJ Antitrust Division <u>Grand Jury Practice Manual</u>, <a href="http://federalevidence.com/pdf/LitPro/GrandJury/Grand_Jury_Manual.pdf" target="_blank">here</a>, says (III-174 - II-177, footnotes omitted):<br />
<a name='more'></a><blockquote class="tr_bq">
A search warrant is, in most cases, preferable to a subpoena where there is a reasonable likelihood that documents will be destroyed, concealed or fabricated. A search warrant allows a direct search for documents, while a subpoena depends on the recipient or its agents to conduct the search and to produce the documents before the grand jury. Given that the basis for issuing the warrant would be the likelihood of document destruction, concealment or fabrication, a direct, warranted search is more likely to achieve the desired result of safeguarding documents than merely relying on the subpoena recipient to produce the documents himself. </blockquote>
<blockquote class="tr_bq">
* * * * </blockquote>
<blockquote class="tr_bq">
<b>Factors to consider in using warrants </b></blockquote>
<blockquote class="tr_bq">
In a limited set of circumstances, attorneys should consider the use of a search warrant to obtain evidence of criminal activity. Generally, warrants should be viewed as an extraordinary method of criminal discovery, and should be sought only when an attorney has a substantial basis for doing so. Moreover, because of differing standards governing their issuance, search warrants cannot be viewed as substitutes for grand jury subpoenas duces tecum. Rather, warrants are useful as complements to subpoenas in cases in which the investigation develops proof either: (a) that material responsive to a previously-issued subpoena was not produced in response to the subpoena; or (b) that there is already probable cause to charge a criminal offense (such as price-fixing) and that evidence not already under subpoena which helps prove that offense can be found at a specified location. In antitrust investigations, the former situation is the more likely one in which a search warrant would be sought. </blockquote>
<blockquote class="tr_bq">
Where the prosecuting attorney can establish that the recipient of a grand jury subpoena duces tecum has not complied fully with the subpoena, either by deliberately withholding responsive documents or by recklessly searching for responsive materials, the prosecutor could proceed either by search warrant or by follow-up subpoena. The search warrant may be the superior alternative, for the following reasons. </blockquote>
<blockquote class="tr_bq">
First, if an individual deliberately or recklessly withheld documents responsive to an earlier grand jury subpoena, it is unlikely that the same individual will produce the required documents in response to a subsequent subpoena. The security of the documents is of paramount importance to the prosecution, as the withheld materials are likely to be proof of both the original offense under investigation (e.g., price-fixing or bid-rigging) and the separate offense (e.g., obstruction of justice or criminal contempt) which was committed when the documents were withheld from production under the original subpoena. Use of a search warrant in these circumstances may be essential to prevent the further concealment or the possible destruction of this evidence. Warrants are issued without notice to the person whose premises are to be searched and they are executed by law enforcement officers who immediately take the evidence into their possession, eliminating the opportunity for destruction of evidence. </blockquote>
<blockquote class="tr_bq">
Second, a search warrant is executed by law enforcement officers without any participation by the owner or custodian of the seized property. Thus, the owner or custodian is not being compelled to do anything which might be deemed "testimonial" and, for that reason, he has no right to assert a 5th Amendment privilege to block execution of the warrant. On the other hand, the courts have held under some circumstances that if the act of producing documents in response to a subpoena can, itself (i.e., independent of the content of the documents), be said to establish an element of a criminal offense, the act of production is deemed "testimonial," and 5th Amendment self-incrimination interests are implicated.</blockquote>
<b>News sources:</b><br />
<ul>
<li>Claire Bushey, <u>Feds search Caterpillar HQ</u> (Crain's Chicago Business 3/2/17), <a href="http://www.chicagobusiness.com/article/20170302/NEWS07/170309960/caterpillar-searched-by-federal-agents" target="_blank">here</a>.</li>
<li>Claire Bushey, <u>Cat raid raises key question: Will Team Trump be tough on tax shelters? </u>(Crain's Chicago Business 3/3/17), <a href="http://www.chicagobusiness.com/article/20170303/NEWS04/170309937/caterpillar-office-raid-raises-questions-about-trump-tax-strategy" target="_blank">here</a>.</li>
<li>Timothy Mclaughlin, <u>U.S. authorities raid Caterpillar's Illinois facilities</u> (Reuters 3/3/17), <a href="http://www.reuters.com/article/us-caterpillar-probe-idUSKBN1692GI" target="_blank">here</a>.</li>
</ul>
<div>
<b>Addendum 3/7/17 3:15pm:</b></div>
<div>
<br /></div>
<div>
Following through on the use of a search warrant when the target of the investigation is supposedly cooperating. The Government's costs to use a search warrant rather than a grand jury subpoena are significantly greater, thus discouraging use of a search warrant if the target really is cooperating. The subpoena would require the target's officers and employees and lawyers to gather the documents, review them, assert appropriate privileges, and deliver them to the grand jury or its agents in some sort of organized way in response to the description on the subpoena duces tecum. Those costs would be incurred by the target. By contrast, the search warrant will require that the Government go on-premises, identify the items within the scope of the search warrant (often the search warrant will want computer files that have to be identified and copied), bring them offsite for review (often requiring a taint team of persons not involved in the grand jury proceeding), and then perhaps flail around with the target's attorneys about seizures outside the scope of the warrant or privileges with expect to documents seized. The point I am making is that, for a target that the Government truly believes was cooperating, using the search warrant rather than the subpoena makes no sense.</div>
<div>
<br /></div>
<div>
I am not a securities lawyer, but I wonder whether, if indeed the Government were concerned about Caterpillar's cooperation, Caterpillar's in its SEC documents and press release that it was cooperating might give shareholders some other ground to complain/sue.<br />
<br />
<b>Addendum 3/8/17 9:00pm:</b><br />
<br />
The New York Times has this article: Jesse Drucker, <u>Caterpillar Is Accused in Report to Federal Investigators of Tax Fraud</u> (NYT 3/7/17), <a href="https://www.nytimes.com/2017/03/07/business/caterpillar-tax-fraud.html" target="_blank">here</a>. I will let readers review the article as they will, but it is an odd article reporting on an odd report.<br />
<br />
1. It is unclear which agency commissioned the report? And for what purpose? I doubt that the IRS commissioned the report. The IRS already knows how to review records and reach appropriate conclusions as to tax matters. And, I would suspect that the other agencies involved have their own internal expertise that would make seeking such outside expertise redundant and meaningless.<br />
<br />
2. The reported conclusions are oddly worded. Here is the key quote from the article:<br />
<blockquote class="tr_bq">
“Caterpillar did not comply with either U.S. tax law or U.S. financial reporting rules,” wrote Leslie A. Robinson, an accounting professor at the Tuck School of Business at Dartmouth College and the author of the report. “I believe that the company’s noncompliance with these rules was deliberate and primarily with the intention of maintaining a higher share price. These actions were fraudulent rather than negligent.”</blockquote>
My initial reaction is whether what she "believes" is meaningful?<br />
<br />
More importantly, I have looked over her web site bio, <a href="http://www.tuck.dartmouth.edu/faculty/faculty-directory/leslie-a-robinson" target="_blank">here</a>. She appears to be very smart and very accomplished. The website indicates: "Her expertise centers on the tax and accounting issues associated with multinational operations." That certainly is the right expertise to understand the Caterpillar operations described in the Senate report. But there is nothing on the website that suggests to me that she has experience sufficient to declare conduct fraudulent in the criminal sense which I gather is the purport of the quote. Fraud is a legal conclusion with particular meanings in the criminal law and particular element and proof requirements. A seasoned white-collar crime prosecutor might be in a position to make such conclusions after marshaling the facts that support the conclusions. And which type of fraud is she referring to -- tax fraud, securities fraud, some other fraud, perhaps some type of unspecified general fraud of unstated elements and proof requirements?<br />
<br />
There are simply too many questions that are unanswered for the report to be meaningful.<br />
<br />
I will raise one possibility, though, and I caution that this is entirely speculation. I wonder whether her report could have been submitted along with a whistleblower claim? I have no idea, but given the numbers involved, a whistleblower claim is likely to be very lucrative indeed. But I certainly have no idea whether that is the case.</div><div><br /></div><div><b>Note: I made minor text changes (wording, grammatical) on 3/20/24 @ 10am, incident to preparing an update blog entry. See Based in Part on NYT Article, Senators Request Information from AG Garland about Possible Political Intervention in Caterpillar Tax Investigation(s) (3/20/24), <a href="https://federaltaxcrimes.blogspot.com/2024/03/based-in-part-on-nyt-article-senators.html">here</a>.</b></div>
Jack Townsendhttp://www.blogger.com/profile/14469823736335455874noreply@blogger.com0tag:blogger.com,1999:blog-1519969502186924526.post-39992178117793027752018-09-28T07:09:00.003-05:002024-03-20T09:54:40.858-05:00Caterpillar Shareholder Suit For Fraudulent Disclosures from Tax Civil and Criminal Investigation Dismissed (9/28/18; 3/20/24)<div class="tr_bq">
I have previously written on the Caterpillar kerfuffle. <u>Search Warrant Executed Against Caterpillar HQ, Apparently Related to Tax</u> (Federal Tax Crimes Blog 3/6/17; 3/8/17), <a href="https://federaltaxcrimes.blogspot.com/2017/03/search-warrant-executed-against.html" target="_blank">here</a>; and <u>The Whistleblower Behind Caterpillar Tax Commotion</u> (6/2/17), <a href="https://federaltaxcrimes.blogspot.com/2017/06/the-whistleblower-behind-caterpillar.html" target="_blank">here</a>. A district court has just dismissed a shareholder claim of securities fraud against Caterpillar for inadequate and misleading disclosures about the search warrant and criminal investigation. <u>Société Générale Securities Services, GbmH v. Caterpillar, Inc.</u> (N.D. Ill. No. 17 cv 1713), order dated 9/26/18, <a href="https://drive.google.com/open?id=1_kgNWSFpPE07fgapqGUchqRf6yaWAKFa" target="_blank">here</a>.</div>
<br />
Several government agencies, including the IRS, obtained and executed a search warrant. The apparent focus was:<br />
<blockquote class="tr_bq">
Caterpillar’s creation of a Swiss subsidiary, Caterpillar S.A.R.L. (“CSARL”) in 1999, through which Caterpillar paid an effective tax rate of 4-6% to the Swiss government. Société Générale alleges that CSARL lacked a proper business purpose and thus was not a legitimate tax reduction plan. A former employee filed a whistleblower lawsuit that was resolved through a settlement. After that lawsuit, however, the IRS, Congress, and other government agencies began investigating Caterpillar’s tax position.</blockquote>
Large dollars are potentially involved, which could substantially affect Caterpillar's financial position and stock price. In addition, if indeed Caterpillar participated in illegal tax shenanigans, major fines and other financial and reputational consequences could apply.<br />
<br />
When a registered public company has a significant event that could affect its share price, it has to make appropriate public announcements. Obviously, a previously undisclosed criminal investigation with a search warrant is a major event requiring some disclosures. Caterpillar made announcements which, according to the opinion, the plaintiff alleged were actionably inadequate by downplaying the potential financial effect of the investigations, particularly the potential for significant tax, penalties and interest. The Court summarized and categorized the claims as follows:<br />
<blockquote class="tr_bq">
(1) General statements that Caterpillar’s consolidated financial statements are prepared in accordance with generally accepted accounting principles (“GAAP”). These statements appear in nearly identical form in Caterpillar’s Form 10-K (2013-2017) and Form 10-Q for each quarter of 2013 and 2014. </blockquote>
<blockquote class="tr_bq">
(2) Statements disclosing the IRS examination of tax returns from 2007 to 2009 in Form 10-K (2013 and 2014) and Form 10-Q (each quarter of 2014). The forms further state: “In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on our consolidated financial position, liquidity or results of operations.” In 2014, Caterpillar included the additional statement that this opinion included “the impact of a loss carry-back to 2005.” </blockquote>
<blockquote class="tr_bq">
(3) Lagacy’s testimony before the Senate Subcommittee and corresponding press release in advance of that testimony in which she referred to Caterpillar’s legal compliance with tax laws, that CSARL is not a shell corporation, and that Caterpillar remains convinced that its restructuring complied with the tax code. </blockquote>
<blockquote class="tr_bq">
(4) Caterpillar’s Form 10-K, 2015-2016 (all quarters) and 2017 (first quarter) disclosed the grand jury subpoena from January 8, 2015, stating: “The Company is cooperating with this investigation. The Company is unable to predict the outcome or reasonably estimate any potential loss; however, we currently believe that this matter will not have a material adverse effect on the Company’s consolidated results of operations, financial position or liquidity.” Caterpillar further states: “we believe that taxing authorities could challenge certain positions[,]” and reported that “[o]n January 30, 2015, we received a Revenue Agent’s Report (RAR) from the Internal Revenue Service (IRS) indicating the end of the field examination of our U.S. tax returns for 2007 to 2009 including the impact of a loss carryback to 2005. The RAR proposed tax increases and penalties for these years of approximately $1 billion primarily related to two significant areas that we intend to vigorously contest through the IRS Appeals process…. Based on the information currently available, we do not anticipate a significant increase or decrease to our recognized tax benefits for these matters within the next 12 months. We currently believe the ultimate disposition of these matters will not have a material adverse effect on our consolidated financial position, liquidity or results of operations. We expect the IRS field examination of our U.S. tax returns for 2010 to 2012 to begin in 2015. In our non-U.S. jurisdictions, tax years are typically subject to examination for three to eight<br />
years.”</blockquote>
I won't get into the details of the Court's treatment of the securities and fraud claims because they relate to law other than the focus of this blog -- federal tax crimes. But, federal tax crimes enthusiasts might be interested in the following excerpts (which at least I found interesting):<br />
<a name='more'></a><blockquote>
What Société Générale is really asking is that Caterpillar be required to admit liability for uncharged, unadjudicated claims while the investigation into its tax position was ongoing. That sort of confession of guilt is not required. See <i>Anderson v. Abbott Labs.</i>, 140 F. Supp. 2d 894, 906 (N.D. Ill.), aff'd sub nom. <i>Gallagher v. Abbott Labs.</i>, 269 F.3d 806 (7th Cir. 2001) (“SEC rules do not create a duty to confess contested charges.”); <i>Ballan v. Wilfred American Edu. Corp.</i>, 720 F.Supp. 241, 249 (E.D.N.Y.1989) (“[T]he SEC's proxy disclosure rules do not require a company's management to confess guilt to uncharged crimes, or ‘to accuse itself of antisocial or illegal policies.’ ... There is no reason why a different rule should apply under § 10(b).”) (citations omitted)). </blockquote>
<blockquote>
* * * * </blockquote>
<blockquote>
Citing the grand jury subpoena and execution of search warrants, Société Générale essentially argues that Caterpillar should have admitted a securities or tax law violation while the investigations were ongoing and the failure to do so was both a material omission and a misstatement. This Court finds such a position untenable. If every investigation or executed search warrant was evidence of wrongdoing then what purpose do hearings and trials have. As previously stated, securities laws generally do not impose such a duty upon publicly traded corporations to confess to uncharged, unadjudicated claims of wrongdoing. See <i>Anderson v. Abbott Labs.</i>, 140 F. Supp. 2d 894, 906 (N.D. Ill.), aff'd sub nom. <i>Gallagher v. Abbott Labs.</i>, 269 F.3d 806 (7th Cir. 2001) (“SEC rules do not create a duty to confess contested charges.”); see also <i>Mogell v. Calhoun</i>, No. 15 CV 1239, 2016 WL 3369233, at *5 (C.D.Ill. Mar. 15, 2016) (Mihm, J.) (finding that the plaintiff failed to show further disclosures were required by Caterpillar’s Board of Directors). </blockquote>
<blockquote>
Société Générale further claims that Caterpillar’s statements, regarding its compliance with the tax laws and its cooperation with the investigation, were false based on a report from an accounting professor, Dr. Robinson, that was prepared for the Senate Subcommittee hearings and was excerpted in the New York Times on March 7, 2017. Société Générale also points to a Wall Street Journal (“WSJ”) article from July 3, 2017. Newspaper and media may be credible sources bolstering plaintiff’s claim, “if the newspaper article includes numerous factual particulars and is based on an independent investigative effort[.]” <i>In re McKesson HBOC, Inc</i>. Sec. Litig., 126 F. Supp. 2d 1248, 1272 (N.D. Cal. 2000). The articles on which Société Générale relies do not support an inference that Caterpillar’s statements regarding its tax position were false, especially where Caterpillar qualified those statements by acknowledging that it could not predict the outcome. The excerpts from Dr. Robinson’s report are stated as opinion, “I believe that the company’s noncompliance with these rules was deliberate and primarily with the intention of a higher share price.” Similarly, the WSJ reported, “[f]ederal investigators believe Caterpillar, Inc. failed to submit numerous required export findings with the government in recent years.” Neither these reports nor the retirement or resignation of two senior executives suggests that Caterpillar did not believe that it complied with tax laws and was cooperating with the investigation. </blockquote>
<blockquote>
* * * * </blockquote>
<blockquote>
The 2009 lawsuit was an employment discrimination suit claiming retaliation by a former employee for raising concerns over the CSARL tax position that settled and was never adjudicated on the merits. Caterpillar contested that case as it has the IRS investigation. That Caterpillar consistently maintained its belief that it complied with tax laws, cooperated with the government, determined to appeal any adverse findings is not undermined by any or all of the allegations. Caterpillar did not present an overly sunny outlook, but specifically disclosed the investigations. Indeed, Caterpillar’s continued statements that it continued to belief its tax position complied with the law, the company specifically tempered those statements with ones acknowledging that the taxing authorities could challenge their position and that the ultimate outcome is not predictable. These facts suggest that it was at least as likely that Caterpillar believed its advisors and accountants that their position complied with the law. This position was perhaps negligent but Société Générale has not supplied sufficient facts to demonstrate that it was fraudulent or even reckless. “Perhaps the executives had a motive to pretend nothing was amiss (though even that does not seem beyond dispute, as they might equally have wanted the most accurate financial picture possible), but a generalized motive common to all corporate executives is not enough to establish scienter.” <i>Kohl’s</i>, 895 F.3d 939-40. Further, there is no meaningful dispute that significant time has passed since the agencies completed their investigations and no charges have been filed.</blockquote>
I don't know the current status of the tax or any other investigations. If readers know and think it material for readers of this blog, please advise either by comment or email to me at <a href="mailto:jack@tjtaxlaw.com">jack@tjtaxlaw.com</a>.<div><br /></div><div><b>Note: I made minor text changes (wording, grammatical) on 3/20/24 @ 10am, incident to preparing an update blog entry. See Based in Part on NYT Article, Senators Request Information from AG Garland about Possible Political Intervention in Caterpillar Tax Investigation(s) (3/20/24), <a href="https://federaltaxcrimes.blogspot.com/2024/03/based-in-part-on-nyt-article-senators.html">here</a>.</b></div>Jack Townsendhttp://www.blogger.com/profile/14469823736335455874noreply@blogger.com0tag:blogger.com,1999:blog-1519969502186924526.post-80611232480085313102024-03-20T09:52:00.003-05:002024-03-20T09:52:31.819-05:00Based in Part on NYT Article, Senators Request Information from AG Garland about Possible Political Intervention in Caterpillar Tax Investigation(s) (3/20/24)<p>In the past, I offered two blog entries on a tax and other
agency investigation of Caterpillar’s use of a Swiss company transfer pricing
diversion of U.S. income from the U.S. tax base. In reverse chronological order, they are:</p><p class="MsoNormal"><o:p></o:p></p>
<p class="MsoNormal"></p><ul style="text-align: left;"><li><u>Caterpillar Shareholder Suit For Fraudulent Disclosures
from Tax Civil and Criminal Investigation Dismissed</u> (Federal Tax Crimes
Blog 9/28/18; 3/20/24), <a href="https://federaltaxcrimes.blogspot.com/2018/09/caterpillar-shareholder-suit-for.html">here</a>;</li><li><u>The Whistleblower Behind Caterpillar Tax Commotion</u> (Federal
Tax Crimes Blog 6/2/17), <a href="https://federaltaxcrimes.blogspot.com/2017/06/the-whistleblower-behind-caterpillar.html">her</a>e.</li><li><u>Search Warrant Executed Against Caterpillar HQ,
Apparently Related to Tax</u> (Federal Tax Crimes Blog 3/6/17; 3/20/24), <a href="https://federaltaxcrimes.blogspot.com/2017/03/search-warrant-executed-against.html">here</a></li></ul><p></p><p class="MsoNormal"><o:p></o:p></p>
<p class="MsoNormal">There is current reporting that there may have been political
influence that stopped the criminal investigation and ended in a quite
favorable civil tax resolution. See Jesse Drucker, <u>How Trump’s Justice Dept.
Derailed an Investigation of a Major Company</u> (NYT 3/9/24), <a href="https://www.nytimes.com/2024/03/09/business/caterpillar-tax-trump-barr.html?unlocked_article_code=1.eE0.DjwL.gO9FKw0H6aPn&smid=url-share">here</a>. Following that article, on March 13, Senators Wyden (D. Oregon) and Whitehouse (D. Rhode Island), who serve as Chairs of the Senate Finance Committee and the Senate Budget Committee, respectively, wrote a letter <a href="https://www.finance.senate.gov/imo/media/doc/wyden_whitehouse_doj_caterpillar_letter.pdf">here</a> to Attorney General Garland requesting information about the handling and conclusion of the investigation. The facts as alleged in Drucker’s article and
in the Senators’ letter (as to which I cannot personally attest) raise issues
that, at least facially, require investigation (or at least answers) regarding
the handling of the Caterpillar investigation that seems to have been resolved
very favorably to Caterpillar.</p><p class="MsoNormal"><u>Note</u>: The Senators' letter linked above as posted on the Senate website as of today asks for a return date for the requested answers of "no later than____." (Letter physical p. 6; the letter does not have pagination.) Perhaps, that means that the return date is to be negotiated.</p><p class="MsoNormal"><o:p></o:p></p>Jack Townsendhttp://www.blogger.com/profile/14469823736335455874noreply@blogger.com0tag:blogger.com,1999:blog-1519969502186924526.post-63919356101441228992024-03-19T15:43:00.009-05:002024-03-19T15:46:00.059-05:00Recent Tax Enforcement Volume of DOJ Journal of Federal Law and Practice (3/19/24)<p class="MsoNormal">I recently discovered the recent Tax Volume of DOJ Journal
of Federal Law and Practice, Vol. 71, number 4 <a href="https://www.justice.gov/usao/media/1329291/dl?inline">here</a> dedicated
to Tax Enforcement. The following articles are in the volume (with page numbers
indicated).</p><p class="MsoNormal">Recent Tax Volume of DOJ Journal of Federal Law and Practice (3/19/24)</p><p class="MsoNormal"></p><ul style="text-align: left;"><li>Elissa Hart-Mahan, <u>Restitution in Criminal Tax Cases: Common Pitfalls and Practical Strategies</u> 5 </li><li>Todd Ellinwood & Caryn Finley, <u>Investigating Legal Source Income Tax Cases</u> 23 </li><li>Howard J. Zlotnick, <u>Twelve Rules for Presenting Accomplices</u> 71 43 </li><li>Andrew H. Kahl, <u>Follow That Lead! Obtaining and Using Tax Information in a Non-Tax Case</u>, 47 </li><li>David Zisserson, <u>Tax Fraud Involving COIVD-Relief Provisions</u> 63 </li><li>Larry Wszalek & Stuart Wexler, <u>Attorney-Client Privilege in the Context of Tax Preparation and Tax Planning</u> 79 </li><li>Gregory S. Knapp & Joseph B. Syverson, <u>Prosecuting Tax Obstruction under 26 U.S.C. 7212(a)</u> 97 (2023)</li><li>Stanley J. Okula, Jr. & Matthew Hicks, <u>Sentencing Advocacy in Criminal Tax Cases - Making the Government's Case for the Appropriate Sentence</u> 109 </li><li>Katie Bagley & Melissa Siskind, A Fool for a Client: Legal and Practical Considerations When Facing Pro Se Defendants 129 </li><li>Sean Beaty & Wilson Stamm, <u>A Taxing Dilemma: Navigating the Crime- Fraud Exception in Criminal Tax Cases</u> 155 </li><li>Sarah Kiewlicz & Thomas F. Koelbl, <u>Prosecuting Fraudulent Tax Return Preparers</u> 175 </li><li>Kimberle E. Dodd & Nanette L. Davis, <u>Gathering and Using Foreign Evidence in Tax Cases</u> 199 </li><li>Jason Bergmann & Richard J. Markel, <u>Monetary Claims Against the Government: When Are They Tax Refund Cases?</u> 223 </li><li>Marie E. Wicks & Michael W. May, <u>They Don't Make 'Em Like They Used to: Statutory Jurisdictional Requirements in the Age of the Clear-Statement Rule</u> 241</li></ul><p></p>Jack Townsendhttp://www.blogger.com/profile/14469823736335455874noreply@blogger.com0tag:blogger.com,1999:blog-1519969502186924526.post-77072205802007795472023-05-23T13:27:00.003-05:002024-03-19T12:15:48.861-05:00 6th Circuit Holds Excessive Restitution Cannot Be Reduced thus Denying IRS Authority to Reduce Excessive Restitution-Based Assessment (5/23/23)<p>In <i>United States v. Asker, </i>2023 FED App. 0223N, 2023 U.S. App. LEXIS 11662, 2023 WL 3370440 (6th Cir. 2023) (Nonpublished) (CA6 <a href="https://www.opn.ca6.uscourts.gov/opinions.pdf/23a0223n-06.pdf">here</a> and GS <a href="https://scholar.google.com/scholar_case?case=10024531366461108438">here</a>),
the court held that where the restitution for tax loss ordered by the
sentencing court for tax crimes was allegedly higher than the actual tax due, the
district court had no authority to reduce the amount. At sentencing, there was
confusion among the players as to the actual tax loss for restitution purposes.*
In trying to determine the amount in the confusion, the court has this Q&A
with counsel:</p><p class="MsoNormal"><o:p></o:p></p>
<p class="MsoNormal"> During
sentencing, however, the court asked what would happen if it were later determined he owed less than $2.5 million in taxes: <o:p></o:p></p>
<p class="MsoNormal"></p><blockquote><p class="MsoNormal">Court: You don’t anticipate that what is owed will be more
than 2.5?<o:p></o:p></p>
<p class="MsoNormal">Government: It is hard to say at this point. It is going to
depend—<o:p></o:p></p>
<p class="MsoNormal">Court: What if it is? Do you anticipate that 2.5 precludes
your client from paying back the rest?<o:p></o:p></p>
<p class="MsoNormal">Asker’s Counsel: I wouldn’t think that if it comes out—I
would not think that this Court’s restitution award would be conclusive on the
IRS. In fact, if there was some civil basis to seek additional penalties or
interests, the IRS could do that. <o:p></o:p></p>
<p class="MsoNormal">I suppose if it turns out the number is less, we may
probably come back and apply to the Court for some relief from the restitution
amount. </p></blockquote><blockquote><p class="MsoNormal">Government: That is correct, Your Honor. </p></blockquote><blockquote><p class="MsoNormal">Court: I just—my concern is
that if it turns out to be more, I think that is owed.<o:p></o:p></p>
<p class="MsoNormal">Asker’s Counsel: Yes, Ma’am. We don’t disagree with that. <o:p></o:p></p>
<p class="MsoNormal">Court: Okay.</p></blockquote><p class="MsoNormal"><o:p></o:p></p>
<p class="MsoNormal">The sentencing court assessed $2.5 million in restitution.<o:p></o:p></p>
<p class="MsoNormal">In due course, the IRS made a restitution-based assessment ("RBA")
for $2.5 million. The IRS has no
authority to reduce the RBA.<o:p></o:p></p>
<p class="MsoNormal">After Asker's criminal appeal affirmed the judgment, Asker
filed amended returns showing a $1.1 million aggregate tax liabilities, which the
Government did not contest because it decided not to allocate resources to an
audit of the amended returns. </p>
<p class="MsoNormal">Asker then moved the district court to reduce the restitution
award which would then permit the IRS to reduce the RBA.<o:p></o:p></p>
<p class="MsoNormal">The sentencing court
sat on the motion for 3 years and then denied it based on the Government's
argument that it had no authority to grant the motion.</p><p class="MsoNormal"><o:p></o:p></p>
<p class="MsoNormal">The Court of Appeals affirmed.<span></span></p><a name='more'></a><p></p><p class="MsoNormal"><o:p></o:p></p>
<p class="MsoNormal"><o:p> </o:p><b>JAT Notes:</b></p><p class="MsoNormal"><o:p></o:p></p>
<p class="MsoNormal">1. This shows the dangers on the parties not working diligently
to nail down good actual tax loss numbers before sentencing. Further, this
shows that sentencing courts should make sure that there are real tax loss numbers
for sentencing purposes because real unintended and significant harm can come from
the restitution. I think the court should target for restitution purposes the <b>lowest</b> reasonable number.</p><p class="MsoNormal"><o:p></o:p></p>
<p class="MsoNormal">2. I quote from Michael Saltzman and Leslie Book, <u>IRS Practice
and Procedure</u> (Thomsen Reuters 2015), as supplemented three times a year, this
from the latest online edition:</p><p class="MsoNormal"><o:p></o:p></p>
<p class="MsoNormal"><b></b></p><blockquote><p class="MsoNormal"><b>¶ 12.06[5][a] Restitution-based Assessment</b></p><p class="MsoNormal"><o:p></o:p></p>
<p class="MsoNormal">** * * *<o:p></o:p></p>
<p class="MsoNormal">2. How do these provisions work if the restitution
overstates the taxpayer's true tax liability?<b>1277.3</b> Let's illustrate the
problem. Assume that the court orders restitution of tax of $100 for year 01. Later, the Service
audits and determines that the taxpayer really owed only $50 of tax. The
Service might still assess the $50 tax
liability and interest and assessable
penalties. But the question is what to do about the $100 restitution
-based assessment that is shown to be
excessive. The answer is that the Service and courts proceeding on the civil
side can do nothing because of the prohibition on contesting restitution -based
assessment. The taxpayer will have to put his defendant hat on and request the
sentencing court to reduce the restitution
award.<o:p></o:p></p>
<p class="MsoNormal"> <b>n1277.3</b> This can happen through the sentencing court acting
on incomplete or inaccurate information or assumptions. Thus, sometimes a
sentencing court will fail to differentiate between tax loss under S.G. 2T1.1
and the actual tax loss for restitution purposes. That appears to be what
happened in <i>Klein v. Comm’r</i>, 149 TC No. 15 (2017). Tax loss for Guidelines
calculations purposes is not the same as actual tax loss, which is the
calculation that must be made for restitution purposes. Thus, for example, the
tax loss may include intended loss where there is no actual tax loss and may be
computed by ignoring previously unclaimed deductions not related to the offense
of conviction. If the sentencing court doesn't make that distinction, it will
just award the tax loss as restitution. When there is adequate communication,
the prosecutor and defense counsel should alert the court as to the problem and
do their best to get to the correct, bottom-line, real, actual tax loss to the
Service. But that did not happen in <i>Klein</i> and, it appears, the restitution
-based assessment was more than the
real, actual tax loss to the Service. In the civil tax proceeding, in <i>Klein</i>,
the Tax Court could not fix the problem by reducing the restitution -based
assessment, but the sentencing court could do that upon motion of the
defendant, particularly where consented to or not opposed by the prosecutor.</p></blockquote><p class="MsoNormal"></p><p class="MsoNormal"><o:p></o:p></p>
<p class="MsoNormal"><u>Disclosure</u>, I am the principal draftsman of Chapter 12 on
tax crimes and the supplements. I will have to include this case in the next supplement. While I have not done new research since I wrote the above quoted material, I had thought that other sentencing court could reduce the restitution upon a proper showing. I don't know whether the Government's failure to agree as to the reduced tax loss (rather than just not audit) was the issue or the proper motion to reduce had timed out. I am a bit stunned that a district court is denied authority to correct an injustice.</p>Jack Townsendhttp://www.blogger.com/profile/14469823736335455874noreply@blogger.com0tag:blogger.com,1999:blog-1519969502186924526.post-15796551212500789082024-03-14T13:00:00.004-05:002024-03-15T06:43:55.344-05:00Excellent Article by Former Tax Crimes Prosecutor About How the Tax Crimes Prosecution Decisions Are Made in Politically Charged Cases (3/14/24)<p><span style="font-family: inherit;">This blog entry will alert Tax Crimes fans to an article
about, well, tax crimes. Andrey Spektor, <u>Opinion: What Hunter Biden and
Donald Trump have in common</u> (CNN 3/13/24), <a href="https://www.cnn.com/2024/03/13/opinions/what-hunter-biden-and-donald-trump-have-in-common-spektor/index.html">here</a>.
Spektor is identified in the article as “Having worked with the Department of
Justice Tax Division and prosecuted tax offenses.” His law firm bio, <a href="https://www.bclplaw.com/en-US/people/andrey-spektor.html">here</a>, mentions
only AUSA experience for EDNY and does not mention DOJ Tax Division experience;
I infer that, as a prosecutor on tax cases in USAO EDNY, he would have “worked”
with the Tax Division which is common. So he has credibility to speak to the how criminal prosecution decisions are made (or not made) in politically charged cases such as Hunter Biden’s and Donald Trump’s.</span></p><p class="MsoNormal"><span style="font-family: inherit;"><o:p></o:p></span></p>
<p class="MsoNormal"><span style="font-family: inherit;">The article is fairly short, engaging, well-written, and,
based on my experience in the tax crimes area, very credible. As to Hunter
Biden, Spektor claims (rightly, I think) that Hunter Biden would not have been
prosecuted on the facts had he not been related to Joe Biden, the President, and decisions influenced by the press and politics. I offer the conclusion in the hope that offering
the conclusion will not discourage anyone from reading the article:</span></p><p class="MsoNormal"><span style="font-family: inherit;"><o:p></o:p></span></p>
<p class="MsoNormal"></p><blockquote><span style="font-family: inherit;"> Hunter Biden
has been treated differently from almost any other person save for, perhaps,
Trump – at least in New York, where the former president has been indicted on a
novel and shaky legal theory reserved for it seems, Trump. That doesn’t mean
that Trump or Hunter Biden are [sic - is] innocent; indeed, the former has more serious
cases to contend with. But unequal treatment of our citizens, no matter how
unethical or despicable they may be, is just as immoral.</span></blockquote><p></p>Jack Townsendhttp://www.blogger.com/profile/14469823736335455874noreply@blogger.com0tag:blogger.com,1999:blog-1519969502186924526.post-85602764285047773412024-03-08T11:49:00.003-06:002024-03-08T11:54:54.709-06:00Taxpayers Should Be Prosecuted Along with Enablers of Abusive Tax Shelters (3/8/24)<p>This blog entry is an opinion piece. Individual taxpayers
should be prosecuted along with their enablers who promote and implement the
abusive shelters (particularly enablers from the tax professions).</p><p class="MsoNormal"><o:p></o:p></p>
<p class="MsoNormal">The following is from a report of Attorney General Garland's comments (Kerry K. Walsh Deborah A.
Curtis Amy Jeffress, <u>“Swift” Justice: Attorney General Garland Vows To
Uphold DOJ Priorities in Fireside Chat</u> (Arnold & Porter 3/6/24), <a href="https://www.arnoldporter.com/en/perspectives/blogs/enforcement-edge/2024/03/swift-justice_ag-garland">here</a>):</p>
<p class="MsoNormal" style="margin-left: 0.5in;">Additionally, AG Garland explained
how DOJ’s three co-equal priorities — upholding the rule of law, keeping
America safe, and protecting civil liberties — implicated corporate
accountability. <b>AG Garland stressed that
the greatest deterrent of white collar crime is holding individual corporate
executives to account.</b> AG Garland also reiterated the importance of
applying the rule of law equally, regardless of rank or position of power.<o:p></o:p></p>
<p class="MsoNormal">I supplied the bold-face to emphasize the point. There has
been a perception that, by delivering up the corporation (or other entity) for
criminal consequences, the people in the corporations (collectively, the
executives) could escape accountability.</p><p class="MsoNormal"><o:p></o:p></p>
<p class="MsoNormal">A similar perception and resulting phenomenon exists in the tax area where the promoters of abusive tax shelters (think, for example, the Son-of-Boss shelters in the late 1990s and early 2000s) were prosecuted, but the taxpayers generally were not. Yet all of those taxpayers or at least most of them knew that they
were violating the law and participated in the fraud. For example, the abusive
shelters wrapped in complex structures and voluminous more-likely-than-not
opinions, required at the minimum that the taxpayers represent to the promoters
that they had a nontax profit motive when, in fact, they did not. That was a lie
that was essential to abusive tax shelter. Moreover, most of those wealthy
taxpayers had independent counsel (other than the ones supplied or recommended
by the promoters) before buying into the deal. Assuming that most of those
independent counsel were competent, those taxpayers knew that the deals were
bogus, but nevertheless sought to buy fraud insurance through the legal opinions
rendered by the promoter’s supplied or recommended counsel (as opposed to their
own independent counsel). That worked as insurance.</p><p class="MsoNormal"><o:p></o:p></p>
<p class="MsoNormal">My argument has been that the way to discourage abusive tax
shelters is to prosecute the taxpayers along with the promoters. This would
discourage the tax professional penalty insurance industry and abusive tax
shelters generally.</p><p class="MsoNormal">This blog entry is cross-posted on the Federal Tax Procedure Blog <a href="https://federaltaxprocedure.blogspot.com/2024/03/taxpayers-should-be-prosecuted-along.html">here</a>.</p><p class="MsoNormal"><o:p></o:p></p>Jack Townsendhttp://www.blogger.com/profile/14469823736335455874noreply@blogger.com0tag:blogger.com,1999:blog-1519969502186924526.post-71368587248739253192024-02-27T10:38:00.003-06:002024-02-27T10:41:12.754-06:00District Court Holds Indicatively While Case on Appeal That Remand of FBAR Willful Penalty to IRS Did Not Vacate the Timely Assessments (2/27/24)<p><span style="font-family: inherit;"> In <i>United States v. Kerr</i> (D. AZ Dkt O. 2:19-CV-05432
Order dtd 2/23/24), TN <a href="https://www.taxnotes.com/research/federal/court-documents/court-opinions-and-orders/indicative-ruling-fbar-case-says-penalties-were-not-vacated/7j7xz">here</a>
and CL <a href="https://storage.courtlistener.com/recap/gov.uscourts.azd.1209283/gov.uscourts.azd.1209283.76.0.pdf">here</a>,
the district court ruled <b>indicatively</b>
clarifying the intended effect of the district court termination of the case after
remand to the IRS of willful FBAR penalties for certain years. The intended
effect was not to vacate those penalties but to provide a procedure to reconsider
and modify the amount of the penalties for future district court judgment. In
other words, the remand did not require a new assessment of FBAR willful penalties
(for which the assessment statute of limitations had run). Rather, any IRS
action would adjust the previously timely assessed FBAR penalties. After this
indicative ruling, the appeal of the case can proceed in the Ninth Circuit.</span></p><p class="MsoNormal"><span style="font-family: inherit;"><o:p></o:p></span></p>
<p class="MsoNormal"><span style="font-family: inherit;">Links to items related to this blog are:</span></p>
<p class="MsoNormal"></p><ul style="text-align: left;"><li><span style="font-family: inherit;">FRCP 62,1, titled Indicative Ruling on a Motion for Relief
That is Barred by a Pending Appeal, </span><a href="https://www.law.cornell.edu/rules/frcp/rule_62.1" style="font-family: inherit;">here</a><span style="font-family: inherit;">,</span></li><li><span style="font-family: inherit;">FRAP 12.1, Remand After an Indicative Ruling by the District
Court on a Motion for Relief That Is Barred by a Pending Appeal, <a href="https://www.law.cornell.edu/rules/frap/rule_12.1">here</a>, </span></li><li><span style="font-family: inherit;">Kerr docket entries for this civil case (FBAR penalty
enforcement case): CL, </span><a href="https://www.courtlistener.com/docket/16355120/united-states-v-kerr/" style="font-family: inherit;">here</a><span style="font-family: inherit;">.</span></li><li><span style="font-family: inherit;">Ninth Circuit Order staying Ninth Circuit proceedings
pending the district court’s indicative ruling, <a href="https://storage.courtlistener.com/recap/gov.uscourts.azd.1209283/gov.uscourts.azd.1209283.75.0.pdf">here</a>.</span></li></ul><p></p>
<p class="MsoNormal"><span style="font-family: inherit;">Prior blogs involving Mr. Kerr are (reverse chronological
order):<span></span></span></p><a name='more'></a><p></p>
<p class="MsoNormal"></p><ul style="text-align: left;"><li><u>Court Holds Defendant in FBAR Suit Alleging No Deficiency in
Tax for Excessive Fines Argument Must Prove Deficiency Despite Tax Court No
Deficiency Decision</u> (Federal Tax Procedure Blog 4/1/22), <a href="https://federaltaxprocedure.blogspot.com/2022/04/court-holds-defendant-in-fbar-suit.html" style="font-family: inherit;">here</a><span style="font-family: inherit;">.</span></li><li><span style="font-family: inherit;"><u>Issue Preclusion (Collateral Estoppel) in FBAR Civil Willful
Penalty Suit After Criminal Conviction</u> (Federal Tax Crimes Blog 3/3/21), </span><a href="https://federaltaxcrimes.blogspot.com/2021/03/issue-preclusion-collateral-estoppel-in.html" style="font-family: inherit;">here</a><span style="font-family: inherit;">.</span></li><li><span style="font-family: inherit;"><u>U.S. Attorney Enabler Sentenced for Assisting Offshore
Evasion</u> (Federal Tax Crimes Blog 3/19/14), </span><a href="https://federaltaxcrimes.blogspot.com/2014/03/us-attorney-enabler-sentenced-for.html" style="font-family: inherit;">here</a><span style="font-family: inherit;">.</span></li><li><span style="font-family: inherit;"><u>Kerr & Quiel - Denial of Post-Trial Motions -
Installment #2</u> (Federal Tax Crimes Blog 8/20/13), </span><a href="https://federaltaxcrimes.blogspot.com/2013/08/kerr-quiel-denial-of-post-trial-motions_20.html" style="font-family: inherit;">here</a>,</li><li><span style="font-family: inherit;"><u>Kerr & Quiel - Denial of Post-Trial Motions -
Installment #1</u> (Federal Tax Crimes Blog 8/19/13), </span><a href="https://federaltaxcrimes.blogspot.com/2013/08/kerr-quiel-denial-of-post-trial-motions.html" style="font-family: inherit;">here</a><span style="font-family: inherit;">.</span></li><li><span style="font-family: inherit;"><u>Convictions of U.S. Persons Related to UBS and Pictet
Accounts</u> (Federal Tax Crimes Blog 4/12/13), </span><a href="https://federaltaxcrimes.blogspot.com/2013/04/convictions-of-us-persons-related-to.html" style="font-family: inherit;">here</a><span style="font-family: inherit;">.</span></li><li><span style="font-family: inherit;"><u>Defendant Waives Attorney-Client Privilege by Asserting
Reliance on FBAR Advice Defense</u> (Federal Tax Crimes Blog 7/19/12), </span><a href="https://federaltaxcrimes.blogspot.com/2012/07/defendant-waivers-attorney-client.html" style="font-family: inherit;">here</a><span style="font-family: inherit;">.</span></li><li><span style="font-family: inherit;"><u>Swiss Bank Pictet Turns Over U.S. Client Data</u> (Federal Tax
Crimes Blog 5/8/12), </span><a href="https://federaltaxcrimes.blogspot.com/2012/05/swiss-bank-pictet-turns-over-client.html" style="font-family: inherit;">here</a><span style="font-family: inherit;">.</span></li><li><span style="font-family: inherit;"><u>2 Taxpayers and their U.S. Lawyer Indicted re Foreign
Accounts</u> (Federal Tax Crimes Blog 2/1/12), </span><a href="https://federaltaxcrimes.blogspot.com/2012/02/2-taxpayers-and-their-us-lawyer.html" style="font-family: inherit;">here</a><span style="font-family: inherit;">.</span></li></ul><p></p>
<p class="MsoNormal"><o:p><span style="font-family: inherit;"> </span></o:p><span style="font-family: inherit;">This blog entry is cross-posted on the Federal Tax Procedure
Blog <a href="https://federaltaxprocedure.blogspot.com/2024/02/district-court-holds-indicatively-while.html">here</a>.</span></p><p class="MsoNormal"><o:p></o:p></p>Jack Townsendhttp://www.blogger.com/profile/14469823736335455874noreply@blogger.com0tag:blogger.com,1999:blog-1519969502186924526.post-50822643213966181352024-02-23T12:58:00.002-06:002024-02-23T13:01:42.423-06:00Tax Court Denies WB Claim Made Contemporaneously With Target Taxpayer’s Voluntary Disclosure (2/23/24)<p><span style="font-family: inherit;">In </span><i style="font-family: inherit;">Whistleblower 14376-16W v. Commissioner</i><span style="font-family: inherit;">, T.C. Memo. 2024-22, GS <a href="https://scholar.google.com/scholar_case?case=7143179007436479259">here</a>, the Court held that the Whistleblower (“WB”) was entitled to no relief from the Whistleblower Office’s denial of an award. The opinion establishes no new precedent, which is why it is a Memo opinion. The opinion does offer some interesting aspects, which I will discuss here.</span></p><p class="MsoNormal"><span style="font-family: inherit;">1. The WB claim targeting several taxpayers was made a couple of months before some of the taxpayers made a request to CI to participate in an IRS voluntary disclosure program.</span><span style="font-family: inherit;"> </span><span style="font-family: inherit;">(It is not clear whether the request was under one of the offshore variants or was under the general voluntary disclosure program (see p. 3 n. 6); it makes no difference, however, for the point I discuss here, so I will just call it a VDP request.) The VDP request was made before any submissions (amended returns, etc.) required to complete voluntary disclosure; those submissions were delayed a substantial period. After the voluntary disclosure request, the WBO processed and sent to the field the WB claim after CI received the VDP request. The IRS subsequently undertook the work required to determine and collect substantial tax based on the taxpayers' submissions. The IRS says that, although its examination function received the WB information, it took no action based on the information. The record before the Court (essentially the record related to the WB claim and related items) supported the IRS’s claim that the proceeds generated from its activity did not rely on the WB claim and information in the WB claim.</span></p><p class="MsoNormal"><span style="font-family: inherit;">2. The Court denied the WB’s sweeping and broadly written discovery requests designed to ferret out all documents and information that could test even tangentially the IRS’s narrative that no collected proceeds resulted from the WB information (including whether the record the IRS submitted to the Court was complete). In part, the WB requested documents and information in the voluntary disclosure package that, it claims, was “indirectly considered” in collecting the proceeds. (See pp. 33-37.) In part, the Court reasoned:</span></p><p class="MsoNormal"></p><blockquote><p class="MsoNormal"> <span style="font-family: inherit;">Petitioner contends, however, that the WBO “indirectly considered” the VDP materials. As one court has aptly observed, “it is not entirely clear what it means to indirectly consider documents or materials.” </span><i style="font-family: inherit;">Amgen Inc. v. Hargan</i><span style="font-family: inherit;">, 285 F. Supp. 3d 397, 404 (D.D.C. 2017) (treating the “indirect consideration” concept as “captur[ing] materials that are necessary to understand the documents that the agency directly relied upon” and denying motion to supplement the administrative record with documents intended to test a decision by the Food and Drug Administration for consistency with previous decisions). The caselaw provides no general test.24 But it does suggest some guiding principles. One court has observed that if an agency's final decision was based “on the work and recommendations of subordinates, those materials should be included as well.” </span><i style="font-family: inherit;">Amfac Resorts, L.L.C. v. U.S. Dep't. of Interior</i><span style="font-family: inherit;">, 143 F. Supp. 2d 7, 12 (D.D.C. 2001) (collecting cases), aff'd in part, rev'd in part 282 F.3d 818 (D.C. Cir. 2002), vacated in part sub nom. </span><i style="font-family: inherit;">Nat'l Park Hosp. Ass'n v. Dep't of Interior</i><span style="font-family: inherit;">, 538 U.S. 803 (2003). On the other hand, it is not always necessary to include in the administrative record source information upon which agency staff relied in making their recommendations to the agency decisionmakers if other information in the record obviates the need to consider the source information independently. See, e.g., </span><i style="font-family: inherit;">James Madison Ltd. by Hecht v. Ludwig</i><span style="font-family: inherit;">, 82 F.3d 1085, 1095 (D.C. Cir. 1996) (affirming denial of discovery and record supplementation with respect to source documents that bank examiners had relied upon in making their bank-insolvency reports to the Comptroller of the Currency, where “detailed contemporaneous reports from the examiner-in-charge and members of her examination team explain[ed] how and why they reached their conclusions regarding the banks' reserves”); </span><i style="font-family: inherit;">Cape Hatteras Access Pres. All.</i><span style="font-family: inherit;">, 667 F. Supp. 2d at 114 (denying motion to supplement the record with a biological report that the National Park Service had relied upon [*35] in developing an interim strategy that was before the Fish and Wildlife Service when it designated certain critical habitats, even though the biological report was referenced by several other documents in the administrative file).<span></span></span></p><a name='more'></a><p></p><p class="MsoNormal"><span style="font-family: inherit;"> In <i>Berenblatt</i>, 160 T.C., slip op. at 19-21, this Court denied requested discovery of certain interview documents and subpoenaed financial records that the IRS had obtained before the whistleblower initially provided information to the IRS in an interview. The CI special agent who had interviewed the whistleblower referenced these documents in his Form 11369 narrative, but they were not included in the designated administrative record. This Court rejected an argument that because these documents had been available to the CI special agent when he completed the Form 11369, they had been indirectly considered in reaching a decision on the whistleblower's award claim. The Court reasoned that the decisionmakers for the whistleblower's claim were the relevant WBO personnel and not the CI special agent who prepared the Form 11369. Id. at 19. The Court observed: “If any potentially available document in the IRS's possession at the time the WBO made its decision were discoverable, that would render the record rule all but meaningless.” Id. at 20. The Court further stated that discovery of items available to the CI special agent were “limited to those relevant to [the whistleblower's] contribution to the ongoing investigation and generally does not extend to those created before his interview.” Id.<o:p></o:p></span></p><p class="MsoNormal"><span style="font-family: inherit;"> In the instant case, CI received the target taxpayers' VDP application and forwarded it to SB/SE weeks before receiving petitioner's complete Form 211 package and forwarding it to a CI analyst for consideration. It was many months later that the WBO, upon learning that CI had ultimately declined to pursue the matter, forwarded petitioner's whistleblower information to SB/SE. Nothing in the record suggests that the VDP materials were “relevant to [the whistleblower's] contribution to the ongoing investigation.” Id. As the record makes clear, the only tax collections resulting from the investigation of the target taxpayers were attributable to the taxes that they reported on their delinquent and amended income tax returns and not to any information that petitioner provided.<o:p></o:p></span></p><p class="MsoNormal"><span style="font-family: inherit;"> Similarly, the references to the target taxpayers' VDP application as contained in SA Chatham's ARMs do not compel the conclusion that the VDP materials were before the WBO in making its decision. As the ARMs make clear, this information was obtained from the Forms 11369 that CI and SB/SE forwarded to the WBO. The mere reference to the [*36] VDP application in these documents does not necessarily make it part of the record. See <i>Berenblatt</i>, 160 T.C., slip op. at 21 n.8; Oceana, Inc. v. Ross, 290 F. Supp. 3d 73, 79 (D.D.C. 2018) (“[T]he mere mention of a document in the agency's decision or the record does not always mean, ipso facto, that the agency considered the document.” (citing <i>Franks v. Salazar</i>, 751 F. Supp. 2d 62, 69 (D.D.C. 2010))). There is a difference between an agency's citing a document for a substantive proposition, which may indicate that the agency actually considered the document in making its decision, and merely referencing a document's existence, which is insufficient, on its own, to show consideration. <i>Oceana</i>, 290 F. Supp. 3d at 80; see also <i>Marcum v. Salazar</i>, 751 F. Supp. 2d 74, 80 (D.D.C. 2010) (“[R]eferences to documents in the administrative record do not prove that that the documents were 'before' the deciding agency.”); <i>WildEarth Guardians v. Salazar</i>, 670 F. Supp. 2d 1, 6 (D.D.C. 2009) (“Although citation to a document may . . . indicate consideration of the contents of the document, the fact that a document is merely mentioned does not lead to the same conclusion.”); <i>Cape Hatteras Access Pres. All.</i>, 667 F. Supp. 2d at 114 (stating that multiple references in the record to a biological report did “not prove that it was before the agency when it made its decision”).<o:p></o:p></span></p><p class="MsoNormal"><span style="font-family: inherit;"> The decisionmakers for petitioner's award claim were STA Chatham and his colleagues in the WBO, not the IRS field personnel who considered the VDP request. See <i>Berenblatt</i>, 160 T.C., slip op. at 19; see also IRM 25.2.1.1.2(2) and (3) (Mar. 10, 2023) (“The authority to determine and approve awards under IRC 7623 . . . is delegated to the Director of the W[B]O. . . . The operating divisions do not have authority to determine or approve awards under IRC 7623.”). Nothing in the record suggests that the WBO actually considered the substantive contents of the target taxpayers' VDP application or of any other VDP materials in making its decision to deny petitioner's award claim. As stated in SA Chatham's supplemental ARM: “This decision to accept the taxpayer's VDP filing was totally outside the purview of the Whistleblower Office and had no direct effect on the outcome of the Whistleblower's claim for award.” In these circumstances the references to the target taxpayers' VDP application in the ARMs and Forms 11369 are insufficient to overcome the presumption that the WBO properly designated the record. See <i>Cape Hatteras Access Pres. Alliance</i>, 667 F. Supp. 2d at 114.<o:p></o:p></span></p><p class="MsoNormal"><span style="font-family: inherit;"> Petitioner suggests that discovery of the VDP materials is necessary because respondent's actions are not adequately explained in the administrative record. Petitioner posits various “mysteries” [*37] involving the IRS's decision to honor the target taxpayers' VDP request — why the IRS accepted a VDP request that was allegedly incomplete, disclosed the existence of a whistleblower to the target taxpayers' representative, and ultimately honored the VDP request even though it was submitted after petitioner had submitted the Form 211. The relevant question in this whistleblower proceeding, however, is not whether the IRS properly processed or honored the target taxpayers' VDP request — again, a question outside the purview of the WBO — but whether the WBO abused its discretion in denying petitioner's award claim. That question is the crux of this case, and we address it below in evaluating the substantive merits of this case rather than as part of our consideration of petitioner's discovery motion.</span><span style="font-family: inherit;"> </span></p></blockquote><p class="MsoNormal"></p><p class="MsoNormal"><span style="font-family: inherit;">3. The Court also denied the WB’s request to include the VDP materials as “extrarecord evidence.” (See pp. 37-40.) After considering other claims, the Court concludes (p. 42-43):<o:p></o:p></span></p><p class="MsoNormal"><span style="font-family: inherit;"></span></p><blockquote><p class="MsoNormal"><span style="font-family: inherit;"> </span><span style="font-family: inherit;">In conclusion, petitioner has failed to overcome the presumption that the WBO has properly compiled the administrative record. Petitioner has not made a significant showing that respondent exercised bad faith in compiling it, nor has petitioner made a significant showing that it omits material that the WBO actually considered, directly or indirectly, or material that otherwise falls under a category listed in Treasury Regulation §301.7623-3(e). Furthermore, petitioner has not demonstrated the applicability of any of the narrow exceptions to the [*43] record rule that would permit extrarecord evidence to be consulted in this case. Consequently, we will deny petitioner's Motion to Compel Production of Documents.</span><span style="font-family: inherit;"> </span></p></blockquote><p class="MsoNormal"></p><p class="MsoNormal"><span style="font-family: inherit;">4. The Court denied the WB’s claim that “a good majority” of the documents in the record “constitute hearsay” reasoning (p. 43):<o:p></o:p></span></p><p class="MsoNormal"><span style="font-family: inherit;"></span></p><blockquote><span style="font-family: inherit;">Respondent has submitted all these documents in support of his Motion for Summary Judgment, not to prove the truth of their contents but to show what documents STA Chatham relied on in deciding to deny petitioner's whistleblower claim. Accordingly, we overrule the hearsay objection. See id.; see also </span><i style="font-family: inherit;">Marino v. Commissioner</i><span style="font-family: inherit;">, T.C. Memo. 2021-130, at *21 (holding that this Court reviews the administrative record in a whistleblower case “without regard to whether it might include evidence that would be inadmissible as hearsay in a trial de novo”); </span><i style="font-family: inherit;">Whistleblower 23711-15W v. Commissioner</i><span style="font-family: inherit;">, T.C. Memo. 2018-34, at *18 n.9 (overruling hearsay objection with respect to contents of a Form 11369 attached to a declaration in support of a motion for summary judgment in a whistleblower case).</span></blockquote><span></span><p></p><p class="MsoNormal"><span style="font-family: inherit;">5. The Court found (p. 46) that “the administrative record indicates that RA Martin in SB/SE used petitioner's whistleblower information to issue IDRs and summonses but ultimately was unable to verify petitioner's information.” The information thus resulted in no collected proceeds which were based on the “taxpayers' delinquent and amended returns.”</span></p><p class="MsoNormal"><span style="font-family: inherit;">6. Finally, the Court addressed IRS “missteps in the summer of 2012 when it revealed to the target taxpayers' representative, in communications about the target taxpayers' eligibility for the VDP program, the existence (but not the identity) of a whistleblower.” </span><span style="font-family: inherit;"> </span><span style="font-family: inherit;">(Pp. 46-47.) Basically, the Court held that that “misstep” did not affect the collected proceeds which is the base from which any award must be based.</span></p><p class="MsoNormal"><span style="font-family: inherit;">This post was cross-posted to the Federal Tax Procedure Blog <a href="https://federaltaxprocedure.blogspot.com/2024/02/tax-court-denies-wb-claim-made.html">here</a>.</span></p>Jack Townsendhttp://www.blogger.com/profile/14469823736335455874noreply@blogger.com0tag:blogger.com,1999:blog-1519969502186924526.post-24693292244713690882024-02-14T08:51:00.004-06:002024-02-14T08:54:09.783-06:00Sixth Circuit Affirms Summary Judgment on FBAR Willful Penalty on Conduct Objectively Reckless (2/14/24)<p><span style="font-family: inherit;">I report this morning on <i>United States v. Kelly</i>, ___
F.4th ___ (6th Cir. 8/8/24), CA6 <a href="https://www.opn.ca6.uscourts.gov/opinions.pdf/24a0024p-06.pdf">here</a>
and GS <a href="https://scholar.google.com/scholar_case?case=17742725558686162187">here</a>.
<i>Kelly</i> affirms the district court's approval of the FBAR willful penalty on motion for summary judgment.</span></p><p class="MsoNormal"><span style="font-family: inherit;"><o:p></o:p></span></p>
<p class="MsoNormal"><span style="font-family: inherit;">I first offer the <b>MS CoPilot</b> (MS’s version of AI)
explanation of the case:</span></p>
<p class="MsoNormal"><span style="font-family: inherit;"></span></p><blockquote><p class="MsoNormal"><span style="font-family: inherit;">Case Title: <i>United States v. James J. Kelly, Jr.</i></span></p>
<p class="MsoNormal"><span style="font-family: inherit;">Background:</span></p>
<p class="MsoNormal"><span style="font-family: inherit;">• James J. Kelly, Jr., a U.S. citizen, opened an
interest-bearing account at Finter Bank in Zurich, Switzerland in 2008.<o:p></o:p></span></p>
<p class="MsoNormal"><span style="font-family: inherit;">• He designated the account as “numbered” to keep his name
off the statements and requested that Finter retain account-related
correspondence instead of mailing it to him.<o:p></o:p></span></p>
<p class="MsoNormal"><span style="font-family: inherit;">Legal Context:<o:p></o:p></span></p>
<p class="MsoNormal"><span style="font-family: inherit;">• Under the Bank Secrecy Act, individuals with foreign bank
accounts containing $10,000 or more must annually file a Report of Foreign Bank
and Financial Accounts (FBAR) with the U.S. Department of the Treasury.<o:p></o:p></span></p>
<p class="MsoNormal"><span style="font-family: inherit;">• Failure to file an FBAR by the deadline can result in
civil penalties. The penalty amount depends on whether the failure was
accidental or willful.<o:p></o:p></span></p>
<p class="MsoNormal"><span style="font-family: inherit;">Case Details:<o:p></o:p></span></p>
<p class="MsoNormal"><span style="font-family: inherit;">• The government sued James Kelly, alleging that he
willfully failed to timely file FBARs for the years 2013, 2014, and 2015.<o:p></o:p></span></p>
<p class="MsoNormal"><span style="font-family: inherit;">• The district court granted summary judgment in favor of
the government.<o:p></o:p></span></p>
<p class="MsoNormal"><span style="font-family: inherit;">• Kelly’s failure to file was deemed a willful violation of
the Bank Secrecy Act.<o:p></o:p></span></p>
<p class="MsoNormal"><span style="font-family: inherit;">Outcome:<o:p></o:p></span></p>
<p class="MsoNormal"><span style="font-family: inherit;">• The court affirmed the judgment, emphasizing that Kelly’s
actions constituted a willful violation of the law.<o:p></o:p></span></p>
<p class="MsoNormal"><span style="font-family: inherit;">• In summary, James Kelly’s failure to file FBARs for his
foreign bank account led to civil penalties due to willful non-compliance with
the Bank Secrecy Act.<span></span></span></p><a name='more'></a><p></p></blockquote><p class="MsoNormal"><span style="font-family: inherit;"><o:p></o:p></span></p>
<p class="MsoNormal"><span style="font-family: inherit;">CoPilot gets it right in high level summary. Lawyers and students
need a bit more of the key reasoning of the case, so I offer some bullet points
below:</span></p><p align="center" class="MsoNormal" style="text-align: center;"></p><ul><li><span style="font-family: inherit; text-align: left;">The fact pattern is a variation on the theme of FBAR willful
penalty cases (secret foreign bank accounts (Switzerland and Liechtenstein) and
incomplete OVDP filings, with also incomplete Form 433-A filing, resulting in
removal from OVDP).</span></li></ul>
<p class="MsoNormal"><span style="font-family: inherit;">Key holdings are:<o:p></o:p></span></p>
<p class="MsoNormal"></p><ul style="text-align: left;"><li><o:p><span style="font-family: inherit;"> </span></o:p><span style="font-family: inherit;">“[W]e hold that, for purposes of an FBAR civil penalty, a
willful violation of the FBAR reporting requirements includes both knowing and
reckless violations. In so holding, we join every other circuit to have
addressed this issue.”</span></li><li><span style="font-family: inherit;">The objective evidence on the motion for summary judgment
shows that Kelly’s conduct was at least reckless, the requirement for the civil
FBAR willful penalty. </span></li><li><span style="font-family: inherit;">"The
undisputed facts show that Kelly knew about his foreign account, undertook
considerable efforts to keep it secret, did not consult with any professionals
about his tax obligations, and then failed to ensure that the FBARs were
submitted after learning he had not met these reporting requirements in the
past. Given all of this, Kelly’s failure to satisfy his FBAR requirements for
the years 2013, 2014, and 2015 was a willful violation of the Bank Secrecy Act."</span></li></ul><div>Willfulness can be a classic case of a fact-intensive issue, with some courts holding in the particular facts of the cases that summary judgment is not appropriate. But where the relevant facts show clearly that the objective reckless standard is met, summary judgment is appropriate.</div><div><br /></div><div>This blog entry is cross-posted on the Federal Tax Procedure Blog <a href="https://federaltaxprocedure.blogspot.com/2024/02/sixth-circuit-affirms-summary-judgment.html">here</a>.</div>Jack Townsendhttp://www.blogger.com/profile/14469823736335455874noreply@blogger.com0tag:blogger.com,1999:blog-1519969502186924526.post-15520916110579102042024-02-07T10:06:00.000-06:002024-02-07T10:06:54.015-06:00Law Firm Tax Partner Sentenced in Germany to 3 1/2 Years for Fraudulent Tax Shelters (2/7/24)<p>An earlier news item finally reached my consciousness this
morning and gave me a déjà vu experience. A Freshfields (prominent law firm) former tax partner
who gave legal advice for clients to exploit an abusive tax shelter (aka bullshit
tax shelter) was sentenced to 3 ½ years incarceration for his role. The shelter
has attracted the name “Cum-Ex.” See e.g., Tom Sims & Kirstin Ridley, <u>Former
Freshfields partner sentenced to jail for German tax fraud</u> (Reuters 1/30/24),
<a href="https://www.reuters.com/markets/europe/ex-freshfields-partner-gets-35-year-sentence-german-tax-fraud-2024-01-30/">here</a>;
and Olaf Storbeck, <u>Freshfields’ former tax partner sentenced to 3½ years in
jail</u> (Financial Times 1/30/24), <a href="https://www.ft.com/content/b395116d-22c8-4cf8-b80e-12abf9a3d6df">here</a>.</p><p class="MsoNormal"><o:p></o:p></p>
<p class="MsoNormal">I don’t know exactly how the scheme worked but the generic
description is summarily described in the Reuters article:</p><p class="MsoNormal"><o:p></o:p></p>
<p class="MsoNormal"></p><blockquote>Using such dividend stripping schemes, banks and investors
would swiftly trade shares of companies around their dividend payout day,
blurring stock ownership and allowing multiple parties to falsely reclaim tax
rebates on dividends.</blockquote><p></p><p class="MsoNormal"><o:p></o:p></p>
<p class="MsoNormal">The following is from the Financial Times article:</p><p class="MsoNormal"><o:p></o:p></p>
<p class="MsoNormal"></p><blockquote><p class="MsoNormal">The fraud centred on share deals executed before and after a
stock’s dividend payments that duped governments to reimburse taxes that were
never paid in the first place.</p><p class="MsoNormal"><o:p></o:p></p>
<p class="MsoNormal">Maple Bank’s cum-ex transactions were equivalent to
“organised [financial] crime”, Gröschel [the judge' said, adding that they were highly
organised, took part over several years and led to “ludicrous” financial
damage.</p><p class="MsoNormal"><o:p></o:p></p>
<p class="MsoNormal">The aim of the transactions, said Gröschel, was not just to
cut the amount of tax paid but to steal from the government. Johannemann’s
legal advice was “a central contribution” to that crime, he added.</p><p class="MsoNormal"><o:p></o:p></p>
<p class="MsoNormal">“Paying [a tax] once but reclaiming [it] twice just does not
work,” he said, and that “a halfway talented elementary school pupil” was able
to understand that concept.</p><p class="MsoNormal">* * * *</p><p class="MsoListParagraph" style="mso-list: l0 level1 lfo1; text-indent: -.25in;"><o:p></o:p></p>
<p class="MsoNormal">During the trial, Johannemann acknowledged he had “glossed
over the fact that my legal advice was used for illegal means”, and said he had
“totally failed” as a lawyer. The judge took issue with that assessment, saying
he was certain Johannemann had been aware of all relevant details of the
fraudulent transactions when giving his advice.<o:p></o:p></p>
<p class="MsoNormal">In his ruling Gröschel also took aim at Freshfields,
accusing the tax practice of one of the world’s most prestigious law firms of
having developed “its own business model” that specialised in giving
affirmative advice on cum-ex transactions. The fees the law firm generated from
such business were “almost ridiculously low”, he said.</p></blockquote><p class="MsoNormal"></p><p class="MsoNormal"><o:p></o:p></p>
<p class="MsoNormal">The latter on fees caught my eye. My experience from the abusive tax
shelter era was that the fees were very large compared to the hours expended delivering the opinions when they were "cookie-cutter" opinions marketed to many taxpayers. The excess fees were a form of “get out of jail free’
insurance premium to the taxpayers paying the fees. Viewed alone from a single transaction, the excess fee would be ridiculously low, but when marketed widely among wealthy and high-income earners, the fees really could add up to ridiculous amounts. See e.g., <u>More on the Daugerdas Case - The Role of
Nonpromoter Enablers</u> (Federal Tax Crimes Blog 6/5/11), <a href="https://federaltaxcrimes.blogspot.com/2011/06/more-on-daugerdas-case-role-of.html">here</a>.</p><p class="MsoNormal"><o:p></o:p></p><p class="MsoNormal"><o:p></o:p></p>Jack Townsendhttp://www.blogger.com/profile/14469823736335455874noreply@blogger.com0tag:blogger.com,1999:blog-1519969502186924526.post-38157480127912433142024-02-03T12:04:00.003-06:002024-02-03T12:08:29.905-06:00Tax Lawyer of Some Notoriety Is Again in the News (2/3/24)<p> I previously blogged on a tax lawyer, John Anthony Castro, a tax lawyer of some notoriety in the tax community. <u>Repeat Tax Player and Republican Presidential Candidate Loses Unauthorized Return Information Disclosure Suit on Appeal</u> (Federal Tax Procedure Blog 12/24/25), <a href="https://federaltaxprocedure.blogspot.com/2023/12/repeat-tax-player-and-republican.html">here</a>. I noted in the blog that Castro was a Republican candidate for President; I reported on a Fifth Circuit disposition of a claim he made against the IRS and his candidacy for President.</p><p>I have two developments to report:</p><p class="MsoNormal"><o:p></o:p></p><p class="MsoNormal"><o:p>1. N</o:p>ewsweek recently reported that Castro is suing Clarence Thomas under the Virginia Fraud Against Taxpayers Act, Code of Virginia, Article 19.1 (“VFATA”), <a href="https://law.lis.virginia.gov/vacodefull/title8.01/chapter3/article19.1/">here</a>. I am not familiar with the VFATA, but it appears to be a state parallel to a federal qui tam action, a suit to recover for the government. Excerpts from the article are:</p><p class="MsoNormal"><o:p></o:p></p><p class="MsoNormal"><o:p></o:p></p><blockquote><p class="MsoNormal"><o:p> </o:p> The complaint, which was shared with Newsweek, alleges that in violation of VFATA, "Clarence Thomas knowingly presented or caused to be presented a false and fraudulent claim (i.e., his 2005 Virginia State Income Tax Return) to the Virginia Department of Taxation on or about April 15, 2016, that failed to report income from discharge of indebtedness."</p><p class="MsoNormal"><o:p></o:p></p><p class="MsoNormal"><o:p> </o:p> Thomas has faced immense scrutiny and calls for his resignation after it was reported that he failed to disclose several transactions, including a $267,230 loan that he received from wealthy friend Anthony Welters. Last year, an investigation from the Senate Finance Committee revealed that Thomas never repaid a "substantial portion" of that loan, raising concerns about whether the justice properly reported it in his tax filings.</p><p class="MsoNormal"><o:p></o:p></p><p class="MsoNormal"> "Under Section 108 of the Internal Revenue Code, he would have had a legal obligation to report [the loan] as taxable income and the tax alone would have been, probably $40,000 or $50,000. That's a third of his annual salary," Castro said on Friday. "And that's when I was like, 'There's no way he reported that because that'd be financially disastrous for him.'"<o:p></o:p></p><p class="MsoNormal"> Castro is suing Thomas under VFATA, which allows private citizens anywhere in the country to bring a claim against a Virginia resident for making a knowingly false or fraudulent claim to the commonwealth for money or property, essentially empowering regular Americans to take on the role of a de factor agent of the Virginia attorney general.<o:p></o:p></p><p class="MsoNormal"> "It basically allows you to bring a tax enforcement action against a taxpayer," Castro said of the law.<o:p></o:p></p><p class="MsoNormal"> Castro said he had planned to file the suit last year but claims that Trump coordinated with the Internal Revenue Service in retaliation against his activities "undermining the political objectives of the Trump Administration."<o:p></o:p></p><p class="MsoNormal"> "Right when I'm going to level these accusations against Clarence Thomas for filing false and fraudulent returns, what happens to me? I get accused of false and fraudulent returns," Castro said.<o:p></o:p></p><p class="MsoNormal"> "They intentionally devised this plan of, 'Let's accuse him of what he's about to accuse Clarence Thomas of, it's going to completely discredit him. And if he brings this claim, nobody's going to believe him," he continued. "But, of course, I still want to go forward with it."<o:p></o:p></p><p class="MsoNormal"> Asked about whether he thinks his lawsuits against Thomas and Trump will fuel speculations about whether or not he was a conservative, Castro insisted he was still a Republican.<o:p></o:p></p><p class="MsoNormal"> "I'm a very, very stubbornly principled person and if I feel that somebody broke the law, I'm going to hold them accountable," he said. "Just like Trump for January 6 and Clarence Thomas for this sham loan." </p></blockquote><p class="MsoNormal"></p><p class="MsoNormal">Note that Castro claims that Trump and the IRS coordinated this alleged retaliatory indictment. That is an interesting pairing.<span></span></p><a name='more'></a><p></p><p class="MsoNormal">2. That reporting led me to the DOJ Tax announcement of Castro’s indictment. <u>Mansfield Man Charged in Fraudulent Tax Return Scam</u> (USAO ND TX Press Release 1/10/24), <a href="https://www.justice.gov/usao-ndtx/pr/mansfield-man-charged-fraudulent-tax-return-scam">here</a>. The press release says that Castro “was indicted on thirty-three counts of aiding and assisting in the preparation and presentation of a false and fraudulent return.” [Note that aiding and assisting is the crime described in § 7206(2); in the preceding paragraph of the Press Release the nature of the charges is described as “33-counts of filing fraudulent tax returns;” although that is cryptic, it is a misdescription of the aiding and assisting charges under § 7206(2).]<o:p></o:p></p><p class="MsoNormal">Other excerpts from the Press Release are:</p><blockquote><p class="MsoNormal"> According to the indictment, Mr. Castro owned and operated Castro & Company LLC. a virtual tax preparation business with locations in Orlando, Florida, Mansfield, Texas, and Washington, D.C. Starting in 2016, Mr. Castro devised a scheme to falsely create and submit false tax returns on behalf of unsuspecting taxpayers. Taxpayers would seek out Castro’s assistance in filing personal tax returns and Mr. Castro would promise a significantly higher refund than taxpayers could receive from other prepares and on many occasions offered to split the additional refund with taxpayers. In order to achieve these larger refunds, Mr. Castro generated false deductions without the taxpayer’s knowledge.</p><p class="MsoNormal"><o:p></o:p></p><p class="MsoNormal"> In 2018, an undercover agent, posing as a taxpayer, contacted Castro & Company, LLC for assistance. Castro refused to meet in person unless a $5,000 retainer was paid but offered to assist the undercover agent virtually. During a recorded telephone conversation, Mr. Castro stated that he could project the amount of the tax refund the undercover agent would likely receive from another firm and then compare that figure with the refund that Mr. Castro would obtain.<o:p></o:p></p><p class="MsoNormal"> According to the indictment, an employee of Mr. Castro’s interviewed the agent over the telephone regarding deductions. The employee stated that Mr. Castro would make any decisions regarding what items would be included on the tax filing. The employee did not identify any deductions that would apply to the agent and in the course of the interview, the undercover agent denied any facts that would support deductions. On March 14, 2018, Mr. Castro filed the agent’s tax return claiming $29,339 in fraudulent deductions. The IRS issued a refund of $6,007, Mr. Castro received $2,999 for his services and the agent received the remaining amount of $3,008. As Castro told the taxpayer, he would have received only a $300 deduction had he used another tax preparer.<o:p></o:p></p><p class="MsoNormal"> Mr. Castro continued in a similar pattern with dozens of other taxpayers, resulting in hundreds of thousands of improperly paid claims.<o:p></o:p></p><p class="MsoNormal"> An indictment is merely an allegation of criminal conduct, not evidence. Mr. Castro is presumed innocent until proven guilty in a court of law.<o:p></o:p></p><p class="MsoNormal"> If convicted on all counts, he faces up to 99 years in federal prison – 3 years per count.</p></blockquote><p>This blog entry is cross-posted on my Federal Tax Procedure Blog, <a href="https://federaltaxprocedure.blogspot.com/2024/02/tax-lawyer-of-some-notoriety-is-again.html">here</a>.</p>Jack Townsendhttp://www.blogger.com/profile/14469823736335455874noreply@blogger.com0tag:blogger.com,1999:blog-1519969502186924526.post-50830006489613405182024-01-25T10:32:00.005-06:002024-01-25T14:09:16.318-06:00Tax Court Again Declines to Reconsider Its Holding that the Preparer's Fraud without the Taxpayer's Fraud Invokes Unlimited Statute of Limitations (1/25/24)<p> Long-time readers of this blog and the parallel blog Federal Tax Procedure may recall that I have had several postings on the issue of whether § 6501(c) unlimited statute of limitations for fraudulent returns requires (i) the taxpayer's fraud or (ii) may be a third party's fraud that is incorporated in the taxpayer's return without the taxpayer's fraud. The classic case is a preparer's fraud, but could also include fraud on an information return (such as a K-1 for partnership flow-through reporting).</p><p class="MsoNormal"><o:p></o:p></p><p class="MsoNormal">At the end of this blog, I list significant Federal Tax Procedure or Federal Tax Crimes postings on the issue. Basically, the state of play was that the Tax Court held in a precedential decision that the taxpayer's fraud is not required. <i>Allen v. Commissioner</i>, 128 T.C. 37 (2007). The Court of Appeals for the Federal Circuit held that the taxpayer's fraud is required. <i>BASR P'ship v. United States</i>, 795 F.3d 1338 (Fed. Cir. 2015). In <i>Finnegan v. Commissioner</i>, 926 F.3d 1261 (11th Cir. 2019), the Court affirmed the Tax Court's <i>Allen</i> holding that the taxpayer waived the statute of limitations argument in the Tax Court.</p><p class="MsoNormal"><o:p></o:p></p><p class="MsoNormal">In <i>Murrin v. Commissioner</i>, T.C. Memo. 2024-10, TA <a href="https://www.taxnotes.com/research/federal/court-documents/court-opinions-and-orders/return-preparers-fraudulent-intent-extended-limitations-period/7j48w">here</a>, decided yesterday, the Tax Court held that <i>Allen</i> was still the interpretation the Tax Court will apply despite the holding in <i>BASR</i>. The <i>Murrin</i> opinion is 13 pages long and analyzes why <i>BASR</i> was not sufficiently persuasive to justify reconsidering its precedential holding in <i>Allen</i>.</p><p class="MsoNormal"><o:p></o:p></p><p class="MsoNormal"><i>BASR</i> is not binding precedent in <i>Murrin</i> under the Tax Court's <i>Golsen</i> rule because appellate authority is only binding when in the Circuit to which an appeal would be taken in the case (barring stipulation otherwise). Mrs. Murrin lived in New Jersey when she filed the Tax Court petition. Thus, her appeal would be to the Third Circuit which has no authority in point, thus requiring the Tax Court to apply its own authority under <i>Golsen</i>.<span></span></p><a name='more'></a><p></p><p class="MsoNormal"><o:p></o:p></p><p class="MsoNormal">The IRS assertion of the <i>Allen</i> holding in <i>Murrin</i> means that it is continuing to assert the <i>Allen</i> holding in other cases, so as to permit at least one other Circuit to address the issue. The Eleventh Circuit punted on that opportunity in <i>Finnegan</i>.</p><p class="MsoNormal"><o:p></o:p></p><p class="MsoNormal">As the saying goes, stay tuned.</p><p class="MsoNormal"><o:p></o:p></p><p class="MsoNormal">My significant prior blogs on this issue (some of which are duplicated in the respect Federal Tax Procedure Blog and Federal Tax Crimes Blog):</p><p class="MsoNormal"></p><ul><li><u>Taxpayer Waived Argument that § 6501(c)(1) Requires Taxpayer's Fraud for Unlimited Statute of Limitations</u> (Federal Tax Crimes Blog 6/14/19), <a href="https://federaltaxcrimes.blogspot.com/2019/06/taxpayer-waived-argument-that-6501c1.html">here</a> (discussing <i>Finnegan</i>).</li><li><u>Major Attorneys Fee Award for BASR Partnership Prevailing on the Allen Issue in Federal Circuit</u> (Federal Tax Procedure Blog 2/11/17), <a href="https://federaltaxprocedure.blogspot.com/2017/02/major-attorneys-fee-award-for-basr.html">here</a>.</li><li><u>Court of Appeals for Federal Circuit Holds that Fraud of the Taxpayer (Or Someone Closer to the Taxpayer than the Fraudster) is Required for Section 6501(c)(1) Unlimited Statute of Limitations</u> (Federal Tax Crimes Blog 7/30/15; 7/31/15), <a href="https://federaltaxcrimes.blogspot.com/2015/07/court-of-appeals-for-federal-circuit.html">here</a>.</li><li><u>Court of Federal Claims Holds that Unlimited Civil Statute of Limitations Requires Taxpayer's Fraud</u> (Federal Tax Procedure Blog 10/3/13), <a href="https://federaltaxprocedure.blogspot.com/2013/10/court-of-federal-claims-holds-that.html">here</a>.</li><li><u>Second Circuit Holds That Fraud on the Return -- Even If Not the Taxpayer's -- Causes an Unlimited Civil Assessment Statute of Limitations to Apply</u> (Federal Tax Procedure Blog 2/4/13), <a href="https://federaltaxprocedure.blogspot.com/2013/03/second-circuit-holds-that-fraud-on.html">here</a>.</li><li><u>Does the Preparer's Fraud Invoke the Unlimited Statute of Limitations?</u> (Federal Tax Procedure Blog 8/5/12), <a href="https://federaltaxprocedure.blogspot.com/2012/08/does-preparers-fraud-invoke-unlimited.html">here</a> (discussing <i>Allen</i>; I argued erroneously that the <i>Allen</i> holding was incorrect)</li></ul><p class="MsoNormal"><o:p></o:p></p><p class="MsoNormal">This entry is cross-posted on the Federal Tax Procedure Blog.</p>Jack Townsendhttp://www.blogger.com/profile/14469823736335455874noreply@blogger.com0tag:blogger.com,1999:blog-1519969502186924526.post-5891644862342011462017-02-11T13:48:00.003-06:002024-01-25T09:46:49.011-06:00Major Attorneys Fee Award for BASR Partnership Prevailing on the Allen Issue in Federal Circuit (2/11/17)<div class="tr_bq">
In <i>BASR Partnership v. United States</i>, 130 Fed.Cl. 286 (2017), <a href="https://ecf.cofc.uscourts.gov/cgi-bin/show_public_doc?2010cv0244-76-0" target="_blank">here</a>, the Court of Federal Claims held that the partnership in a TEFRA proceeding in which it prevailed after sending a qualified settlement offer of $1 was entitled to recover attorneys fees at the higher than normal attorney fee rate. There is a good story here and practice tip for attorneys interested in recovering attorneys fees should they prevail in tax litigation.</div>
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BASR Partnership won the merits decision -- really a procedural decision -- at the trial and appellate levels holding that the fraud of persons other than the taxpayer or someone related to the taxpayer is not sufficient to invoke the unlimited statute of limitations in § 6501(c)(1). <i>BASR Partnership v. United States</i>, 113 Fed. Cl. 181 (2013), aff'd <i>BASR Partnership v. United States</i>, 795 F.3d 1338 (Fed. Cir. 2015), reh. denied. I previously blogged on these decisions, but link here to the one on the appeals decision: <u>Court of Appeals for Federal Circuit Holds that Fraud of the Taxpayer (Or Someone Closer to the Taxpayer than the Fraudster) is Required for Section 6501(c)(1) Unlimited Statute of Limitations</u> (Federal Tax Crimes Blog 7/30/15; 7/31/15), <a href="http://federaltaxcrimes.blogspot.com/2015/07/court-of-appeals-for-federal-circuit.html" target="_blank">here</a>.<br />
<br />
Having won the decision, rather than being satisfied with the substantial victory -- the avoided cost of large tax liabilities for its partners -- the partnership desired to recover attorneys fees. That leads to § 7430, <a href="http://www.law.cornell.edu/uscode/text/26/7430" target="_blank">here</a>. Normally, recovering attorneys fees requires that the party seeking recovery be the "prevailing party." The prevailing party is defined in § 7430(c)(4) to be the party who "substantially prevailed" as to the amount and who meets certain financial requirements (in relevant party net worth of less than $7 million). BASR did not fail the financial test. (As noted below, the Government argued that the "real parties in interest" -- the ultimate parties behind the partners -- had net worths exceeding the $7 million limit, but the Court rejected that argument.)<br />
<br />
The prevailing party requirement is a bit more nuanced. Certainly, in ordinary parlance, BASR was the prevailing party. It won the whole cahuna, so that the IRS is not able to assess and collect tax from its partners under the TEFRA procedures. But, prevailing party is defined to exclude positions as to which the government was "substantially justified." Given the holding in <u>Allen v. Commissioner</u>, 128 T.C. 37 (2007), the Government position was substantially justified.<br />
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But wait, there is an exception to the substantially justified exception. If the taxpayer has made what is referred to as a qualified offer under 7430(g) then the party will be treated as the prevailing party if the judicial result "is equal to or less than the liability of the taxpayer which would have been so determined if the United States had accepted a qualified offer of the party under subsection (g)." See § 7430(c)(4)(E). The result of the BASR litigation is that the Government gets $0 from affected taxpayers which is certainly less than the $1 offered. Hence, bottom-line, the Court award BASR its attorneys fees and at a higher than normal hourly rate. The aggregate award was $314,710.49.<br />
<a name='more'></a><br />
In getting to the bottom-line, the Court rejected the Government's various arguments, some of which seems pretty picky.<br />
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The Court held that BASR was a party (it filed the TEFRA proceeeding) and it did not fail the net worth test. The Court refused to look through BASR to the single member LLC partners and then to the ultimate "taxpayers") who, if considered, would have flunked the net worth test.<br />
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Then, the Court found that BASR was a prevailing party because it made a qualifying offer. The Court rejected the Government's argument that there was no tax at issue in the TEFRA partnership level proceeding, thus making the $1 offer meaningless. The Court held that the FPAA was effectively a "letter of proposed deficiency" to the partners, analogizing the FPAA in the TEFRA partnership proceeding to the notice of deficiency which clearly permits the qualified offer. The Court also rejected the Government's argument that the $1 offer was a sham because it was de minimis relative to the potential tax liability at the partner level -- tax on gain of $6.6 million. The Court rejected the argument because, well: "$1 is more than $0."<br />
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The Court then rejected other technical government arguments. <br />
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Nice victory for BASR and its lawyers.<br />
<br />
I have for some times had the following Example and discussion in my Federal Tax Procedure Book (in the August 2016 edition in the Student Edition at pp. 400-401 and in the Practitioner Edition at pp. 570-571):<br />
<blockquote class="tr_bq">
<span class="Apple-tab-span" style="white-space: pre;"> </span><u>Example 2</u>: Assume a single issue case also involving $100,000 in additional tax. The issue is an either/or issue. At trial, either the IRS prevails 100%, or the taxpayer prevails 100%. There will be no point in between as is usually involved in valuation issues. This appears to be a no-brainer in terms of a QO. The taxpayer should offer $1. </blockquote>
<blockquote class="tr_bq">
<span class="Apple-tab-span" style="white-space: pre;"> </span>What happens if, in the ensuing litigation, the IRS offers the taxpayer an 80% victory to settle? If the taxpayer accepts, judgment will be entered at $20,000, which of course exceeds the QO of $1. Settled issues do not qualify for the QO anyway, so the taxpayer appears no worse off for having offered only $1. The taxpayer can still seek recovery under the general rules of § 7430, and the substantial concession made by the IRS might at least suggest that its position was not substantially justified, although a 20% settlement might suggest at least reasonable basis. What happens if the IRS trial attorney concedes in full after receiving the QO (or, alternatively, accepts the QO of $1)? Again, there is no issue left for trial and the QO is irrelevant. However, barring unusual circumstances in which the taxpayer’s lack of cooperation led to the IRS’s assertion of the worthless position, it would appear that the taxpayer would have a strong case under the general § 7430 rules for recovery of costs.</blockquote>
This seems to be the BASR case, but without the complications of the partnership TEFRA rules.<br />
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OK, I know some of you are wondering about examples 1 and 3. Here they are:<br />
<blockquote>
<span class="Apple-tab-span" style="white-space: pre;"> </span><u>Example 1</u>: Suppose a case involves a single issue with a proposed additional tax of $100,000. The issue is a valuation issue that a court may resolve to produce additional tax anywhere between 0 and $100,000. Taxpayer’s aggressive position is that the right result is 0, but believes that a court might find a range of values that would produce additional tax of between $30,000 and $40,000. The Appeals Officer, however, assesses the range of potential values differently, to produce say from $60,000 to $70,000 additional tax. (FYI, I have chosen a valuation issue first because, by the time the IRS refines its position for trial, it is likely that, absent a QO, a Court would find that the IRS’s position was substantially justified, thus precluding recovery under the general § 7430 rules; in this example, if the IRS refines its position in the notice of deficiency to $70,000, the upper end of the Appeals Officer’s range, then presumably the Court will find that the IRS was substantially justified.) </blockquote>
<blockquote>
<span class="Apple-tab-span" style="white-space: pre;"> </span>If the taxpayer were comfortable with his assessment of the range, the taxpayer might make an offer of $35,000 (middle of the taxpayer’s range). The taxpayer does not think the Appeals Officer would accept that offer, and they will go to trial. The taxpayer’s risk, of course, would be that the Court would determine a higher value than the taxpayer’s mid-range, thus producing a tax in excess of $35,000. The taxpayer might therefore be more conservative and propose additional tax of $40,000 (which represents the top end of his range). The Appeals Officer is not likely to accept this offer either, and it would give the taxpayer a better chance at recovering § 7430 costs. Still, there is some risk that the Court might come up with a higher value than even the taxpayer predicted as the top of the range. The taxpayer thus might consider an offer of $50,000 which is the mid-point between the respective mid-points of their two assessments. The taxpayer really does not want to settle for that amount (because he still believes the $30,000-$40,000 range is right), but the higher amount will better situate him to recover § 7430 costs which will be substantial and, if accepted, will at least avoid the further costs of litigation which will substantially exceed the amount recoverable under the qualified offer concept. </blockquote>
<blockquote>
<span class="Apple-tab-span" style="white-space: pre;"> </span>The tension, of course, is created because the QO works best when the taxpayer is conservative (i.e., offers the higher proposed additional tax). An aggressive taxpayer offer (e.g., one producing say $20,000 of tax in this example) is unlikely to be accepted, and in this example it may not be likely that an ultimate court holding would sustain that small a tax liability. A conservative taxpayer offer (i.e., one producing higher tax) better situates the taxpayer to recover § 7430 costs. The risk, of course, is that, if the offer is too conservative, the IRS may accept the offer and thus lock the taxpayer into a significantly worse result than the taxpayer could achieve at trial. Thus, the taxpayer must factor into his offers what he thinks he can get on the merits at trial and whether what he is risking in a conservative offer may be greater than the prospective benefits of recovering § 7430 costs at trial. The taxpayer must keep in mind that, even if he does recover § 7430 costs, the recovery will be less than his real additional costs (e.g., his attorneys fees will be higher than allowed). It may thus be that, given those additional costs, the taxpayer would be willing to offer $45,000 or even $50,000 which is beyond his estimate of the top end of the range in the hope that the IRS would accept it. Or that point may be his point of indifference as to whether the IRS accepts the offer or rejects it, with the result that, if he has assessed the case correctly, he will recover attorneys fees. </blockquote>
<blockquote>
* * * * [See Example 2 above] </blockquote>
<blockquote>
<span class="Apple-tab-span" style="white-space: pre;"> </span><u>Example 3</u>: Now assume that a single case for a single year involves both of the issues and amounts in Examples 1 and 2. Pull out your crystal ball, and have fun thinking through all the permutations of this one!</blockquote>
Jack Townsendhttp://www.blogger.com/profile/14469823736335455874noreply@blogger.com0tag:blogger.com,1999:blog-1519969502186924526.post-69647697924008459452019-06-14T15:01:00.003-05:002024-01-25T09:35:58.178-06:00Taxpayer Waived Argument that § 6501(c)(1) Requires Taxpayer's Fraud for Unlimited Statute of Limitations (6/14/19)In <i>Finnegan v. Commissioner</i>, 926 F.3d 1261 (11th Cir. 2019), <a href="https://scholar.google.com/scholar_case?case=9869323902999127778">here</a>, the 11th Circuit held that the taxpayers had waived the right to assert that § 6501(c)(1) required the taxpayer's own fraud for the unlimited statute of limitations. Readers will recall that § 6501(c)(1) provides as an exception to the normal 3 year civil statute of limitations:<br />
<blockquote class="tr_bq">
"In the case of a false or fraudulent return with the intent to evade tax, the tax may be assessed, or a proceeding in court for collection of such tax may be begun without assessment, at any time."</blockquote>
The Tax Court held in <i>Allen v. Commissioner</i>, 128 T.C. 37 (2007) that the taxpayer's own fraud was not required. The Court of Federal Claims held in <i>BASR Partnership v. United States</i>, 795 F.3d 1338 (Fed. Cir. 2015), that the taxpayer's fraud was required.<br />
<br />
The substantive issue is, of course, important because tax preparers can commit fraud on a return without the taxpayer engaging in the fraud on the return. In addition, any number of enablers (such as preparers and tax shelter promoters) can commit fraud that finds it way on a return. In either event, if all that is required is fraud on the return without the taxpayer's own participation in the fraud, then there is an unlimited statute of limitations.<br />
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The 11th Circuit did not address the merits of the split between the Tax Court in <i>Allen</i> and the Court of Federal Claims in <i>BASR</i>. So, the merits of the issue is still open. The important thing is that the Government is still asserting that <i>Allen</i> was correct -- that the taxpayer's fraud is not required for the unlimited statute of limitations in § 6501(c)(1). The Government's brief is <a href="https://drive.google.com/open?id=1a3N3pxHXhUcg3UhgI9nLFSvtwbFK2SgS">here</a>. I offer some brief excerpts from that brief stating the argument (but without the detail support for the argument):<br />
<blockquote class="tr_bq">
[*2] </blockquote>
<blockquote class="tr_bq">
"2. Whether the fraud exception under I.R.C. § 6501(c)(1), requiring 'a false or fraudulent return with the intent to evade tax,' applies where, as here, the taxpayer’s return preparer, and not the taxpayer, possessed the requisite intent." </blockquote>
<blockquote class="tr_bq">
* * * *<br />
<a name='more'></a></blockquote>
<blockquote class="tr_bq">
[*15] </blockquote>
<blockquote class="tr_bq">
* * * *</blockquote>
<blockquote class="tr_bq">
<b>SUMMARY OF ARGUMENT </b></blockquote>
<blockquote class="tr_bq">
This case boils down to the principle that the fraud exception to the statute of limitation on assessing tax lifts the limitations period in the case of a fraudulent return, regardless whether it was the taxpayer or the taxpayer’s return preparer who intended to evade tax. </blockquote>
<blockquote class="tr_bq">
* * * * </blockquote>
<blockquote class="tr_bq">
[*17] </blockquote>
<blockquote class="tr_bq">
2. Should the Court nevertheless decide to reach the merits, taxpayers’ attempt to read into the fraud exception the requirement that the taxpayer personally intend to evade tax is flawed. The statute, by its terms, does not impose such a requirement or even mention the word “taxpayer.” Rather, the exception is conditioned on the fraudulent nature of the return, without regard to who intended to evade tax, and taxpayers’ argument for departing from the plain language contravenes the rule construing statutes of limitations strictly in favor of the Government. Moreover, limiting the exception to fraud by the taxpayer would undermine its purpose to protect the public fisc in the case of a false or fraudulent return, which puts the IRS at a special disadvantage in detecting and investigating an underpayment of tax. The disadvantage to the IRS is the same regardless of who intended to evade tax, and therefore the requisite intent is not confined to the taxpayer. Taxpayers’ circuitous arguments cannot get around these bedrock principles.</blockquote>
<b>JAT Comments:</b><br />
<br />
1. I have not dug into the waiver issue. The substantive issue is the important issue, but the court ducked that issue.<br />
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2. The issue of the interpretation of § 6501(c)(1) is incredibly important. Think of the waive of abusive tax shelters in the 1990s going over into the 2000s. Think BLIPS, etc. Most of the major accounting firms has some variation of the shelters. Many of the shelters were fraudulent, and some of the promoter/enablers of the shelters were successfully prosecuted. So the Government can certainly prove fraud by clear and convincing evidence for the more abusive ones. Since the returns reported shelter benefits that were fraudulent, the unlimited statute of limitations could apply and taxpayers who have long since thought they dodged the bullet could be at risk. The poster child of such a taxpayer is <i>United States v. Home Concrete & Supply, LLC</i>, 566 U.S. 478 (2012). That taxpayer won the audit statute of limitations lottery (because the Supreme Court rejected the regulations applying the six-year statute of limitations). But, my research indicates that, if the Government ultimately prevails on the interpretation that § 6501(c)(1) requires only fraud on the return and does not require the taxpayer's fraud, then the statutes of limitations for that wave of fraudulent shelters can be opened up. Indeed, the statute of limitations for the <i>Home Concrete</i> taxpayers can be opened up. I speculate that there are likely billions of dollars out there already known to the IRS that can be picked up with an unlimited statute of limitations for the fraudulent shelters. And, for those otherwise not already known to the IRS, there may be "whistleblowers" willing to inform the IRS. For those who might be able to get some information about taxpayers involved with bullshit tax shelters, remember that the reward is 15-30% of (i) the tax, (ii) probably 40% of the tax as a civil penalty, and (iii) interest on the tax and the penalty since the due date of the returns.Jack Townsendhttp://www.blogger.com/profile/14469823736335455874noreply@blogger.com0tag:blogger.com,1999:blog-1519969502186924526.post-65636986502386997972016-06-17T21:43:00.002-05:002024-01-25T09:29:13.635-06:00The Tax Court Sticks to Its Allen Holding that the Taxpayer's Fraud is not Required for § 6501(c)(1)'s Unlimited Statute of Limitations (6/17/16; 6/20/16)I have previously blogged on the issue of whether the unlimited statute of limitations for fraud in § 6501(c)(1), <a href="http://www.law.cornell.edu/uscode/text/26/6501" target="_blank">here</a>, requires the taxpayer's personal fraud or, on the other hand, merely a fraudulent position as a result of someone else's fraud (such as a return preparer). The issue rose to prominence after the Tax Court's decision in <i>Allen v. Commissioner</i>, 128 T.C. 37, 40 (2007) which held that the taxpayer's personal fraud was not required; all that was required, according to <i>Allen</i>, was fraud on the return without regard to the taxpayer's personal culpability. The Second Circuit seemed to agree in <i>City Wide Transit, Inc. v. Commissioner</i>, 709 F.3d 102 (2d Cir. 2013). But, the Court of Appeals for the Federal Circuit did not agree (at least two of three judges on the panel did not agree). <i>BASR P'ship v. United States</i>, 795 F.3d 1338 (Fed. Cir. 2015). The Government did not seek rehearing or certiorari in BASR, so that matter seemed to be practically resolved because taxpayers could choose to litigate the issue in the Court of Federal Claims (governed by its Court of Appeals, the Court of Appeals for the Federal Circuit).<br />
<br />
But, there will be cases with the issue that are not litigated in the Court of Federal Claims. One just was. <i>Finnegan v. Commissioner</i>, T.C. Memo. 2016-118, <a href="https://scholar.google.com/scholar_case?case=1563479869780360756" target="_blank">here</a>. There, the return preparer fraudulently prepared the return. <i>Allen</i> of course was the governing authority in the Tax Court, so the Tax Court was bound to follow Allen unless it chose to reconsider Allen. It chose not to. The relevant portion of the opinion is short, so I quote it in full (Slip Op. pp. 17-18):<br />
<blockquote class="tr_bq">
<b>OPINION</b> </blockquote>
<blockquote class="tr_bq">
We must decide whether respondent has proved that petitioners’ returns were prepared falsely or fraudulently with the intent to evade tax.</blockquote>
<blockquote class="tr_bq">
<b>I. Limitations Period</b> </blockquote>
<blockquote class="tr_bq">
We begin with an analysis of the limitations period for assessment of income tax. The Commissioner generally must assess any income tax within the three-year period after a taxpayer files his or her return. Sec. 6501(a). In the case of a false or fraudulent return with the intent to evade tax, however, tax determined to be due may be assessed at any time. Sec. 6501(c)(1). In <i>Allen v. Commissioner</i>, 128 T.C. at 42, we held that section 6501(c)(1) applies even if it is the preparer of the return, and not the taxpayer, who falsely or fraudulently prepared the return with the intent to evade tax. But see <i>BASR P’ship v. United States</i>, 113 Fed. Cl. 181 (2013), aff’d, 795 F.3d 1338 Fed. Cir. (2015). <b>n6</b><br />
<b>n6 </b>We see no reason to revisit <i>Allen v. Commissioner</i>, 128 T.C. 37 (2007), on account of <i>BASR P’ship v. United States</i>, 113 Fed. Cl. 181 (2013), aff’d, 795 F.3d 1338 (Fed. Cir. 2015). In the Court of Appeals for the Federal Circuit’s opinion, a persuasive dissent was filed, as well as a concurring opinion that relied on sec. 6229, a provision inapplicable in the instant case. Accordingly, even in cases appealable in the Federal Circuit, it is unclear whether, in the absence of the application of sec. 6229, which interpretation of sec. 6501(c)(1) would prevail. Moreover, there is no jurisdiction for appeal of any decision of the Tax Court to the Court of Appeals for the Federal Circuit. Sec. 7482(a)(1). Additionally, the parties have not cited <i>BASR P’ship</i> and do not contend we should revisit <i>Allen</i>. Thus, <i>Allen</i> is controlling precedent in the instant case, and we do not revisit the analysis and conclusion in that Opinion.<br />
<a name='more'></a></blockquote>
This is a cautionary tale. First, practitioners must help their clients in forum choices. Where this issue is presented, the best forum choice is the Court of Federal Claims which, under <i>Flora</i>, requires full pre-payment of some amount, perhaps the full tax in issue. Second, taxpayers going to the Tax Court either by petition for redetermination of a deficiency or in a CDP hearing where liability can be contested (not all CDP cases if an opportunity to contest was previously available) will not fare well. Third, since sporadic litigation will continue in forums other than the Court of Federal Claims (particularly the Tax Court), it would appear that this issue will bubble up to other Circuits and, unless the IRS gives up the issue, a conflict may develop that might cause the Supreme Court to grant certiorari. <i>Finnegan</i> is appealable to the Eleventh Circuit which has not yet addressed the issue. My sense is that the Eleventh Circuit will be a taxpayer-friendly venue on this issue. Still, the Eleventh Circuit could create a conflict with the Court of Appeals for the Federal Circuit..<br />
<br />
Finally, just a coincidence having nothing to do with the merits, <i>Allen</i> was decided by Judge Kroupa, who resigned from the Tax Court and was recently indicted. See <u>Former US Tax Court Judge Kroupa Indicted</u> (Federal Tax Crimes Blog 4/4/16; 4/5/16), <a href="http://federaltaxcrimes.blogspot.com/2016/04/former-us-tax-court-judge-kroupa.html" target="_blank">here</a>.<br />
<br />
Les Book has an excellent discussion of <i>Finnegan</i> at <u>Tax Court Sticks to Its Guns and Holds Fraud of Preparer Can Indefinitely Extend Taxpayer’s SOL on Assessment</u> (Procedurally Taxing Blog 6/20/16), <a href="http://procedurallytaxing.com/tax-court-sticks-to-its-guns-and-holds-fraud-of-preparer-can-indefinitely-extend-taxpayers-sol-on-assessment/" target="_blank">here</a>.<br />
<br />
<b>JAT Correction</b>: An earlier version of this blog entry indicated that the Finnegans lived within the Second Circuit which would make <i>City Wide</i> an influential, if not controlling, authority on appeal. Actually, at the time of filing the petition, they lived in the Eleventh Circuit which has yet to speak on this issue. Jack Townsendhttp://www.blogger.com/profile/14469823736335455874noreply@blogger.com0tag:blogger.com,1999:blog-1519969502186924526.post-8465617848788308162024-01-11T13:12:00.000-06:002024-01-11T13:12:17.636-06:00Article Recommendation on Sentencing in Tax Cases-Amendment to Guidelines (1/11/24)<p>I recommend the following post: Evan
Davis, <u>Major Sentencing Guideline Changes for Most Tax Offenders, With More
on the Way: ABA Sentencing Panel</u>, <a href="https://www.taxlitigator.com/wp-content/uploads/2023/12/Blog-ussg-amendments.pdf">here</a>. It is short and, for the subject, feature packed, so I will not summarize it here.</p><p class="MsoNormal"><o:p></o:p></p>Jack Townsendhttp://www.blogger.com/profile/14469823736335455874noreply@blogger.com0tag:blogger.com,1999:blog-1519969502186924526.post-8667486258093608422024-01-10T14:53:00.004-06:002024-01-10T14:59:02.158-06:00DOJ Tax Publicizes Sentencings and Plea Agreements of Syndicated Conservation Easement Enablers; Where Are the Taxpayers (1/10/24)<p><span style="font-family: inherit;">DOJ Tax issued a press release about sentencing and guilty
pleas of enablers in abusive, illegal (maybe redundant) syndication easement
tax shelters. <u>Two Tax Shelter Promoters Sentenced to 25 Years and 23 Years
in Billion-Dollar Syndicated Conservation Easement Tax Scheme; Two More CPAs
Plead Guilty </u>(Press Release # 24-29 1/9/23), <a href="https://www.justice.gov/opa/pr/two-tax-shelter-promoters-sentenced-25-years-and-23-years-billion-dollar-syndicated">here</a>.</span></p><p class="MsoNormal"><span style="font-family: inherit;"><o:p></o:p></span></p>
<p class="MsoNormal"><o:p><span style="font-family: inherit;">T</span></o:p><span style="font-family: inherit;">he lengths of the sentences are noteworthy.</span></p>
<p class="MsoNormal"><span style="font-family: inherit;">The two other individuals pled guilty to a single count each
of the </span><i style="font-family: inherit;">Klein</i><span style="font-family: inherit;">/defraud conspiracy, thus capping their potential sentences
each to 5 years. Of course, they were not the masterminds of the fraudulent tax
shelter scheme, but their pleas indicate that they willfully participated.</span></p>
<p class="MsoNormal"><span style="font-family: inherit;">Of course, it is late in the Syndicated Conservation
Easement game, so enablers in the game should be on notice now that they can be
caught and punished. How much effect this will have as a future deterrent is
unknown because, I suspect, many who know the downside will attempt maneuvers
to prevent the IRS or DOJ Tax from discovering their complicity in such
conduct. Most economic crime violators (including enablers) do not think they will be caught or
their skullduggery will be understood.</span></p>
<p class="MsoNormal"><span style="font-family: inherit;">My only comment relates to what I call the elephant in the
room—</span><b style="font-family: inherit;">the taxpayers willfully participating
in such schemes</b><span style="font-family: inherit;">. My experience in these elaborate abusive shelters is that
well-heeled taxpayers are also complicit. Those taxpayers who are complicit
feel (or at least hope) that the blizzard of paper (including fake opinions and
appraisals) and participation of facially expert promoters will protect them
from penalties, civil and criminal, thus giving them cost-free access to the
audit lottery. But those who consulted independent counsel (and many, probably
most, did at least in the Son-of-Boss shelters and, I suspect, in the
Syndicated Conservation Easement Shelters) would have known the shelters did
not work.</span></p>
<p class="MsoNormal"><span style="font-family: inherit;">If the IRS and DOJ Tax want to discourage abusive tax
shelters, it should prosecute the taxpayers involved (or at least enough of
them, the more egregious ones, to send the message to the abusive tax shelter taxpayer
community that there is risk of a criminal reckoning). Even where the enablers
of the abusive tax shelters put together a package that facially seems to
support the tax benefits claimed, most well-heeled tax shelter investors have
their own independent legal counsel. Good advice would certainly include enough
warning that the gambit is illegal and that their participation is willful. Prosecuting
and convicting taxpayers would send the message of risk to all participating in
abusive shelters and could substantially reduce the number of players involved by
reducing the market for abusive tax shelters.<span></span></span></p><a name='more'></a><p></p>
<p class="MsoNormal"><span style="font-family: inherit;">Further, it seems to me that the IRS (with DOJ Tax
participation) could implement a type of voluntary disclosure program for enablers
where enablers would “earn” a lesser plea (not absolution altogether) with
lesser incarceration exposure for delivering proof of the taxpayers’ guilt. I
will let readers’ minds go into high gear on how enablers can deliver that proof.
Indeed, “well-advised” enablers wanting to play the abusive tax shelter game may
adopt in their toolkits getting incriminating information as to the taxpayers’ actions
and state of knowledge.</span></p>
<p class="MsoNormal"><span style="font-family: inherit;">This type of voluntary disclosure program could apply even
to enablers that are already in the IRS or DOJ Tax sites as potential targets. Indeed,
even without a formal voluntary disclosure program, if I were representing an enabler
target of an IRS or DOJ Tax investigation, I would explore the possibility of a
lesser plea for delivering up the taxpayers for criminal prosecution. </span></p><p class="MsoNormal"><span style="font-family: inherit;">Of course, one issue that such a program, formal or informal, might raise is whether the Government is in effect deputizing the enablers willing to gather information on the taxpayers' guilt. This would certainly raise the prospect of entrapment which is an issue that I can't develop here. See e.g., DOJ Criminal Resource Manual </span>645. Entrapment—Elements, <a href="https://www.justice.gov/archives/jm/criminal-resource-manual-645-entrapment-elements#:~:text=A%20valid%20entrapment%20defense%20has,by%20far%20the%20more%20important.">here</a>.</p><p class="MsoNormal">And, there would be a civil benefit of pursuing the taxpayers (with a broader net than could be cast for criminal prosecution) is to make them subject to the civil fraud penalty in § 6663 where the burden of proof on the Government is, in theory, the lesser clear and convincing standard (as opposed to the criminal standard of beyond a reasonable doubt). This possibility too could serve as a deterrent for the market for bogus tax shelters.</p><p class="MsoNormal"><o:p></o:p></p>Jack Townsendhttp://www.blogger.com/profile/14469823736335455874noreply@blogger.com0tag:blogger.com,1999:blog-1519969502186924526.post-80670381261688608972023-10-01T12:59:00.003-05:002023-10-01T13:45:11.538-05:00Posted to Wrong Blog<p>This afternon I erroneously posted a blog here that should have been posted to the Federal Tax Procedure Blog. I have deleted the blog on FTCB and posted it to FTPB. The blog entry may be viewed here:</p><p><u>Update on Supreme Court Deference Case (with Speculation) and New Supreme Court case on General 6-year Statute for Challenging Regulations Interpretations (Without Speculation)</u> (Federal Tax Procedure Blog 10/1/23), <a href="https://federaltaxprocedure.blogspot.com/2023/10/update-on-supreme-court-deference-case.html">here</a>.</p>Jack Townsendhttp://www.blogger.com/profile/14469823736335455874noreply@blogger.com0tag:blogger.com,1999:blog-1519969502186924526.post-53121472753739257582023-04-01T13:30:00.012-05:002023-07-03T12:03:16.371-05:00Update on Wartime Suspension of Limitations Act ("WSLA"), 18 USC 3287, and Tax Crimes (4/1/23; 4/2/23)<p><span style="color: red; font-family: inherit;">Caveat: Although authored and published on 4/1/23, this blog is not an April Fool's Joke.</span></p><p><span style="font-family: inherit;">I have written before about the Wartime Suspension of
Limitations Act ("WSLA"), 18 USC § 3287, <a href="https://www.law.cornell.edu/uscode/text/18/3287">here</a>, that suspends certain
criminal statutes of limitations while "the United States is at war or Congress has
enacted a specific authorization for the use of the Armed Forces, as described
in section 5(b) of the War Powers Resolution (50 U.S.C. 1544(b))." The statutes of limitations are suspended in relevant part for crimes "(1) involving <b>fraud or
attempted fraud against the United States</b> or any agency thereof in any manner,
whether by conspiracy or not." My blogs on this subject discussing the potential
application of this WSLA suspension for tax crimes are collected by relevance <a href="https://federaltaxcrimes.blogspot.com/search?q=%223287%22">here</a> and
reverse chronological order <a href="https://federaltaxcrimes.blogspot.com/search?q=%223287%22&max-results=20&by-date=true">here</a>. In those blogs, I have noted that the WSLA's literal application to certain tax crimes
involving "fraud" would mean that the WSLA could have a pervasive effect permitting
the charging of tax crimes far before the normal suspensions often encountered for
tax crimes. See also, Michael Saltzman & Leslie Book, <u>IRS Practice and
Procedure</u>, ¶ <b>12.05[9][a][iii] Suspension and tolling</b> (discussing normal
suspensions and discussing § 3287 at n. 933); and John A. Townsend, <u>Federal
Tax Procedure (2022 Practitioner Ed.)</u> 317-387 (August 3, 2022). Available
at SSRN: <a href="https://ssrn.com/abstract=4180710">https://ssrn.com/abstract=4180710</a>.</span></p><p class="MsoNormal"><span style="font-family: inherit;"><o:p></o:p></span></p>
<p class="MsoNormal"><span style="font-family: inherit;">1. The blog supplements those discussions
until the next revisions of those respective books (note that I am the
principal author of the Saltzman and Book chapter). Since I have already
brought the discussion up to date in the 2023 working draft for the <u>Federal
Tax Procedure Book (2023 Practitioner Ed.)</u>, I will just offer the following
from the 2023 draft (which should be finalized by early August 2023). The last sentence in the carryover paragraph will be changed
to and a footnote added as follows (note that I link the blog entries and key
case entries in this blog but will not link them in the book):</span></p><blockquote><p class="MsoNormal"><span style="font-family: inherit;"><o:p></o:p></span></p>
<p class="MsoNormal"><span style="font-family: inherit;">This provision [WSLA] might apply to the Iraq and
Afghanistan engagements, but its application to tax crimes with
elements of fraud or attempted fraud is notable only because of the many cases
in which it could have been applied but is rarely, very rarely, asserted where
statute of limitations defenses are asserted. <b>fn<span></span></b></span></p><a name='more'></a><p></p>
<p class="MsoNormal"></p><blockquote><span style="font-family: inherit;"> <b>fn</b> E.g., <u>Appeals Arguments Over
Whether Government Brought Evasion and Tax Conspiracy Charges Within Statute of
Limitations With No Mention of WSLA</u> (Federal Tax Crimes Blog 9/19/21), <a href="http://federaltaxcrimes.blogspot.com/2021/09/appeals-arguments-over-whether.html">here</a>.
Further, the WSLA is not even mentioned in the DOJ Criminal Tax Manual. SEE DOJ
CTM 7.00 Statute of Limitations (viewed 3/31/23), <a href="https://www.justice.gov/tax/file/870501/download">here</a>. Apparently
because of its rarity of use in tax crimes, the ABA has recommended ”Guidance
making it clear that the Service’s Criminal Investigations division will not
recommend prosecution for charges that otherwise would be untimely except
through the operation of the Wartime Suspension Limitations Act,” I discuss and
link this recommendation in <u>ABA Tax Section Recommendation to IRS for
Priority Guidance to Disavow Application of WSLA and Further Comments Re Same</u>
(Federal Tax Crimes Blog 7/23/21), <a href="http://federaltaxcrimes.blogspot.com/2021/07/aba-tax-section-recommendation-to-irs.html">here</a>;
and <u>More on the Wartime Suspension of
Limitations Act (WSLA) (Federal Tax Crimes Blog</u> 2/20/21), <a href="http://federaltaxcrimes.blogspot.com/2021/02/more-on-wartime-suspensions-of.html">here</a>. Nevertheless, the WSLA has been applied in
some tax offense and defraud conspiracies. See in addition to cases in the cited blogs, e.g., <i>Daugerdas v. United
States</i>, 2021 WL 603068 (S.D. N.Y.
2/16/21), <a href="https://scholar.google.com/scholar_case?case=1126938521869700529">here</a> (noting
the Afghanistan and Iraq resolutions and stating: “Accordingly, beginning in
September 2001, the WLSA tolled the statute of limitations on the conspiracy to
defraud the United States [for tax objects of conspiracy] and mail fraud
charges. See <i>Wells Fargo Bank</i>, 972 F. Supp. 2d 593 at 613–14 (holding
that the WSLA suspended the ten-year statute of limitations for certain fraud
claims arising prior to June 25, 2002 because hostilities had not ended).)”;
and <i>United States v. Wellington</i>, 2022 WL 3345759 (D. N.M. 2022), <a href="https://scholar.google.com/scholar_case?case=6653193049190138002">here</a> (Defendant charged “violation of 18 U.S.C. §
371, Conspiracy to Commit Tax Evasion and Defraud the United States;” held WSLA
applied based on holding in <i>United States v. Nishiie</i>, 996 F.3d 1013,
1028 (9th Cir. 2021), cert. denied, 142 S. Ct. 2653 (U.S. Apr. 25, 2022) and
also citing <i>Wells Fargo</i>.)</span></blockquote><p></p></blockquote><p class="MsoNormal"></p>
<p class="MsoNormal"><span style="font-family: inherit;">Although the Government rarely invokes the WSLA, I presume it did in <i>Daugerdas</i> and know it did in <i>Wellington</i>. For example, see </span>U.S. Response in <i>Wellington</i> asserting WSLA (at pp. 2-3), <a href="https://storage.courtlistener.com/recap/gov.uscourts.nmd.462126/gov.uscourts.nmd.462126.45.0.pdf">here</a>:</p><p class="MsoNormal"><span style="font-family: inherit;">2. The key to those potential applications is "war or
Congress has enacted a specific authorization for the use of the Armed Forces."
The United States is not now at war, but there are some specific authorizations
for the use of military force. As news reports have recently discussed, the Senate
has voted to revoke the AUMF for the Iraqi War. See Barbara Sprunt & Susan Davis, <u>Senate votes to repeal Iraq War
authorization</u> (NPR 3/29/23), <a href="https://www.npr.org/2023/03/29/1165581083/aumf-iraq-war-senate">here</a> (discussing the Senate action and noting that
the House must now act). Just focusing on that Iraq War AUMF, if the revocation is enacted (must pass
House), it will cause the WSLA 5-year statute on that AUMF to start. But there
was a separate AUMF for the 9/11/01 attack (Afghanistan) and even earlier AUMFs
that have not been repealed. See P.L. 107-40, 115 STAT. 224 9/18/01, <a href="https://www.congress.gov/107/plaws/publ40/PLAW-107publ40.pdf">here</a>; and see
the <b>Caveat</b> in <u>BA Tax Section
Recommendation to IRS for Priority Guidance to Disavow Application of WSLA and
Further Comments Re Same</u> (Federal Tax Crimes Blog 7/23/21), <a href="http://federaltaxcrimes.blogspot.com/2021/07/aba-tax-section-recommendation-to-irs.html">here</a>,
that are still effective and could potentially still require suspension of the criminal
statutes of limitations even if the Iraq AUMF is revoked.</span></p><p class="MsoNormal"><span style="font-family: inherit;"><o:p></o:p></span></p>
<p class="MsoNormal"><span style="font-family: inherit;">3. I have stated my concern that § 371's defraud conspiracy
will not support application of the WSLA because the term <b>"defraud"</b> in 18 USC §
371 (defining offense and defraud conspiracies) is broader than the term "fraud"
as generally used in criminal or related statutes such as § 3287. See <u>More on
the Wartime Suspension of Limitations Act (WSLA)</u> (2/20/21), <a href="http://federaltaxcrimes.blogspot.com/2021/02/more-on-wartime-suspensions-of.html">here</a>,
¶¶ 3 and 4. In both <i>Daugerdas</i> and <i>Wellington</i> the courts thought
it did to apply the WSLA to the defraud conspiracy. I think that was simply a gut holding assuming that "fraud" in § 3287 and "defraud" in § 371 are coextensive; the
two terms are not coextensive because of the atypical and broader interpretation the Court
put on § 371's use of "defraud" in <i>Hammerschmidt
v. United States</i>, 265 U.S. 182 (1924). </span></p><p class="MsoNormal"><span style="font-family: inherit;"></span></p><blockquote><p class="MsoNormal"><span style="font-family: inherit;"> a, <b>[Added 4/2/23 1:45pm]</b>: Upon reflection, I am not sure that the <i>Hammerschmidt</i> holding that the § 371 "defraud" conspiracy is boader than "fraud" as used in the WSLA will foreclose using a defraud conspiracy to invoke the WSLA. Conceivably, the "defraud" conspiracy as interpreted in <b>Hammerschmidt</b> includes two types of objects: (i) a defraud conspiracy with an object to commit fraud; and (ii) a defraud conspiracy with an object to defraud <b>without</b> an object to commit fraud. A special interrogatory or a question on the verdict form might answer which of the two types were used. Cf. <i>United States v. Pursley</i>, 22 F.4th 586, 591-593 (5th Cir. 1/13/22). A special interrogatory could be used to determine ensure that the jury determines which type of object is involved.</span></p><p class="MsoNormal"><span style="font-family: inherit;">b. </span>Use of special interrogatories in criminal cases have received much judicial and scholarly discussion, the concern being that special interrogatories can "lead" the jury to conviction and thus are anti-defendant. They are used, nevertheless for specialized needs such as the statute of limitations which is a jury issue if the defense of the statute of limitations is in issue in the case and a defendant requests an appropriate submission of the statute of limitations issue to the jury. I won't get into the nuances of the concerns about special interrogatories, but just cite generally a recent article: But see e..g. Charles Eric Hintz, Fair Questions: <u>A Call and Proposal for Using General Verdicts with Special Interrogatories to Prevent Biased and Unjust Convictions</u>, 4 U.C. Davis L. Rev. Online 43 (2021), <a href="https://scholarship.law.upenn.edu/cgi/viewcontent.cgi?article=3277&context=faculty_scholarship">here</a>; and Kate H. Nepveu, <u>Beyond "Guilty" or "Not Guilty": Giving Special Verdicts in Criminal Jury Trials</u>, 21 Yale L. & Pol'y Rev. 263 (2003), <a href="https://www.steelypips.org/miscellany/specialverdicts.html">here</a>.</p><p class="MsoNormal">c. I offer an example of how a special interrogatory may be framed in a defraud conspiracy case potentially involving the WSLA and the distinction between defraud and fraud. The judge would give the jury standard jury instructions about the defraud conspiracy (based on the <i>Hammerchmidt</i> broad reading of defraud and explaining the that defraud conspiracy includes both actual fraud or the broader defraud definition of <i>Hammerschmidt </i>(this type of iinstruction would be required to properly instruct the jury that it could convict for defraud which does not require fraud). The judge would submit to the jury a general jury verdict (Guilty/Not Guilty) form. The judge contemporaneously would submit a sealed envelope with a separate form to be opened and completed only <b>if and after</b> the jury rendered a unanimous general Guilty verdict for the defraud conspiracy defined per <i>Hammerschmidt</i>. The form inside the sealed envelope would ask whether the jury can find beyond a reasonable doubt that the defraud conspiracy for which the jury found the defendant guilty included at least one overt act with the intent to commit actual <b>fraud</b> (properly defined) after the starting date for the applicable statute of limitations (based on the WSLA).</p></blockquote><p class="MsoNormal"></p><p class="MsoNormal"><o:p></o:p></p>Jack Townsendhttp://www.blogger.com/profile/14469823736335455874noreply@blogger.com0tag:blogger.com,1999:blog-1519969502186924526.post-60203203542853341272023-04-14T13:28:00.004-05:002023-07-03T11:41:46.049-05:00Updated DOJ Tax Voluntary Disclosure Policy (4/14/23; 4/30/23)<p><span style="color: red; font-family: inherit;"><b>Caveat on 4/30/23 3:00pm: The Disclosure Policy was updated on 4/25/23. I have not had a chance to determine whether any material changes were made and will do so when I have a chance. The updated web page in HTML is <a href="https://www.justice.gov/tax/corporate-voluntary-self-disclosure-policy">here</a>.</b></span></p><p><span style="font-family: inherit;">DOJ
components, including DOJ Tax, have updated their respective corporate
voluntary disclosure policies. While an attorney representing corporations
having a potential federal criminal problem should familiarize themselves with
appropriate component policies, I focus here on the DOJ Tax updated policy (in HTML <a href="https://www.justice.gov/tax/corporate-voluntary-self-disclosure-policy">here</a> and pdf <a href="https://www.justice.gov/tax/page/file/1570836/download">here</a>). The DOJ Tax update "<b>supplements</b>" the Tax
Division's existing policy by providing much more detail as to the requirements
for the policy. For background, I include verbatim the DOJ Tax voluntary
disclosure policy in CTM 4.01, <a href="https://www.justice.gov/sites/default/files/tax/legacy/2012/12/05/CTM%20Chapter%204.pdf">here</a>:</span></p>
<p class="MsoNormal"><b><span style="line-height: 107%; mso-bidi-font-size: 14.0pt;"><span style="font-family: inherit;"></span></span></b></p><blockquote><p class="MsoNormal"><b><span style="line-height: 107%; mso-bidi-font-size: 14.0pt;"><span style="font-family: inherit;">4.01 VOLUNTARY DISCLOSURE</span></span></b></p>
<p class="MsoNormal"><b><span style="line-height: 107%; mso-bidi-font-size: 14.0pt;"><span style="font-family: inherit;">4.01[1] Policy Respecting
Voluntary Disclosure<o:p></o:p></span></span></b></p>
<p class="MsoNormal"><span style="line-height: 107%; mso-bidi-font-size: 14.0pt;"><span style="font-family: inherit;"> Whenever a person voluntarily discloses that
he or she committed a crime before any investigation of the person’s conduct
begins, that factor is considered by the Tax Division along with all other
factors in the case in determining whether to pursue criminal prosecution. See
generally USAM, § 9-27.220, et. seq. <o:p></o:p></span></span></p>
<p class="MsoNormal"><span style="font-family: inherit;">If a putative criminal defendant has complied in all respects with all of the requirements of the Internal Revenue Service’s voluntary disclosure Practice, <b>n1</b> </span></p></blockquote><blockquote><p class="MsoNormal"></p><blockquote><span style="font-family: inherit;"> <b>n1</b> See <i>United States v. Knottnerus</i>, 139 F.3d 558, 559-560 (7th Cir. 1998) (holding that prior visit by special agent disqualified defendant from voluntary disclosure program); <i>United States v. Tenzer</i>, 127 F.3d 222, 226-28 (2d Cir. 1997), vacated in part and remanded on other grounds, 213 F.3d 34, 40-41 (2d Cir. 2000) (taxpayer must pay or make bona fide arrangement to pay taxes and penalties owed to qualify for consideration); and <i>United States v. Hebel</i>, 668 F.2d 995 (8th Cir. 1982).</span></blockquote><p></p><p class="MsoNormal"><span style="font-family: inherit;"> A
person who makes a “voluntary disclosure” does not have a legal right to avoid criminal
prosecution. Whether there is or is not a voluntary disclosure is only one
factor in the evaluation of a case. Even if there has been a voluntary
disclosure, the Tax Division still may authorize prosecution. See <i>United States
v. Hebel</i>, 668 F.2d 995 (8<sup>th</sup> Cir.), cert. denied, 456 U.S. 946
(1982).</span></p></blockquote><p class="MsoNormal"><span style="line-height: 107%; mso-bidi-font-size: 14.0pt;"><span style="font-family: inherit;"><o:p></o:p></span></span></p>
<p class="MsoNormal"><span style="line-height: 107%; mso-bidi-font-size: 14.0pt;"><span style="font-family: inherit;">I discuss
certain (but not all) aspects of the Update. I provide this discussion in the order of the presentation of the Update
(and not necessarily in the order of importance). The alphabetical paragraph references
(e.g., ¶ A) are to the paragraphs in the policy; the numbered paragraphs are to
my points and are sequential through all paragraphs:<span></span></span></span></p><a name='more'></a><span style="font-family: inherit;"><o:p></o:p></span><p></p>
<p class="MsoNormal"><span style="line-height: 107%; mso-bidi-font-size: 14.0pt;"><span style="font-family: inherit;"><b>¶ A
Introduction</b><o:p></o:p></span></span></p>
<p class="MsoNormal"><span style="font-family: inherit;">1. <u>Entities
within the scope of the policy</u>. "Footnote
2 says, "The terms corporation and company apply to all types of business
organizations, including but not limited to partnerships, government entities,
and unincorporated associations. See Justice Manual ("JM") § 9-28.200. This
policy does not, however, apply to sole proprietorships.""</span></p>
<p class="MsoNormal"><span style="font-family: inherit;">2. <u>What is the role of the IRS Voluntary Disclosure Practice? </u>The
policy states: "Any voluntary self-disclosure related to matters arising under
the internal revenue laws <b>must</b> be
made to the Tax Division. Division. See JM § 6-4.010; 28 C.F.R. § 0.70.” (Emphasis supplied.) The
cited references do not state that voluntary disclosure <b>must</b> be made to DOJ Tax. Further, the DOJ CTM provision (quoted
above) does not require voluntary disclosure only to DOJ Tax and says that
voluntary disclosure to the IRS under its practices will be considered. My
inference is that this aspect of the DOJ Tax policy will continue. Nevertheless, a "belt and suspenders" approach suggests voluntary
disclosure to DOJ Tax and IRS and let them sort out who takes the lead in confirming
compliance.</span></p>
<p class="MsoNormal"><span style="font-family: inherit;">3. Disclosures
where government is otherwise aware. "Companies
are encouraged to make disclosures to the Tax Division even if they believe the
government may already be aware of the misconduct." The full benefits may not be available, but some can be.</span></p>
<p class="MsoNormal"><span style="font-family: inherit;">4 Substantial
compliance possibility. "Prompt
self-disclosures will be considered favorably, even if they do not satisfy all
the criteria for a voluntary self-disclosure as set forth below."</span></p>
<p class="MsoNormal"><span style="font-family: inherit;"><span style="line-height: 107%; mso-bidi-font-size: 14.0pt;"> </span><b><span style="line-height: 107%; mso-bidi-font-size: 14.0pt;">¶ B. Voluntary
Self-Disclosure</span></b></span></p>
<p class="MsoNormal"><span style="line-height: 107%; mso-bidi-font-size: 14.0pt;"><span style="font-family: inherit;">This
portion of the policy update sets details of the conditions in much the way the IRS
voluntary disclosure practice in the IRM sets forth the conditions. DOJ's conditions are more detailed. These conditions are so important that I copy
and paste them verbatim (with some emphases in boldface provided by me without
further discussion where I believe readers of this blog will get the point):<o:p></o:p></span></span></p>
<p class="MsoNormal"></p><blockquote><p class="MsoNormal"><span style="font-family: inherit;">The
Tax Division will determine, <b>at its sole
discretion</b>, whether a disclosure constitutes a voluntary self-disclosure
based on a careful, case-by-case assessment. To be a voluntary self-disclosure
under this policy, the following criteria must be met:</span></p>
<p class="MsoNormal"><span style="font-family: inherit;">1 <i>Voluntary</i>:
The disclosure of criminal misconduct must be voluntary. <b>A disclosure is not voluntary where there is a preexisting obligation
to disclose</b>, such as pursuant to regulation, contract, or a prior
Department resolution (e.g., non-prosecution agreement or deferred prosecution
agreement).</span></p>
<p class="MsoNormal"><span style="font-family: inherit;">2 <i>Timing
of the Disclosure</i>: The voluntary disclosure must be made to the Tax
Division:</span></p>
<p class="MsoNormal"><!--[if supportFields]><span lang=EN-CA style='mso-bidi-font-size:
14.0pt;line-height:107%;mso-ansi-language:EN-CA'><span style='mso-element:field-begin'></span><span
style='mso-spacerun:yes'> </span>SEQ CHAPTER \h \r 1</span><![endif]--><!--[if supportFields]><span
lang=EN-CA style='mso-bidi-font-size:14.0pt;line-height:107%;mso-ansi-language:
EN-CA'><span style='mso-element:field-end'></span></span><![endif]--><span style="line-height: 107%; mso-bidi-font-size: 14.0pt;"><span style="font-family: inherit;"></span></span></p><blockquote><p class="MsoNormal"><span style="line-height: 107%; mso-bidi-font-size: 14.0pt;"><span style="font-family: inherit;">◦ “prior to an imminent
threat of disclosure or government investigation,” U.S. Sentencing Guidelines
(“U.S.S.G.”) § 8C2.5(g)(1);<o:p></o:p></span></span></p>
<p class="MsoNormal"><!--[if supportFields]><span lang=EN-CA style='mso-bidi-font-size:
14.0pt;line-height:107%;mso-ansi-language:EN-CA'><span style='mso-element:field-begin'></span><span
style='mso-spacerun:yes'> </span>SEQ CHAPTER \h \r 1</span><![endif]--><!--[if supportFields]><span
lang=EN-CA style='mso-bidi-font-size:14.0pt;line-height:107%;mso-ansi-language:
EN-CA'><span style='mso-element:field-end'></span></span><![endif]--><span style="line-height: 107%; mso-bidi-font-size: 14.0pt;"><span style="font-family: inherit;">◦ prior to the criminal
misconduct being publicly disclosed or otherwise known to the government
(except in cases where prior disclosure was made to the Internal Revenue Service
(“IRS”) or other appropriate regulatory authority, in which case disclosure,
absent good cause shown, must be made to the Tax Division within 15 days of the
prior disclosure); and<o:p></o:p></span></span></p>
<p class="MsoNormal"><!--[if supportFields]><span lang=EN-CA style='mso-bidi-font-size:
14.0pt;line-height:107%;mso-ansi-language:EN-CA'><span style='mso-element:field-begin'></span><span
style='mso-spacerun:yes'> </span>SEQ CHAPTER \h \r 1</span><![endif]--><!--[if supportFields]><span
lang=EN-CA style='mso-bidi-font-size:14.0pt;line-height:107%;mso-ansi-language:
EN-CA'><span style='mso-element:field-end'></span></span><![endif]--><span style="line-height: 107%; mso-bidi-font-size: 14.0pt;"><span style="font-family: inherit;">◦ within a reasonably prompt
time after the company becomes aware of the criminal misconduct, with the
burden being on the company to demonstrate timeliness.</span></span></p></blockquote><p class="MsoNormal"><span style="line-height: 107%; mso-bidi-font-size: 14.0pt;"><span style="font-family: inherit;"><o:p></o:p></span></span></p>
<p class="MsoNormal"><span style="font-family: inherit;">3 <i>Substance
of the Initial Disclosure and Accompanying Actions</i>: For a disclosure to be
deemed a voluntary self-disclosure under this policy, the disclosure must
include all relevant facts concerning the misconduct that are known to the
company at the time of the disclosure. The Tax Division recognizes that a
company disclosing soon after becoming aware of the misconduct may not know all
of the relevant facts at the time of the voluntary self-disclosure. Therefore,
a company should make clear that its disclosure is based upon a preliminary
investigation or assessment of information, but it should nonetheless provide a
fulsome disclosure of the relevant facts known to it at the time. In addition:</span></p>
<p class="MsoNormal"><!--[if supportFields]><span lang=EN-CA style='mso-bidi-font-size:
14.0pt;line-height:107%;mso-ansi-language:EN-CA'><span style='mso-element:field-begin'></span><span
style='mso-spacerun:yes'> </span>SEQ CHAPTER \h \r 1</span><![endif]--><!--[if supportFields]><span
lang=EN-CA style='mso-bidi-font-size:14.0pt;line-height:107%;mso-ansi-language:
EN-CA'><span style='mso-element:field-end'></span></span><![endif]--><span style="line-height: 107%; mso-bidi-font-size: 14.0pt;"><span style="font-family: inherit;"></span></span></p><blockquote><p class="MsoNormal"><span style="line-height: 107%; mso-bidi-font-size: 14.0pt;"><span style="font-family: inherit;">◦ <i>Preservation of
Documents</i>: The company must timely preserve, collect, and produce relevant
documents and/or information, and provide timely factual updates.<o:p></o:p></span></span></p>
<p class="MsoNormal"><!--[if supportFields]><span lang=EN-CA style='mso-bidi-font-size:
14.0pt;line-height:107%;mso-ansi-language:EN-CA'><span style='mso-element:field-begin'></span><span
style='mso-spacerun:yes'> </span>SEQ CHAPTER \h \r 1</span><![endif]--><!--[if supportFields]><span
lang=EN-CA style='mso-bidi-font-size:14.0pt;line-height:107%;mso-ansi-language:
EN-CA'><span style='mso-element:field-end'></span></span><![endif]--><span style="line-height: 107%; mso-bidi-font-size: 14.0pt;"><span style="font-family: inherit;">◦ <i>Cooperation and
Remediation</i>: To receive full credit for a voluntary disclosure, the company
must provide full cooperation and timely and appropriate remediation, as
described in Parts C and D of this policy.<o:p></o:p></span></span></p>
<p class="MsoNormal"><!--[if supportFields]><span lang=EN-CA style='mso-bidi-font-size:
14.0pt;line-height:107%;mso-ansi-language:EN-CA'><span style='mso-element:field-begin'></span><span
style='mso-spacerun:yes'> </span>SEQ CHAPTER \h \r 1</span><![endif]--><!--[if supportFields]><span
lang=EN-CA style='mso-bidi-font-size:14.0pt;line-height:107%;mso-ansi-language:
EN-CA'><span style='mso-element:field-end'></span></span><![endif]--><span style="line-height: 107%; mso-bidi-font-size: 14.0pt;"><span style="font-family: inherit;">◦ <i>Disclosure of Returns
and Return Information</i>: A voluntary disclosure to the Tax Division must be
accompanied by a written consent by the company, pursuant to 26 U.S.C. §
6103(c), authorizing the IRS to disclose to the Tax Division all relevant
returns and return information. The consent must also authorize that the Tax
Division may make use of the information to the extent otherwise permitted
under § 6103(h), including applicable regulations. The Tax Division may consult
with and obtain the assistance of the IRS in evaluating and investigating the
voluntary self-disclosure.</span></span></p></blockquote><p class="MsoNormal"><span style="line-height: 107%; mso-bidi-font-size: 14.0pt;"><span style="font-family: inherit;"><o:p></o:p></span></span></p>
<p class="MsoNormal"></p></blockquote><blockquote><blockquote><p class="MsoNormal"><span style="font-family: inherit;">◦ <i>Method of Disclosure</i>:
A company interested in making a voluntary self-disclosure to the Tax Division
should submit a request to <a href="mailto:CorpTax.Disclosures@usdoj.gov">CorpTax.Disclosures@usdoj.gov</a>.</span></p></blockquote></blockquote>
<p class="MsoNormal"><span style="line-height: 107%; mso-bidi-font-size: 14.0pt;"><span style="font-family: inherit;">1. Query, since the policy applies at DOJ Tax's sole discretion, is there a possible attack that can be made to denial based on abuse of discretion? I doubt it, but one faced with the actuality of denial might consider it.</span></span></p><p class="MsoNormal"><span style="font-family: inherit;">2. Is
there some possibility that, if a joint disclosure to DOJ Tax and the IRS, DOJ
Tax may deny the voluntary disclosure and IRS grant it? I doubt the two
entities would conflict, but what if they did? Of course, if DOJ Tax grants voluntary disclosure but IRS disagrees and
recommends prosecution, it does not matter what the IRS recommends.</span></p><p class="MsoNormal"><span style="font-family: inherit;">3. Should a joint disclosure to DOJ Tax and the IRS meet the requirements of both policies/practices?</span></p>
<p class="MsoNormal"><b><span style="line-height: 107%; mso-bidi-font-size: 14.0pt;"><span style="font-family: inherit;">¶ C. Benefits of Voluntary Self-Disclosure</span></span></b></p>
<p class="MsoNormal"><span style="font-family: inherit;">1. These
are new but consistent with other DOJ component voluntary disclosure policies.</span></p>
<p class="MsoNormal"><span style="font-family: inherit;">2. Under
the policy, "the Tax Division <b>may choose
not to impose a criminal penalty</b>." Of course, DOJ Tax does not impose criminal penalties; courts do that. I
suppose that fairly read, this means that DOJ Tax may <b>choose</b> not to seek indictment.</span></p>
<p class="MsoNormal"><span style="font-family: inherit;">3. The
policy offers to request a reduction in the Guidelines' recommended <b>fine</b> ranges based upon meeting the
policy or key aspects of the policy including cooperation. I am not sure that fine ranges are that
material to corporations.</span></p>
<p class="MsoNormal"><span style="font-family: inherit;">4. Logically,
there is no agreement as to sentencing range because
corporations are not incarcerated.</span></p>
<p class="MsoNormal"><b><span style="line-height: 107%; mso-bidi-font-size: 14.0pt;"><span style="font-family: inherit;">¶ D. Cooperation<o:p></o:p></span></span></b></p>
<p class="MsoNormal"><span style="line-height: 107%; mso-bidi-font-size: 14.0pt;"><span style="font-family: inherit;">The
policy provides many conditions to meet the cooperation requirement. <o:p></o:p></span></span></p>
<p class="MsoNormal"><b><span style="line-height: 107%; mso-bidi-font-size: 14.0pt;"><span style="font-family: inherit;">¶ E. Timely and Appropriate
Remediation<o:p></o:p></span></span></b></p>
<p class="MsoNormal"><span style="font-family: inherit;"><span style="line-height: 107%; mso-bidi-font-size: 14.0pt;"> </span>No
agreement as to Civil Penalties.</span></p>Jack Townsendhttp://www.blogger.com/profile/14469823736335455874noreply@blogger.com0tag:blogger.com,1999:blog-1519969502186924526.post-67011029378630724912023-05-10T12:28:00.006-05:002023-07-02T15:14:41.329-05:00Third Circuit Holds That Tax Loss for Tax Crimes Sentencing Calculations is the Intended Loss Rather than Actual Loss (5/10/23)<p><span style="font-family: inherit;">In <i>United States v. Upshur</i>, 67 F.4th 178 (3rd Cir.
5/8/23), CA3 <a href="https://www2.ca3.uscourts.gov/opinarch/213281p.pdf">here</a>
and GS <a href="https://scholar.google.com/scholar_case?case=5084628127086416835">here</a>, the Court held that the loss driving the Tax Table at U.S.S.G.
§ 2T4.1, <a href="https://www.ussc.gov/guidelines/2021-guidelines-manual/annotated-2021-chapter-2-c#2b11">here</a>,
is the intended loss rather than the actual loss to the Treasury. The holding is driven by the language in the
Guideline itself: “the tax loss is the total amount of loss that was the object
of the offense (i.e., the loss that would have resulted had the offense been
successfully completed).” § 2T1.1(c), <a href="https://www.ussc.gov/guidelines/2021-guidelines-manual/annotated-2021-chapter-2-l-x#2t11">here</a></span></p><p class="MsoNormal"><span style="font-family: inherit;"><o:p></o:p></span></p>
<p class="MsoNormal"><span style="font-family: inherit;">That only became an issue because the Third Circuit held in <i>United
States v. Banks</i>, 55 F.4th 246 (3d Cir. 2022) that, for larceny and related
financial crimes in U.S.S.G. § 2B1.1, the “loss” (meaning actual loss) is the
measure. Both results were driven by the plain meaning of the respective terms
in the Guidelines.</span></p><p class="MsoNormal"><span style="font-family: inherit;"><o:p></o:p></span></p>
<p class="MsoNormal"><span style="font-family: inherit;"><o:p> </o:p>The case highlights a possible disconnect between the sentencing
for the two types of financial crimes. It is not apparent from the Guidelines
why there is a difference, but as the plain text of both Guidelines provisions
establishes, there is a difference.</span></p><p class="MsoNormal"><span style="font-family: inherit;"><o:p></o:p></span></p>
<p class="MsoNormal"><span style="font-family: inherit;">The Court also said (Slip Op. 6 n.1):</span></p><p class="MsoNormal"><span style="font-family: inherit;"><o:p></o:p></span></p>
<p class="MsoNormal"></p><blockquote><span style="font-family: inherit;"> n1 Because we
conclude that the text of § 2T1.1(c)(1) is unambiguous, we need not go further
and examine its “structure, history, and purpose” or determine if the relevant Guidelines
Commentary merits <i>Auer</i> deference. See <i>Kisor</i>, 139 S. Ct. at 2415.</span></blockquote><span style="font-family: inherit;"><o:p></o:p></span><p></p>
<p class="MsoNormal"><span style="font-family: inherit;">Auer deference in the Guidelines context would be Commentary
interpretation of the Guidelines (which for deference is treated like a notice
and comment regulations).</span></p><p class="MsoNormal"><o:p></o:p></p>Jack Townsendhttp://www.blogger.com/profile/14469823736335455874noreply@blogger.com0tag:blogger.com,1999:blog-1519969502186924526.post-87894220551543197402023-05-02T15:32:00.005-05:002023-05-02T15:39:27.049-05:00Tax Crimes Outline for UVA Law Tax Procedure Class (5/2/23)<p>On March 31, 2023, I taught Tax Crimes session for Jim Malone's Tax Procedure Class at UVA Law School. I prepared an outline that may be useful for others, so I link it <a href="https://drive.google.com/file/d/1wVjktFQnRCDxf_3Rk3vw9aVMEl1qRBt8/view?usp=sharing">here</a>. The outline is from my Federal Tax Procedure Book published annually in early August. The outline is updated with major developments through about March 11, 2023. Keep in mind that the outline is an overview appropriate for one session in a semester class on tax procedure. It is not definitive on Federal Tax Procedure. For more definitive discussion of tax crimes, I refer readers to Chapter 12: Criminal Penalties and the Investigation Function in Michael Saltzman and Leslie Book, <u>IRS Practice and Procedure</u> (Thomsen Reuters 2015), <a href="https://store.tax.thomsonreuters.com/accounting/Tax/IRS-Practice-and-Procedure/p/100200942">here</a>, as updated three times a year. I am the principal author of that Chapter and the updates.</p>Jack Townsendhttp://www.blogger.com/profile/14469823736335455874noreply@blogger.com0tag:blogger.com,1999:blog-1519969502186924526.post-31022665768080999262021-05-08T09:04:00.008-05:002023-04-25T15:43:56.082-05:00Fifth Circuit Holds that the Defraud/Klein Conspiracy Does Not Have Pending Proceeding Element; Update on Cert Petition in Related Case (5/8/21)<p>In <i>United States v. Herman</i>, 997 F. 3d 251, 273 (5th Cir. 2021), CA5 <a href="https://www.ca5.uscourts.gov/opinions/pub/19/19-50830-CR0.pdf">here</a> & GS <a href="https://scholar.google.com/scholar_case?case=15801398953105474286">here</a>, the Court affirmed the convictions
of husband and wife, restaurant owners and operators for the defraud/<i>Klein</i> conspiracy and willfully filing false tax returns. </p><p class="MsoNormal"><o:p></o:p></p>
<p class="MsoNormal">The noteworthy holding in the opinion is that the <i>Klein</i>
conspiracy in § 371 does not import the holding in <i>Marinello v. United States</i>, 584 U.S. ___, 138 S. Ct. 1101 (2018), that the tax
obstruction crime (§ 7212(a)) requires a nexus to an administrative
proceeding. (See Slip Op. 25-29.) </p><p class="MsoNormal">
As the Fifth Circuit panel notes, its holding is consistent with the two other circuits’
holdings, the only circuit court cases addressing the issue.<o:p></o:p></p>
<p class="MsoNormal">One of the other circuit court cases was <i>United States v. Flynn</i>,
969 F.3d 873 (8th Cir. 2020), cert. docketed, 20-1129 (Feb. 17, 2021). I previously wrote on the petition for cert
in <i>Flynn</i>. See <u>Defendant Petitions for
Cert on Relationship of Defraud Conspiracy and Marinello Interpretation of Tax
Obstruction</u> (2/22/21), <a href="http://federaltaxcrimes.blogspot.com/2021/02/defendant-petitions-for-cert-on.html">here</a>. I thought readers
might want an update on the status of the pending petition for cert in <i>Flynn</i>.</p><p class="MsoNormal"><o:p></o:p></p>
<p class="MsoNormal">The Supreme Court docket entries in <i>Flynn</i>, <a href="https://www.supremecourt.gov/search.aspx?filename=/docket/docketfiles/html/public/20-1129.html">here</a>, indicate that the following key entries:</p><p class="MsoNormal"></p><ul style="text-align: left;"><li>The petition was filed 2/11/12, </li><li>The Government’s response is due 5/19/21 (after
some extensions) </li><li>An amicus brief in support of the petition was filed by the
New York Council of Defense Lawyers on 5/2/21. <span><a name='more'></a></span></li></ul><p style="text-align: left;"><span style="font-family: inherit;">I recommend to readers the petition, <a href="https://www.supremecourt.gov/DocketPDF/20/20-1129/168790/20210211154408855_Petition.pdf">here</a>, and the amicus brief, <a href="https://www.supremecourt.gov/DocketPDF/20/20-1129/172390/20210319162736110_20210319-162521-95753060-00000341.pdf">here</a>. As presented in the petition, the Questions Presented are:</span></p><p class="MsoNormal"><o:p></o:p></p><blockquote><p class="MsoNormal">I. Whether the due process clause of the United States
Constitution, as discussed in <i>McCarthy v. United States</i>, 394 U.S. 459 (1969)
and more recent decisions of this Court, requires discussion in open court of
the elements of an 18 U.S.C. § 371 conspiracy to defraud the Internal Revenue
Service (Klein Conspiracy) offense to advise the defendant of the nature of the
charges against him before a guilty plea is accepted.</p><p class="MsoNormal"><o:p></o:p></p>
<p class="MsoNormal">II. Whether the requirement for a nexus between a particular
administrative proceeding and a taxpayer’s conduct is necessary to save the constitutionality
of a conviction under an 18 U.S.C. § 371 conspiracy to defraud the Internal
Revenue Service (Klein Conspiracy) after this Court’s decision in <i>Marinello v.
United States</i>, 138 S. Ct. 1101 (2018).<o:p></o:p></p>
<p class="MsoNormal">III. Whether a criminal defendant is entitled to a jury
trial to determine the amount of restitution under either the Sixth or Seventh
Amendments to the United States Constitution.</p></blockquote><p class="MsoNormal"><o:p></o:p></p>
<p class="MsoNormal">The petition and the amicus brief are well-written and highly recommended for
those interested in the scope of the Klein conspiracy.</p><p class="MsoNormal">I am surprised that it has taken the SG so long to file its response (3 months by the current due date). Presumably, when filed, the SG's response (presumably a brief in opposition) will address the arguments in both the petition and the amicus brief.</p><p class="MsoNormal">I do hope that the Court takes cert in this case or some case soon to address the sweep of the defraud conspiracy as interpreted which raises the same overbreadth issues that cause the Court to limit the sweep of the tax obstruction statute (§ 7212(a)). I have noised about my concerns since writing an article on the subject and providing a companion discussion of some potentially disturbing applications. John A. Townsend, <u>Tax Obstruction Crimes: Is Making the IRS's Job Harder Enough?</u>, 9 Hous. Bus. & Tax L.J. 260 (2009), on SSRN <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2061018">here</a> and the companion online appendix, on SSRN <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3014880">here</a>.</p><p class="MsoNormal"><o:p></o:p></p>Jack Townsendhttp://www.blogger.com/profile/14469823736335455874noreply@blogger.com0tag:blogger.com,1999:blog-1519969502186924526.post-23058220846587528162013-07-29T17:08:00.003-05:002023-04-02T13:06:12.707-05:00Juror Unanimity and Predicate Facts (7/29/13)<div class="tr_bq">
Jury unanimity is required as to the elements of an offense. Thus, if the crime requires elements 1, 2 and 3 and the jury reaches unanimity only as to elements 1 and 2, then the jury cannot -- well, should not -- convict. But, I have just given you the easy case as to jury unanimity. What if element 3 had some subsidiary facts required to constitute element 3. Must the jury be unanimous as to the same subsidiary facts constituting element 3?</div>
<br />
Consider this from Eric S. Miller, <u>Compund-Complex Criminal Statutes and the Constitution: Demanding Unanimity as to Predicate Acts</u>, 104 Yale L.J. 2277 (1995) (footnotes omitted):<br />
<blockquote class="tr_bq">
In his first judicial act, Daniel, who would become one of the Hebrew Bible's most respected judges, saved an innocent woman from a death sentence. Susanna, wife of the wealthy and respected Joakim, went to her garden to bathe. In the garden, two lecherous elders trapped her alone and demanded that she have sex with them. If she refused, they threatened to accuse her publicly of having sex with a man other than her husband, a crime whose punishment was death. Susanna did refuse, and the next day the elders accused her of adultery, telling the judges that they saw a young man lying with her in her garden. The judges believed the elders and sentenced Susanna to death. </blockquote>
<blockquote class="tr_bq">
As Susanna was being led to her execution, Daniel cried out, "Are you such fools, O Israelites! To condemn a woman of Israel without. . . clear evidence?" Questioning the elders separately, Daniel asked each, "[U]nder which tree did you see them together?" One elder answered, "Under a mastic tree"; the other answered, "Under an oak." On the basis of this lack of agreement, Susanna was freed. "Thus was innocent blood spared that day . . . And from that day onward Daniel was greatly esteemed by the people." </blockquote>
<blockquote class="tr_bq">
In modern criminal procedure terminology, Daniel was confronted with a problem of verdict specificity. To Daniel, a determination that the accused was guilty of the crime charged was not enough. Instead, he demanded "clear evidence" of how the crime was committed. Without such evidence, Daniel said, the judges were "passing unjust sentences" and "condemning the innocent." </blockquote>
<blockquote class="tr_bq">
Like Daniel, the United States Constitution demands a certain level of verdict specificity. The Sixth Amendment requires that convicting jurors in federal criminal trials be unanimous not solely as to the ultimate question of guilt or innocence, but also as to the principal factual elements of the crime charged. </blockquote>
The question is one of specificity.<br />
<a name='more'></a><br />
With this in mind, in 2012, Vernon K. Newson, a Las Vegas tax preparer, was convicted of aiding and assisting the preparation of false returns. Accoridng to the press release from USAO DLV, <a href="http://www.justice.gov/usao/nv/news/2012/05012012.html" target="_blank">here</a>:<br />
<blockquote class="tr_bq">
According to the court records, Newson operated a business in Las Vegas called Perdiem, Inc., dba "The Money Man," and provided payday loans, bill-paying services, DMV registration, and tax return preparation. Between the 2002 and 2006 tax years, Newson filed 22 false tax returns for 10 clients. Newson padded customers' tax returns with false deductions and credits, invented businesses to create business losses, and inflated W-2 wages and itemized deductions. Newson also attempted to cover up his activities by telling clients to lie to auditors, and presented two other false tax returns in 2006 for "undercover" businesses which were being tracked by the IRS. The tax loss to the government was determined by the court to be approximately $142,949.</blockquote>
Newson appealed, urging that the trial court erred in not giving the specific unanimity instruction he requested. In <i>United States v. Newson</i>, 2013 U.S. App. LEXIS 14925 (9th Cir. 2013), <a href="http://cdn.ca9.uscourts.gov/datastore/memoranda/2013/07/23/12-10224.pdf" target="_blank">here</a>, an unpublished opinion, the Ninth Circuiit rejected his argument,. The opinion is somewhat cryptic, so I quote it is full to give readers -- students and new practitioners -- a feel for the genre of the argument and its resolution (footnotes omitted):<br />
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<span class="Apple-tab-span" style="white-space: pre;"> </span>Newson asserts that the district court erred when it refused to instruct the jury that the jurors had to unanimously agree that a particular deduction was willfully false before they could agree that he had willfully assisted in preparing or presenting an income tax return with false matter. See id. We disagree. </blockquote>
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<span class="Apple-tab-span" style="white-space: pre;"> </span>Certainly a defendant cannot be convicted of a crime unless the jury's verdict is unanimous, which means that the jurors must agree that all elements of the offense have been proved. However, that does not mean that the jurors must agree on the "'preliminary factual issues which underlie the verdict."' <i>Schad v. Arizona</i>, 501 U.S. 624, 632, 111 S. Ct. 2491, 2497, 115 L. Ed. 2d 555 (1991). Of course, jurors cannot be instructed that a defendant can be convicted of an offense if he committed, for example, crime A or crime B, unless they are also instructed that there must be unanimous agreement on which crime it was. See <i>Richardson v. United States</i>, 526 U.S. 813, 818-20, 824, 119 S. Ct. 1707, 1710-11, 1713, 143 L. Ed. 2d 985 (1999); United States v. Anguiano, 873 F.2d 1314, 1319-20 (9th Cir. 1989). And, even if the jurors are not presented with that stark a choice, if the presentation of the case leads to juror confusion, the confusion must be eliminated. See <i>United States v. Echeverry</i>, 719 F.2d 974, 975 (9th Cir. 1983). That can be accomplished by use of a specific unanimity instruction. See <i>Richardson</i>, 526 U.S. at 817-20, 824, 119 S. Ct. at 1710-11, 1713; <i>Anguiano</i>, 873 F.2d at 1319. </blockquote>
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<span class="Apple-tab-span" style="white-space: pre;"> </span>Again, however, the mere fact that jurors might agree that the crime was committed while not agreeing on the specific underlying facts is not a sufficient reason to require a specific unanimity instruction. See <i>Schad</i>, 501 U.S. at 631-32, 644-45, 111 S. Ct. at 2497, 2503-04 (jury need not agree on whether a murder was premeditated or a killing in the course of committing another felony); id. at 649-50, 111 S. Ct. at 2506 (Scalia, J., concurring); <i>United States v. Lyons</i>, 472 F.3d 1055, 1068-69 (9th Cir. 2007) (mail fraud); <i>United States v. Woods</i>, 335 F.3d 993, 998-99 (9th Cir. 2003) (same); <i>United States v. Carlson</i>, 235 F.3d 466, 471 (9th Cir. 2000) (tax evasion); <i>United States v. Kim</i>, 196 F.3d 1079, 1082-83 (9th Cir. 1999) (aiding and abetting). Here, the crime in question was the preparation of a return, which "is false as to any material matter" for presentation to the government. 26 U.S.C. § 7206(2) (emphasis added); See also <i>United States v. Salerno</i>, 902 F.2d 1429, 1431-32 (9th Cir. 1990) (elements of 26 U.S.C. § 7206(2) offense). That does not spell out a separate crime for each materially false fact within a return, nor do jurors have to agree on any single materially false fact; rather, "'different jurors may be persuaded by different pieces of evidence, even when they agree upon the bottom line.'" <i>Schad</i>, 501 U.S. at 631-32, 111 S. Ct. at 2497. And there was little or no chance of jury confusion; that leads to the final insurmountable revetment faced by Newson. </blockquote>
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<span class="Apple-tab-span" style="white-space: pre;"> </span>Whether a specific unanimity instruction should have been given or not, Newson's attack fails because on this record any error was harmless beyond a reasonable doubt. See <i>United States v. Nobari</i>, 574 F.3d 1065, 1081-83 (9th Cir. 2009); Southwell, 432 F.3d at 1053; cf. <i>United States v. Montalvo</i>, 331 F.3d 1052, 1056-57 (9th Cir. 2003). The evidence against him was overwhelming. Numerous individuals for whom he prepared returns testified to his methods and to the fact that he made up nonexistent businesses and then made up false business deductions for those nonexistent ventures. In short, "the overall picture of [Newson's] conduct [was] crystal clear." <i>Carlson</i>, 235 F.3d at 471. </blockquote>
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<span class="Apple-tab-span" style="white-space: pre;"> </span>AFFIRMED.</blockquote>
Jack Townsendhttp://www.blogger.com/profile/14469823736335455874noreply@blogger.com0