Civil Liability for Conduct that is Acquitted in Criminal Case (11/20/21)

The Kyle Rittenhouse acquittal on all counts is in the news.  Acquittal or conviction (on some or all counts) was sure to become a political charged phenomenon.  I don’t deal with the political issues here. I respond to a question I was asked yesterday as to whether Rittenhouse’s acquittal absolves him of potential civil liability related to the same conduct for which he was acquitted and specifically address the criminal tax analog of the phenomenon.

For a discussion of the nontax answer, I point readers to this discussion:  Euguene Volokh, Could Kyle Rittenhouse Be Sued for Negligence? (The Volokh Conspiracy 11/20/21), here.  Professor Volokh answers the question succinctly at the beginning of the blog post:

A criminal acquittal doesn't preclude a civil lawsuit out of the same claims. First, the acquittal resolves only that guilt couldn't be proved beyond a reasonable doubt (requiring, say, a >90% confidence level); the standard for civil liability is preponderance of the evidence (which requires just >50%, or perhaps ≥50%, if the injury is easily proved and the burden is then shifted to the defendant to prove self-defense).

A similar phenomenon plays out in the criminal tax area.  A criminal tax evasion acquittal does not prevent the imposition of the civil fraud penalty in § 6663.  And, for the same reason:  the burden of proof for the civil fraud penalty is less than for the criminal penalty. so that acquittal is not issue or claim preclusive for the civil fraud penalty.  Civil liability for the civil fraud penalty requires that the Government prove civil fraud liability by clear and convincing evidence, a burden that as articulated is less burdensome (so to speak) for the Government than the beyond a reasonable doubt standard.

 Here is the key paragraph from my Federal Tax Procedure Book (2021 Practitioner Edition), p. 333 here (footnotes omitted from the quote but may be viewed at the link here):

If the taxpayer is acquitted of the tax evasion charge, however, the IRS may still assert the civil fraud penalty (the acquittal is not preclusive that there was no civil fraud).  Why?  A finding of not guilty is not necessarily a finding of innocence; it is only a finding that the government failed to prove guilt beyond a reasonable doubt.  In an ensuing civil tax case, the government must establish fraud only by clear and convincing evidence, a substantially lesser burden than the beyond a reasonable doubt requirement for criminal conviction.  Accordingly, the IRS may and usually does assert the civil fraud penalty when the taxpayer has been acquitted.

Most civil liability exposures relate to liabilities such as negligence discussed above that require proof of liability by a preponderance of the evidence.  Liability for the civil fraud penalty requires proof by clear and convincing evidence, a standard that falls somewhere between beyond a reasonable doubt (the criminal conviction standard) and preponderance of the evidence.  For discussion of the difficulties in articulating these standards, particularly in jury instructions useful to a jury, see discussion in my book pp. 331-332, here, particularly at n. 1414 and pp.601-602.

This blog post is cross-posted on my Federal Tax Procedure Blog here.

Reasonable Doubt About Reasonable Doubt Instructions (2/5/21)

I have written below about some of the problems with the venerable “beyond a reasonable doubt” for convictions for crimes.  E.g., Inspired by the Manafort Trial, On the Beyond a Reasonable Doubt Standard (8/15/18; 8/17/18), here (collecting some earlier posts).  See also my earlier pdf book the latest offering being for 2013 after discontinuing because of my chapter in the Saltzman book.   Townsend, John A., Federal Tax Crimes, 2013 (February 5, 2013). Available at SSRN: https://ssrn.com/abstract=2212771.  The key discussion starts on p. 680 [p. 717 of the pdf] beginning here.  I think the cited discussion is still a fair even though now over 7 years old.

Readers interested in the meaning and problems in the criminal standard “beyond a reasonable doubt” might be interested in a law review article I read yesterday.  Michael D. Cicchini, Reasonable Doubt and Relativity, 76 Wash. & Lee L. Rev. 1443 (2019), here.  The key discussion for present purposes starts with the outline  II.B. B. Reasonable Doubt is Not Self-Defining  1455 (pdf p. 14), here.

Key points 

1. After explaining problems in the approaches of not explaining to the jury what reasonable doubt means or attempting some explanation, the author notes from pp. 1455-1456 (pdf pp.. 14-15):  

With so many pitfalls awaiting the trial judge who attempts to define or explain reasonable doubt, many courts have determined  “that the better practice is not to attempt the definition.” Their justification is this: reasonable doubt is already “self-defining,” and, therefore, jurors require no further explanation to understand it. However, this assumption has now been thoroughly tested and debunked.

2. The author presents (pp. 1456-1460 (pdf pp 15-19)) some studies that indicate that jurors really do not reach different outcomes under the reasonable doubt standard as compared to the lesser burdens in civil cases – preponderance of the evidence and clear and convincing evidence.

3. The author discusses the so-called “60/65” rule (pp, 1460-1462 (pdf pp. 19-21), footnotes omitted):

In addition to the above studies showing no significant differences in acquittal rates under the three burdens of proof, researchers have also been testing the impact of reasonable doubt jury instructions in a different way: they seek to determine the subjective confidence level that jurors require before they are willing to convict. “This research has consistently shown that the jurors in criminal cases will often be satisfied with much less certainty than is conventionally assumed.”

District Court Sustains FBAR Willful Penalty But Rejects Fraudulent Failure to File Penalty for Income Tax (9/1/20)

In United States v. DeMauro (D. N.H. Dkt. 17-cv-640-JL Order and Verdict After Bench Trial dtd. 8/28/20), CL here, the Court sustained the FBAR willful penalty but rejected the fraudulent failure to file penalty.  In both cases, in broad strokes the conduct penalized is the same.  If that statement is correct, the difference in outcome is based on the differing burdens of persuasion.  The Government must prove application of the FBAR willful penalty by a preponderance of the evidence; the Government must application of the fraudulent failure to file penalty by clear and convincing evidence.

The willful FBAR penalty requires that the conduct penalized (failure to report) be willful.  In the FBAR civil penalty context, the Courts have held willfulness is (i) specific knowing failure to file (more or less the Cheek standard) or (ii) willful blindness or reckless disregard of the obligation to report.

The fraudulent failure to file penalty, like the civil fraud penalty for filed returns companion in § 6663, requires fraud.  The following is from my Federal Tax Procedure Book in discussing civil fraud under § 6663, but the same applies for the fraudulent failure to file:

The Code does not define fraud, but it may be viewed as the civil counterpart of criminal tax evasion in § 7201. n1 Examples of how courts have stated civil fraud under § 6663 are:  (i)  civil fraud requires “intentional commission of an act or acts for the specific purpose of evading tax believed to be due and owing”; n2 and (ii) civil fraud requires that “the taxpayer have intended to evade taxes known to be due and owing by conduct intended to conceal, mislead or otherwise prevent the collection of taxes and that is an underpayment.”n3  In making the determination, as with criminal cases, courts will often look to certain common patterns indicating fraud–referred to as badges of fraud, such as unreported income, failure to keep adequate books, dealing in cash, etc.n4  The key differences between the two is that § 6663 is a civil penalty and has a lower burden of proof (clear and convincing rather than beyond a reasonable doubt) as I note later.
   n1 Anderson v. Commissioner, 698 F.3d 160, 164 (3d Cir. 2012), cert. denied 133 S. Ct. 2797, 133 S. Ct. 2797 (2013) (“the elements of evasion under 26 U.S.C. § 7201 and fraud under 26 U.S.C. § 6663 are identical.”).
   n2 Erikson v. Commissioner, T.C. Memo. 2012-194.
   n3 Nelson v. Commissioner, T.C. Memo. 1997-49; Zell v. Commissioner, 763 F. 2d 1139, 1142-1143 (3rd Cir. 1985) (“Fraud means "actual, intentional wrongdoing, and the intent required is the specific purpose to evade a tax believed to be owing.”); and Fiore v. Commissioner, T.C. Memo. 2013-21 (“Fraud is the ‘willful attempt to evade tax’” and using the criminal law concept of willful blindness to find the presence of civil fraud; note that, in the criminal law, the concept of willful blindness goes by several names.)
   n4 E.g., Kosinski v. Commissioner, 541 F.3d 671, 679-80 (6th Cir. 2008).  For use of a negative inference from assertion of the Fifth Amendment privilege in concluding that the IRS had met its burden of proving civil fraud by clear and convincing evidence, see Loren-Maltese v. Commissioner, T.C. Memo. 2012-214.

Tax Court Case Shows That the IRS Burden to Prove Fraud by Clear and Convincing Evidence Is Formidable Indeed (12/17/18)

In Matthews v. Commissioner, T.C. Memo. 2018-212, here, the taxpayer represented himself "pro se" to contest a deficiency with a year that was open based on the IRS determination of civil fraud.  The taxpayer prevailed because, the Court (Judge Vasquez) concluded, the IRS had not proved civil fraud by clear and convincing evidence, despite some acknowledged bad acts, including  lying to the agents, along the way.  The story is interesting because it shows just formidable the clear and convincing standard is.

The civil tax years in the Tax Court case were 2007 & 2008.  Previously, Matthews was originally indicted for tax evasion under section 7201 and subscribing to a false return under § 7206(1) for tax years 2004 through 2008.  A new prosecutor abandoned the tax evasion charges in a superseding indictment that charged (i) § 7206(1), tax perjury, for 2004 through 2008 and (ii) impeding the lawful function of the IRS, 7212(a) (tax obstruction).  Matthews was convicted of all charges, sentenced to a 27-month prison term, and the conviction was affirmed on appeal.  United States v. Mathews, 761 F.3d 891 (8th Cir. 2014), here.

According to a footnote (p. 17 fn 8), "SA Williams testified that the new prosecutor believed the sec. 7206(1) charges would make for a “cleaner case” than the sec. 7201 charges. As discussed infra, sec. 7206(1) does not require the Government to prove that the defendant intended to evade tax."  Note  to students and practitioners, this easier case to prove criminally beyond a reasonable doubt is often the reason that DOJ Tax foregoes a tax evasion charge ab initio, but one would have thought that DOJ Tax would have made the decision earlier.  Still, some prosecutors, particularly a new one on the block, could see the case differently and convince DOJ Tax to permit the "lesser charge" of tax perjury under § 7206(1).  (And, to close that loop, I have even had local prosecutors (AUSAs) with some gravitas with DOJ Tax convince DOJ Tax to forego criminal charges previously authorized based on their different assessments of the case.)

In the ensuing civil examination, the IRS determined that Matthews had unreported income and, based on the assertion of fraud, opened the statute of limitations and asserted the civil fraud penalty.  Matthews petitioned for redetermination to contest the fraud determination.  If successful, Matthews would owe no tax because the assessment statute of limitations had expired.

The fraud issue required that the IRS prove fraud by clear and convincing evidence.  The Court held that the IRS had failed to do so.  The Court held:

1.  Based on assessment of Matthews' credibility, the Court determined (pp. 22-31) that the IRS had failed to established fraud by clear and convincing evidence.  The aspect of the case turned upon credibility determinations.  I enclose below extended excerpts related to this credibility determination.

2.  The Court held (30-31) that the Section 7206(1) conviction was not issue preclusive on fraud.  This is a standard holding.

3.  Matthews was not bound to stipulations of fraudulent intent because contrary to record (pp. 31-33.)

Here are key quotes of interest to tax crimes practitioners who must be concerned with civil liabilities.

Order on Motion In Limine and Trial Briefs in Case Involving FBAR Willful Penalty (9/11/17)

In Bedrosian v United States, 2017 U.S. Dist. LEXIS 142793 (E.D. Pa. 2017), here, the Court granted the U.S. motion in limine "to preclude evidence concerning the 'procedures, actions, analyses, or viewpoints of the Internal Revenue Service and its personnel at the administrative level regarding willfulness.'"  Basically, the holding is that the FBAR willful liability at issue is determined by the Court de novo.  That means that Bedrosian's willfulness is determined based upon his own mental state -- willfulness -- and his actions in failing to report his UBS account at issue.  The IRS's administrative actions are irrelevant to that issue.

While downloading the order, I also downloaded the following:

• Bedrosian Docket Entries as of 9/11/17, here.
• Bedrosian Trial Brief 8/28/17, here.
• United States Trial Brief 8/28/17, here.

The docket entries (#59) indicate a Minute entry for proceedings on 9/8/17.  I could not get to that minute entry because, the message said, "You do not have permission to view this document."  I don't know if that was the minute entries of the trial.  But, in view of the court's order the previously indicated trial time of two days was likely much shorter and could have been completed in one day.

Key points from the trial briefs are (keep in mind that, when I state a fact from the briefs, it is what the party asserts the record will establish):

Bedrosian Brief:

1.  Bedrosian told his accountant in the 1990s about UBS account.  His accountant told him that he should have been reporting the account but to "leave the account as it was and that he (or his estate) would pay taxes on the money in the account when repatriated." Plaintiff dutifully followed his accountant's "instructions."

2. The accountant passed away in 2007.  There is no indication that there is any written or otherwise objective evidence of the accountant's advice to Bedrosian other than Bedrosian's testimony.

3.  Bedrosian's new accountant (i) answered the Schedule B foreign account question in the affirmative and indicated the account was in Switzerland and (ii) prepared an FBAR with only one of two accounts listed because he "inadevertently" omitted it and "plaintiff always viewed it as one account with a subaccount."

4.  In 2009, Bedrosian began to question his reporting position, engaged an attorney who, in turn, engaged a "forensic accountant" to prepare amended returns and FBARs and engaged Swiss counsel to obtain the bank records.  Swiss counsel then advised that UBS had turned over the account information to the IRS.  "Significantly, Plaintiff had already decided to file amended returns and FBAR forms when he learned this fact.  He then filed his FBAR reports.  [JAT note:  Significantly, this flurry of activity in 2009 probably occurred after UBS was in the news for its assistance to U.S. taxpayers in evading or avoiding their income tax obligations.]

5.  In 2011, the IRS advised Bedrosian that his 2007 and 2008 returns had been selected for examination.  The following then occurred in the audit activity:

a.  Bedrosian was "very cooperative," according to the agent.

b.  The IRS agent "requested and received plaintiff's FBAR reports for 2006-2009."  It is not clear whether this was the original filing of those reports or was copies of the earlier filing after the activity in 2009.

c.  The IRS agent "ultimately determined, based on the totality of his investigation, that plaintiff's violation of the FBAR requirements was non-willful."

d.  In 2012, the IRS agent and his supervisor "met with the treaty case panel which "recommended that platintiff's case be closed with non-willful violations, thereby sustaining [the IRS agent's] conclusions."

e.  That revenue agent went out on medical leave.  Another agent was assigned to the matter and "decided that the penalty proposed by [the first revenue agent] was not correct."  Bedrosian makes certain claims as to deficiencies in the new agent's investigation.

f.  On July 18, 2013, the IRS imposed a 50% willful penalty "the highest penalty that could be imposed."  [I question this since the statute allows 50% per year, although the IRS will generally not assert more than 50% of the high amount in the open years.]

[JAT Note:  the assertions regarding the IRS investigation appear not relevant based on the Court's order on the motion in limine.]

Fifth Circuit Rejcts Nontraditional Contest of FBAR Willful Burden of Proof Contest (3/22/17)

I previously had several blogs on the attempt by Bernhard Gubser to contest the burden of proof issue for the FBAR willful penalty through nontraditional means.  The most recent is this:  Case on Appeal to Fifth Circuit on Standard of Proof for FBAR Willful Penalty (Federal Tax Crimes Blog 11/16/16), here.  Mr. Gubser complained that the Government's burden of persuasion on the FBAR willful penalty should be clear and convincing rather than preponderance.  He alleged that the Appeals Officer had represented that he would win if the burden of persuasion were clear and convincing rather than preponderance.

It appears that Mr. Gubser failed to persuade the Fifth Circuit of the merits of his argument -- at least on whether he made the argument via the right process.  On March 22, 2017, in a short per curiam nonprecedential opinion, the Fifth Circuit rejected Mr. Gubser's bid.  Gubser v. United States, 119 AFTR 2d ¶ 2017-532 (5th Cir. 2017), here.

Case on Appeal to Fifth Circuit on Standard of Proof for FBAR Willful Penalty (11/16/16)

I have written before about the burden of proof the Government must meet in order to sustain an FBAR willful penalty.  I offer at the end of this blog some of the key blog entries on that issue.  Briefly, the issue is whether the Government must prove willfulness by a preponderance of the evidence or by clear and convincing evidence.  Although there is no universally agreed definition of either standard, many conceptualize the standards as follows:  (i) preponderance of the evidence on a fact issue is the evidence which, in the trier of fact's mind, indicates that the fact issue is more likely than not, sometimes stated as 50+% likely; and (ii) clear and convincing is higher than more preponderance but less than the reasonable doubt standard applicable in criminal cases.  Now, readers will note that I did not put a percentage construct on the clear and convincing standard because that certainly is not agreed upon, so perhaps the best statement is that clear and convincing is higher than preponderance and lower than reasonable doubt.  Of course, we don't know what percentage to assign to reasonable doubt, so that won't help up figure out a percentage for clear and convincing.  I include at the end of this blog some materials on this issue as presented in my Federal Tax Procedure book on the civil fraud penalty.  Suffice it to say now that there are cases in which the Government, bearing the civil burden of proof, might be able to prove a fact by a preponderance of the evidence, but could not prove the fact by clear and convincing evidence.  Those who have tried cases involving the civil fraud penalty, where the Government must prove fraud by clear and convincing evidence, know that the clear and convincing burden is substantial indeed, compared to the preponderance standard.

In a case now pending before the Court of Appeals for the Fifth Circuit, Guber v. IRS (No. 16-40948), the plaintiff-appellant, Gubser, had filed a complaint in district court asking for a declaratory judgment that the proper standard was the clear and convincing standard.  The FBAR penalty is not a tax penalty and thus not subject to the prohibitions on injunctions and declaratory judgments for tax matters.  But declaratory judgments do have some minimum justificability requirements in order to invoke the jurisdiction and action of the federal courts.  Therein lay the problem.

Gubser had not yet suffered the practical injury that might come from the imposition of the lower preponderance of the evidence standard because the FBAR penalty had not been assessed against.  All Gubser apparently had was some indication from the Appeals Officer that, if the standard were preponderance, the Appeals Officer would sustain the examining officer's assertion of the FBAR willful penalty, but that if the standard were clear and convincing the Appeals Officer would not sustain the penalty.  Gubser was claiming that the mere uncertainty as to the proper standard impacted his rights to fair processing of the Appeals hearing.

I offer here the brief in the Fifth Circuit by Gubser, by the Government and by Amicus representing other persons potentially impacted.  After offering links to those documents, I offer the summary of the argument in the Gubser's opening brief, in the Government's opening brief and in the Amicus brief.

• Gubser's Opening Brief, here.
• Government Answering Brief, here.
• Gubser's Reply Brief, here.
• Amicus Brief (supporting Gubser's position), here.

Summary of the Arguments:

Gubser's Opening Brief

Bernhard Gubser has established standing to sue for a declaration of the proper standard of proving a willful FBAR penalty. He pleaded sufficient facts to show (1) imminent harm (2) caused by the FBAR penalty proposed by the IRS (3) that the district court can redress with a declaratory judgment. Before filing suit, Gubser tried to settle the controversy with an IRS Appeals officer. ROA.17, 152-53, 156-57. The Appeals officer identified the standard of proof as dispositive and asked Gubser to seek guidance on this uncertain area. ROA.17, 109, 114-115. So Gubser sued for a declaration that the IRS must prove that he willfully violated the FBAR filing requirement by clear-and-convincing evidence (and not merely by a preponderance of the evidence).
The district court erroneously dismissed his suit for lack of standing, solely emphasizing the failure to establish redressability. ROA.85-86. The district court committed legal error when it mistakenly determined that declaratory judgment would be proper only if its order would legally bind the Appeals officer or would prevent the IRS from assessing the penalty. ROA.85-86. This Court reviews that legal error de novo. Time Warner Cable, Inc. v. Hudson, 667 F.3d 630, 635 (5th Cir. 2012) (“We review questions of standing de novo.”). 

U.S. Taxpayer Seeks Declaratory Judgment that Government Must Prove Willfulness for the FBAR Willful Penalty by Clear and Convincing Evidence (12/22/15)

Former Swiss account holders who joined the OVDP program and, upon opt out, are potentially subject to the willful penalty have filed a complaint, Gubser v. IRS (SD TX No. 15-00298), here, seeking a declaratory judgment as follows (from the complaint prayer for relief, p. 13 of the Complaint):

A judgment under 28 U.S.C. § 2201 declaring that the Defendants must establish willful violations of the FBAR filing requirement of 31 U.S.C. § 5314 by clear and convincing evidence when seeking to impose civil penalties under 31 U.S.C. § 5321(a)(5)(C)-(D).

The gravamen of the legal claim as to the proper evidentiary standard is in the following paragraph:

21. Congress’ use of the term “willful” with respect to the civil FBAR penalty reflects a level of wrongdoing commensurate with civil fraud [which is subject to the clear and convincing standard].

Most of the rest of the complaint seems to go far beyond the requirements of "notice" pleadings required by FRCP Rule 8(a), here, and seems more directed to an audience other than the judge and the opposing party.

Readers will recall that I have visited the issue of the proper burden of proof frequently and believe that the correct standard should be clear and convincing.  I link to some of those blog entries at the end of today's blog.  That is the same issue presented in this declaratory judgement format.  Normally, this issue would be presented after the FBAR is assessed, some of it paid, and suit to recover the payment as illegal.  (Note that this is not a tax refund suit subject to Flora's full payment requirement.)

As to the ripeness of the case in terms of the fundamental requirement of case or controversy, the key part of the complaint's introduction is as follows (emphasis supplied by JAT):

4. An actual controversy exists between Gubser and Defendants because: (i) the IRS has notified Gubser of a proposed civil FBAR penalty for a willful violation; (ii) an IRS Appeals Officer has indicated that, were the clear and convincing evidence standard applied, the IRS could not establish a willful violation by Gubser; (iii) the civil FBAR penalty for a non-willful violation is $10,000; and, thus, (iv) this Court’s declaration that the clear and convincing standard applies will prevent government confiscation of one-half of Gubser’s retirement savings, or approximately $1.35 million, as well as the opprobrium and other negative consequences of a finding that Gubser willfully violated U.S. law.

The current posture is that the IRS has made a proposed decision now being reviewed by Appeals, but that is just a proposed decision.  Even if the Appeals Officer has stated an inclination to apply the preponderance of the evidence standard in assessing the hazards of litigation (see par. 36, p. 12), that seems to just be stating at most a preliminary inclination rather than a decision on behalf of the IRS.  Moreover, I am not sure how much independent authority the Appeals Officer exercises for the FBAR willful penalty; when I handled an appeal on a proposed willful penalty, the Appeals Officer clearly signaled that the ultimate authority was not his.  So, I would expect that a significant "defense" to the case will be that the case is not yet ripe.  And, when it does become ripe -- by assessment -- Gubser will have an adequate remedy once the decision is made and an assessment pursuant to the decision is made.

I do not know that I can add anything that I have not said before.  I think the ultimate legal position is the correct one.  And I think the issue is an important one.  That is why proper presentation and ultimate resolution of the issue is so important.  As I have argued before, the two cases to date are of limited authority, if any, so the issue should still reasonably be in play when presented and properly litigated in a proper venue.  I am just not sure that the current action presents a proper venue for litigating the issue.

Here are some but not all of my previous blogs (presented in reverse chronological order):

• ABA Tax Lawyer Publication Comment on FBAR Willful Penalty (Federal Tax Crimes Blog 2/16/15), here.
• More on Recklessness as Cheek Willfulness (Including for FBAR Civil Penalty) or Willful Blindness (Federal Tax Crimes Blog 7/22/14), here.
• Willful Blindness / Conscious Avoidance and Crimes Requiring Intent to Violate a Known Legal Duty (Federal Tax Crimes Blog 7/21/14), here.
• 11th Circuit Holds Clear and Convincing Evidence Required for Section 6701 Penalty; Can Reasoning be Extended to FBAR Willful Penalty? (Federal Tax Crimes Blog 6/14/14), here.
• McBride #2 - Proof of Willfulness (Federal Tax Crimes Blog 11/13/12), here.
• McBride #1 - Court Holds Government Must Prove FBAR Willful Penalty by a Preponderance (Federal Tax Crimes Blog 11/11/12), here.
• Fourth Circuit Reverses Williams on Willfulness (Federal Tax Crimes Blog 7/20/12; revised 7/24/12), here.
• Burden of Proof for Willfulness in FBAR Violations (Federal Tax Crimes Blog 9/6/11), here.

Bullshit Tax Shelter Salesman Avoids Fraud Finding for Investment in Bullshit Tax Shelter (4/8/15)

In Jacoby v. Commissioner, T.C. Memo. 2015-67, here, the Tax Court relieved a bullshit tax shelter salesperson who drank his own poison from liability for the tax and penalties (and, as a result, the interest thereon).  How did / could that happen?  The short answer is - I don't know.  The opinion is quite cryptic.  Which may be the answer -- it may be just a mystery.

So, let's wade into the cryptic opinion.

1.  Jacoby had an accounting degree and a law degree.

2.  He had a short stint with a major accounting firm doing financial audit (not tax) work.  In 1987, he joined Twenty-First Securities Corp., a major player in the sophisticated tax strategy market.  He focused on strategies for high net worth individuals and large companies.  The strategies he sold were developed by others in the firm or outside the firm.  During the 9 years he worked there, he earned between $5 and $6 million.  Obviously, he learned enough about the working of the strategies to sell them to others.  (JAT comment:  One example of a strategy developed by Twenty-First Securities is the strategy blessed blasted by the Tax Court and then blessed by the Fifth Circuit in Compaq Computer Corp. v. Commissioner, 113 T.C. 214 (1999), rev’d 277 F.3d 778 (5th Cir. 2002); I have no idea whether Jacoby worked on that strategy, but that strategy was apparently in-house while he was with First Securities.

3.  In 1996, Jacoby joined Diversified Group Inc. ("DGI"), a tax shelter boutique run by James Haber.  DGI and Haber were major players in the bullshit tax shelter market.  See also e.g., Ironbridge v. Commissioner, T.C. Memo. 2012-158 (noting that, "Although he has not been indicted or tried, the principal of petitioners, James Haber, believes he was one of the persons involved in the criminal investigation.Mr. Haber stated during deposition testimony that he believes he became a potential “target” of the criminal investigation around “2002 or 2003;" lot more history there, but not developed in the Jacoby opinion, so I pass for now).  The Jacoby opinion says that Jacoby was interviewed in the criminal investigation, agreed to extend the statute of limitations for criminal prosecution, but was never prosecuted.  (Haber was never prosecuted either.)

4. Jacoby's arrangement with DGI was a joint venture agreement ("JVA") with Jacoby's company, SMD Capital Corp. ("SMD"), through which he would get 50% of the net profits from business he brought to DGI.

Ninth Circuit Requires Relevant Conduct Financial Loss Determinations in NonTax Case to be Made by Clear and Convincing Evidence (3/30/15)

Last night, in our Tax Fraud and Money Laundering Class at University of Houston Law School, we covered the U.S. Sentencing Guidelines.  The U.S. Sentencing Guidelines Manual may be viewed here.  We covered the following points:

• The financial loss for financial crimes is the principal driver for the Guidelines.  In the tax Guidelines, the financial loss is called the tax loss.  See S.G. 2T1.1, here (for the major tax crimes); see S.G. 2T4.1 (Tax Table), here.  
• The tax loss from the count(s) of conviction and the tax loss from related unconvicted conduct -- called "relevant conduct" -- can be included the the tax loss for purpose of the determinations.  For the  concept of relevant conduct, see SG 1B1.3, here.  
• These sentencing determinations are generally made by a preponderance of the evidence.  We did note that the Ninth Circuit may require some sentencing determinations to be made by clear and convincing evidence.

This morning, while going through my list of recent cases that I had not yet read, I came across United States v. Hymas, ___ F.3d ___, 2015 U.S. App. LEXIS 4822, 1-21 (9th Cir. Idaho 2015), here.  In Hymas, the Ninth Circuit held that, in the facts of the case, relevant conduct financial loss determinations for nontax financial crimes must be made under by clear and convincing evidence.  Although sentencing determinations are normally made by a preponderance of the evidence, the Ninth Circuit requires those determinations to be made by clear and convincing evidence "when a sentencing factor has an extremely disproportionate effect on the sentence relative to the offense of conviction." United States v. Mezas de Jesus, 217 F.3d 638, 642 (9th Cir. 2000) (citing United States v. Restrepo, 946 F.2d 654, 659 (9th Cir. 1991) (en banc)).  The NInth Circuit has established no "bright-line rule for the disproportionate impact test," but requires it to be made in the context of the totality of the facts under guidance first given in United States v. Valensia, 222 F.3d 1173 (9th Cir. 2000).  The Ninth Circuit said.

Under the Valensia totality of the circumstances test, six factors, none of which is dispositive, guide the determination of whether a sentencing factor has a disproportionate impact on the sentence:(1) whether the enhanced sentence falls within the maximum sentence for the crime alleged in the indictment; (2) whether the enhanced sentence negates the presumption of innocence or the prosecution's burden of proof for the crime alleged in the indictment; (3) whether the facts offered in support of the enhancement create new offenses requiring separate punishment; (4) whether the increase in sentence is based on the extent of a conspiracy; (5) whether an increase in the number of offense levels is less than or equal to four; and (6) whether the length of the enhanced sentence more than doubles the length of the sentence authorized by the initial sentencing guideline range in a case where the defendant would otherwise have received a relatively short sentence.Treadwell, 593 F.3d at 1000.

In Hymas, the Ninth Circuit reviewed the relevant facts as follows: