Second Circuit Affirms Conviction of Lawyer Offshore Account Enabler (10/4/20)

In United States v. Little, 2020 U.S. App. LEXIS 31384 (2d Cir. 9/30/20), here, the Court affirmed the conviction and sentencing of Michael Little, a lawyer who enabled the Seggerman family to cheat on their taxes, using in part failure to file FBARs.  I have written on Little before (see blogs on him, including in some blogs the Seggermans), here

I discuss here only two points from the opinion.

1. Willfulness.

The Court rejected Little’s Cheek defense that there was insufficient evidence to prove that he knew the legal duty.  The Court handled the defense summarily (Slip Op. pp. 5-6):

            We conclude that substantial evidence supports the jury verdict on each of the challenged counts. In a nutshell, Little contends that he merely misunderstood the byzantine tax code. But Little is a British-trained barrister admitted to the New York Bar with a quarter-century of experience in complex international financial transactions who, for much of his life, has claimed German domicile for tax [*7]  purposes. A reasonable juror could easily conclude that the failures of such a sophisticated professional to report his income to the IRS, including compensation from the Seggerman family, and to report foreign bank accounts into which his compensation was funneled, were willful acts. See United States v. MacKenzie, 777 F.2d 811, 818 (2d Cir. 1985) (permitting the inference of "knowledge of the law" from the "[d]efendants' backgrounds," including education). Similarly, Little's sophistication supports a conclusion that he was willfully misleading the Seggerman family's accountants when he informed them that the transfers from Lixam Proviso were merely "gifts from a kind benefactor from overseas" and not distributions.

2. Jury Instructions on Conscious Avoidance / Willful Blindness

The Court rejected Little’s claim that the conviction should be reversed because the Court improperly instructed the jury on conscious avoidance (usually called willful blindness, but the Second Circuit often uses conscious avoidance).  Again, the Court rejects the defense summarily as follows (Slip Op. 6):

First, Little challenges the "conscious avoidance" instructions on the failure to file return counts, the failure to file FBAR count, and the conspiracy count; and second, that the district court's instructions as to willfulness erroneously converted the standard into a reasonableness standard. Conscious avoidance instructions are permissible only when the defendant mounts a defense that he lacked "some specific aspect of knowledge required for conviction" and "a rational juror may reach the conclusion beyond a reasonable doubt that the defendant was aware of a high probability of the fact in dispute and consciously avoided confirming that fact." United States v. Coplan, 703 F.3d 46, 89 (2d Cir. 2012) (citation and internal quotation marks omitted). Here, each predicate is met: Little defended himself by claiming ignorance of his obligations under the Tax Code and, because of Little's legal education and the relative straightforwardness of his obligations, a reasonable juror could conclude that Little was aware of a high probability that his actions were unlawful.

 So, in this case, the conscious avoidance / willful blindness instruction was properly given.

 JAT Comments:

Court Grants Government Partial Summary Judgment on FBAR NonWillful Penalty (8/14/19)

In United States v. Ott, 2019 U.S. Dist. LEXIS 132013 (E.D. Mich. 2019), here, the court granted the Government's motion for partial summary judgment on the $10,000 nonwillful penalties on 2 separate accounts for each of 3 years.  The penalties aggregated $60,000 plus interest and further nonpayment penalties.  Since the defendant failed to report the accounts, she was subject to penalties unless she could establish reasonable cause.

Reasonable cause is an affirmative defense, meaning that the person claiming reasonable cause must plead and the prove the defense.  On a motion for summary judgment by the party not bearing the burden on the defense (the United States in Ott), the party bearing the burden (Ott in Ott) must submit sufficient evidence to show that there is a fact reasonably in dispute. The Court framed it this way:

The Government moves for summary judgment against Ms. Ott, asserting there is no dispute that she violated 31 U.S.C. § 5314 when she failed to report her financial interest in, or authority over, her foreign financial accounts. Ms. Ott opposes the Motion, arguing there is a genuine dispute of material fact as to whether the affirmative defense of reasonable cause excuses her failure. The Court will disagree.

The steps in the Court's disagreement and thus entry of summary judgment for the U.S. are:

1.  "Ott does not dispute that she violated § 5314's reporting requirements, but maintains that assessing penalties under § 5321 would be inappropriate because she had reasonable cause for her omission."

2.  31 U.S.C. § 5321(a)(5)(B)(ii), here and quoted below in this blog, allowing the reasonable cause defense, does not define reasonable cause.  The Court, as have other courts, looked to the reasonable cause defense to tax penalties, citing Moore v. United States, 2015 U.S. Dist. LEXIS 43979, 2015 WL 1510007, at *4 (W.D. Wash. Apr. 1, 2015); and Jarnagin v. United States, 134 Fed. Cl. 368, 376 (2017).  The Court also cites the regulation under § 6664, 26 CFR § 1.6664-4(b)(1).

3.  The Court then held (Slip Op. at 6-7):

Here, Ms. Ott has not met her burden of establishing a material question of fact as to whether she had reasonable cause for the failure to disclose her foreign financial accounts. See ATL & Sons Holdings, Inc. v. Comm'r of Internal Revenue, 2019 U.S. Tax Ct. LEXIS 8, 2019 WL 1220942, at *10 (U.S. Tax Court Mar. 13, 2019) ("In litigation a taxpayer's contention of 'reasonable cause' is in the nature of an affirmative defense, which the taxpayer is obliged to raise."). Critically, she has not shown that she took any steps to learn whether she was required to report her foreign financial accounts. To the contrary, she notes that she hired an advisor to complete her tax returns, but fails to even suggest that she informed the advisor of these accounts. See Jarnagin, 134 Fed. Cl. at 378-79 ("[T]he Jarnagins neither requested nor received any advice one way or the other from their accountants regarding whether they were required to file FBARs . . . [t]he Jarnagins . . . cannot use as a shield reliance upon advice that they neither solicited nor received."). This certainly does not constitute ordinary business care and prudence. Ms. Ott's limited education and experience does not excuse this misstep. 

Ms. Ott's primary argument is that she "has yet to present evidence on this critical issue for trial." See Dkt. No. 20, p. 16 (Pg. ID 123). But the time for her to present facts and evidence demonstrating a genuine issue for trial was now, and unfortunately, that opportunity has passed. See Highland Capital, Inc. v. Franklin Nat. Bank, 350 F.3d 558, 564 (6th Cir. 2003) ("[T]he non-moving party cannot rest on its pleadings, but must identify specific facts that can be established by admissible evidence that demonstrate a genuine issue for trial."). Because there is no dispute that Ms. Ott violated § 5314's reporting requirements, and because she has not met her burden of establishing reasonable cause for that violation, the Court will Grant the Government's Motion for Partial Summary Judgment.

Seggerman Siblings (4 of them) Sentenced for Offshore Evasion (7/16/19)

I have previously written on the offshore account saga of the Seggerman family, principally as it relates to the prosecution of their lawyer-enabler, Michael Little.  (My blogs are listed at the bottom of this blog entry.)  The Seggermans were a prominent family.  The Seggerman siblings (4 of them), whose deceased father started the evasion, were sentenced last week.  Three were sentenced to 4-months, and one was sentenced to 6-months.  I post some links to news reports on the internet and in some cases bold-face items that I found particularly interesting:

Aaron Elstein, In surprise, New York's first family of tax evasion sentenced to prison (Crains New York  (6/26/19), here):

A federal judge Wednesday imposed prison sentences of four to six months on the four adult children of deceased Wall Street money manager Harry Seggerman, who bequeathed them a $12 million inheritance hidden in a secret Swiss bank account. 

The siblings funneled the money into the U.S. tax-free through shell companies or a fraudulent foundation. One would return from annual trips to the World Economic Forum in Davos, Switzerland, with just under $10,000 in her pocket, and had her husband and daughter do the same, so they wouldn't have to declare the cash to U.S. customs officials. 

"There is a strong need to deter others from the conduct that went on here," U.S. District Judge P. Kevin Castel declared as he sentenced the family members. Estate taxes could have eroded roughly half of the father's fortune. 

Henry Seggerman, 66, got six months in prison. Henry inherited his father's money management business and is a former movie producer who helped bring Crocodile Dundee to American audiences. 

Judge Castel imposed four-month sentences on Yvonne Seggerman, 63, who used to run a nonprofit playhouse in Rhode Island; Suzanne Seggerman, 56, former president of the nonprofit Games for Change; and John Seggerman, 55, a former aide to Sens. John and Lincoln Chaffee of Rhode Island. 

The eldest sibling got a longer sentence because he was involved in tax evasion for a longer time, the judge said. The Seggermans had all pleaded guilty and cooperated with the government after they were caught. 

The expressions and body language of prosecutors suggested they were surprised the Seggerman offspring got prison time at all, given that the government had not recommended any. Prosecutors had praised the Seggermans for testifying last year at the trial of their adviser, British lawyer Michael Little, who is serving a 20-month sentence. 

Judge Castel took note of the cooperation and commended the heirs for their philanthropic and volunteer activities with immigrant and school groups. He agreed they are unlikely to be repeat offenders. But he also observed that a poor person who committed tax fraud would probably go to prison, as would a poor person who committed immigration fraud. 

"There are not two federal systems of justice," he said.

Andrew Denney and Bruce Golding, Siblings sentenced for elaborate Swiss bank inheritance scam (NY Post 6/26/19), here.

USAO SDNY Sentencing Memo for Michael Cohen for Tax and Other Crimes (12/9/18)

The USAO SDNY sentencing memo for Michael Cohen, former attorney for President Donald J. Trump (identified in the memo as "Individual-1"), is linked, here, and excerpted in the following:  Paul Caron, Michael Cohen And Theories Of Deterrence In Tax Evasion Cases (TaxProf Blog 12/7/18), here.

The TaxProf Blog excerpts are good. 

For the benefit of readers, I would flesh out the quote from U.S.S.G. Ch. 2, Part T, intro. Cmt. here.  Here is the entire commentary:

The criminal tax laws are designed to protect the public interest in preserving the integrity of the nation's tax system.  Criminal tax prosecutions serve to punish the violator and promote respect for the tax laws.  Because of the limited number of criminal tax prosecutions relative to the estimated incidence of such violations, deterring others from violating the tax laws is a primary consideration underlying these guidelines.  Recognition that the sentence for a criminal tax case will be commensurate with the gravity of the offense should act as a deterrent to would-be violators.

There is a lot for tax crimes fans to unpack in that short statement.  I will not try to do that here.

I point to some cases where courts have referred to this commentary:

U.S. v. Engle, 592 F.3d 495, 501-2 (4th Cir. 2010), here.

As the government notes, the policy statements issued by the Sentencing Commission make it clear that the Commission views tax evasion as a serious crime and believes that, under the pre-Guidelines practice, too many probationary sentences were imposed for tax crimes. See U.S.S.G. Ch. 1, Pt. A, introductory cmt. 4(d) (1998) ("Under pre-guidelines sentencing practice, courts sentenced to probation an inappropriately high percentage of offenders guilty of certain economic crimes, such as theft, tax evasion, antitrust offenses, insider trading, fraud, and embezzlement, that in the Commission's view are `serious.'"). The policy statements also reflect the Commission's view that general deterrence — that is, deterring those other than the defendant from committing the crime — should be a primary consideration when sentencing in tax cases. As the Commission has explained, 

The criminal tax laws are designed to protect the public interest in preserving the integrity of the nation's tax system. Criminal tax prosecutions serve to punish the violator and promote respect for the tax laws. Because of the limited number of criminal tax prosecutions relative to the estimated incidence of such violations, deterring others from violating the tax laws is a primary consideration underlying these guidelines. Recognition that the sentence for a criminal tax case will be commensurate with the gravity of the offense should act as a deterrent to would-be violators. 

U.S.S.G. Ch. 2, Pt. T, introductory cmt. (1998). The policy statements likewise make it clear that the Commission believes that there must be a real risk of actual incarceration for the Guidelines to have a significant deterrent effect in tax evasion cases. The Guidelines therefore 

classify as serious many offenses for which probation was frequently given and provide for at least a short period of imprisonment in such cases. The Commission concluded that the definite prospect of prison, even though the term may be short, will serve as a significant deterrent, particularly when compared with pre-guidelines practice where probation, not prison, was the norm. 

Id. at Ch. 1, Pt. A, introductory cmt. 4(d) (1998) (emphasis added). Given the nature and number of tax evasion offenses as compared to the relatively infrequent prosecution of those offenses, we believe that the Commission's focus on incarceration as a means of third-party deterrence is wise. The vast majority of such crimes go unpunished, if not undetected. Without a real possibility of imprisonment, there would be little incentive for a wavering would-be evader to choose the straight-and-narrow over the wayward path.

United States v. Snipes, 611 F.3d 855, 872 (11th Cir. 2010), here:

Offshore Account Enabler Post Conviction Motions for Acquittal and New Trial Denied; Issue on Reliance of Counsel (11/11/18; 11/15/18)

I have previously blogged on the indictment and conviction of Michael Little, a lawyer and an offshore account enabler.  I list the prior blogs at the end of this blog entry.  In an Opinion and Order dated November 1, 2018, the district court denied Little's motion for acquittal and alternative motion for new trial.  United States v. Little, 2018 U.S. Dist. LEXIS 187643 (S.D. N.Y. 2018), here.

The opinion is straight-forward. The only thing that caught my attention was this (Slip Op. p. 10):

Essentially, he [little] argues that the evidence was insufficient with respect to the third element—willfullness—because the government failed to disprove his advice of counsel defense. This claim is meritless. An advice of counsel defense is an affirmative defense. As such, the burden is on the defendant to prove the elements of the defense, not on the government to disprove the defense. A successful advice of counsel defense requires the defendant to prove that he (1) honestly and in good faith sought the advice of counsel, (2) fully and honestly laid all the facts before his counsel, and (3) honestly and in good faith followed his counsel's advice, believing it to be correct and intending that his acts be lawful. United States v. Colasuonno, 697 F.3d 164, 181 (2d Cir. 2012).

I think the court errs in saying that the advice of counsel defense is an affirmative defense requiring that the defendant bear the burden of proof.  The defendant does bear a threshold burden on the issue, like a burden of production, to put the reliance on counsel defense in play.  But the Government's burden of proof beyond a reasonable doubt is to prove willfulness and that requires the Government to disprove good faith (including reliance on counsel) when that "defense" has properly been put in play in the case.

Here is the relevant excerpt from Michael Saltzman and Leslie Book, IRS Practice and Procedure (Thomsen Reuters 2015) (disclosure, I am the principal draftsman of Chapter 12):

¶ 12.05[2][b][ii] Blame others —tax professionals. 

A defendant will frequently assert that he or she lacked willfulness because he or she relied upon a tax professional. This is a Cheek argument in that the government failed to meet its burden to prove willfulness rather than a defense per se. The government thus has to show that the defendant did not rely upon the tax professional in order to show willfulness. n524 But, as in Cheek, the defendant has to put the “defense” in play by introducing some evidence of reliance on the tax professional. n525 Once the defendant does that, n526 it is then the government's burden to show that the defendant acted willfully, which means negating the taxpayer's claimed reliance. 

If the defendant does put the reliance defense in play, the following is a typical instruction that the government will request to advise the jury of what it must consider with respect to the defense: 

A good faith reliance upon the advice of a qualified tax accountant is also a complete defense to the charges because such a reliance is inconsistent with the intent required to commit these crimes. In order for the defendant to rely on the advice of a qualified tax accountant in good faith, the defendant must (1) make full and complete disclosure of all tax-related information, (2) to a qualified tax accountant, (3) actually rely upon and follow the advice that was provided, (4) without reason to believe that the advice was not correct. n527

Update on Manafort Convictions Status (8/31/18)

I post today some links to Court documents from the docket entries on Pacer.  I remind readers that the Court Listener web site (here) offers cloned docket entries for cases (not sure whether it is all cases, but certainly most of the cases of importance).  Sometimes documents listed on the cloned docket entries are downloadable from the Court Listener web site.  The Court Listener docket entries for the Manafort case are here.  Sometimes it takes a day or two to update for the latest docket entries.  However, it does not appear that any of the Manafort documents are downloadable.  That seems strange to me because, the actual Pacer docket entries offers me the opportunity to obtain the documents free from Court Listener, which means that the documents are available on the Court Listener site (although not linked on the Court Listener docket entries).  In any event, since I can get the link to free documents, I offer that the links to key documents below for readers to see the documents if they wish.

Dkt Entry	Date	Description (JAT Brief Description)	Link
261	8/16/18	Jury Questions	Link
264	8/22/18	Mistrial Order	Link
280	8/21/18	Jury Verdict	Link
291	8/29/18	Gov't Motion to Extend Date re Retrial	Link
292	8/20/18	Order on Government Motion to Extend	Link

I have transcribed the jury's questions (Dkt 261) which are handwritten as follows (bullets added):

• Is one required to file an FBAR if they own less than 50% of the account, do not have signature authority but do have authority to direct disbursement of the funds?
• Can you define "shelf company" and filing requirements related to income?
• Can you please re-define "reasonable doubt?"
• Can the exhibit list be amended to include the indictment count to which they are related?

I don't have a transcription of the judge's answers.  All I have had is reporters' paraphrasings.  When and if I get the answers, I will post them and offer any comments I may have.  (If anyone has the transcription of the answers, please post them as a comment or email them; and, if anyone has the complete jury instructions, I would greatly appreciate receiving them.  My email is jack@tjtaxlaw.com.

Now on the possible retrial for the counts that were mistried because of the jury's inability to reach a unanimous verdict, I previously posted a discussion of why the sentencing for the counts of conviction could produce a sentencing range under the Sentencing Guidelines that is the same as if Manafort had been convicted of all counts submitted to the jury.  See Paul Manafort Verdict - On Relevant Conduct (8/21/18), here.  In calculating the Guidelines range the Judge is directed to consider "relevant conduct" -- similar criminal conduct other than the counts of conviction if the Government proves the conduct by a preponderance of the evidence.  Certainly, the mistried FBAR counts (Counts 11-14) are relevant conduct to the FBAR conviction (Count 11) and to the tax convictions (Counts 1-5). Likewise the mistried Bank Fraud and Conspiracy Counts (Counts 28-32) are relevant conduct to the convicted bank fraud count (Count 27).  So, assuming that the Government proves that unconvicted conduct by a preponderance of the evidence, the Guidelines calculations will be just as if Manafort were convicted on all counts.

Michael Little, British/US Lawyer, Convicted for Offshore Account Enabler and Personal Income Tax Charges (4/22/18)

I have previously posted on the prosecution of Michael Little, a UK barrister, U.S. lawyer and U.S. citizen.  Little was an enabler for U.S. persons evading U.S. tax liabilities and FBAR reporting requirements.  I list the significant prior blogs at the end of this blog.  In the second superseding indictment, here, Little was indicted for one count of tax obstruction (§ 7212(a), six counts of failure to file his own income tax return (§ 7203), one count of failure to file FBAR (31 USC § 5314 & 5322(a); CFR §§ 103.24, 103.27(c,d) and 103.59(b); and 2 USC § 2), one count of defraud / Klein conspiracy (18 USC § 371), and ten counts of aiding and assisting (§ 7206(2)).

On April 10, 2018, Little was convicted on all counts.  See the jury verdict here; see also the USAO Press Release on the convictions here.  Key excerpts from the press release are:

Geoffrey S. Berman, the United States Attorney for the Southern District of New York, announced that a federal jury today found MICHAEL LITTLE guilty of charges that he participated in an 11-year tax fraud scheme in which he advised and helped an American family to defraud the Internal Revenue Service by hiding approximately $14 million in overseas Swiss bank accounts and by other means, failed to file his own personal tax returns, and assisted in the filing of false tax returns.  The three-week-long trial took place before U.S. District Judge P. Kevin Castel, who is scheduled to sentence LITTLE on September 6, 2018. 

According to the allegations contained in the Complaint, Indictment, and the evidence presented in Court during the trial: 

LITTLE, a British attorney who resides in England and is licensed to practice law in New York, was a business associate of the patriarch of the Seggerman family, an American family residing in the United States.  In August 2001, after the patriarch died, LITTLE and a lawyer from Switzerland (the “Swiss Lawyer”) met with his widow and adult children at a hotel in Manhattan, and advised them that the patriarch had left them approximately $14 million in overseas accounts that had never been declared to U.S. taxing authorities.  LITTLE and the Swiss lawyer also advised the various family members on steps they could take to continue hiding these assets from the IRS.  In particular, LITTLE discussed with the family members various methods by which they could bring the money into the United States from the Swiss accounts while evading detection by the IRS.  Among other means, he advised family members that they could bring money back to the United States in small increments, or “little chunks,” through means such as traveler’s checks, or by disguising money transfers to the United States as being related to the sales of artwork or jewelry.  Various members of the Seggerman family agreed to work together with LITTLE and the Swiss Lawyer to repatriate the offshore funds.  

In accordance with the plan he orchestrated, LITTLE assisted in opening an undeclared Swiss account for the purpose of holding and hiding the widow’s inheritance funds.  LITTLE also enlisted the assistance of a New Jersey accountant to prepare false and fraudulent tax returns and to keep falsified accounting records for a corporate entity in the United States, controlled by the widow and used to receive inheritance funds repatriated from the Swiss account.  Between 2001 and 2010, LITTLE caused over $3 million to be sent surreptitiously from the undeclared Swiss account to the United States corporate entity for the widow’s benefit.  LITTLE also worked with the New Jersey accountant to establish a sham mortgage that allowed another Seggerman family member to access approximately $600,000 of undeclared inheritance funds held in a Swiss account. 

In or about 2010, LITTLE became aware of an IRS criminal investigation into the scheme.  In an attempt to cover up his involvement, LITTLE communicated with a tax attorney and the accounting firm that had prepared the widow’s individual tax returns.  LITTLE provided false information to the tax lawyer and the accounting firm about the nature of the transfers from the Swiss account to the United States, claiming that the transfers represented “pure gifts” from a non-U.S. person who had “absolutely no relationship” to the widow.  Based on LITTLE’s misrepresentations, the accounting firm filed inaccurate tax returns for the years 2001 through 2010, which categorized the transfers of over $3 million to the widow as foreign gifts. 

LITTLE has been a lawful permanent resident of the United States, also known as a green card holder, since 1972.  As a lawful permanent resident, he had an obligation to file annual tax returns reporting his worldwide income to the IRS.  In or about 2005, LITTLE was admitted to the New York State Bar as an attorney.  Between 2005 and at least late 2008, LITTLE resided full time in New York City, where he worked and earned hundreds of thousands of dollars of income as an attorney representing clients.  During the period of 2001 to 2010, LITTLE also earned other legal fees, along with hundreds of thousands of dollars more in fees for his work on behalf of the Seggerman family.  LITTLE failed to file any tax returns with the IRS between 2005 and 2010.  He further failed to file, for years 2007 through 2010, annual Reports of Foreign Bank and Financial Accounts (“FBARs”) in connection with foreign bank accounts he controlled, which held in excess of $10,000 each year. 

Lawyer, Alleged Offshore Account Enabler, Loses Motion to Dismiss Indictment (5/6/17)

I have previously written about Michael Little, a British and U.S. lawyer and U.S. permanent resident, who was indicted for enabling offshore evasion for U.S. taxpayers.  (I list at the end of this blog entry the principal prior blog entries mentioning Little.)  The superseding indictment is here; the extensive docket entries in the case are here.  The superseding indictment charges:

• Count 1 Tax Obstruction, § 7212(a) (Pages 1-10)
• Counts 2 through 7 Failure to File for 2005-2010, § 7203 (Page 11)
• Count 8 Willful Failure to File FBAR, 31 USC § 5313 and 5322(a); Title 31 CFR §§ 103.24, 103.27(c,d) and 103.59(b); 18 USC § 2. (Page 12)
• Count 9 Conspiracy (Pages 12-16
• Counts 10-19 Aiding and Assisting the filing of false Forms 3520, § 7206(2) (Pages 16-18)

In United States v. Little, 2017 U.S. Dist. LEXIS 67580 (SD NY 2017), here, the Court denied Little's motion to dismiss.  The gravamen of the Court's action is stated in the opening paragraph:

Defendant Michael Little moves for partial dismissal of the Second Superseding Indictment on the grounds that his prosecution for failure to file individual income tax returns and Reports of Foreign Bank and Financial Accounts ("FBARs") would deprive him of due process of law in violation of the Fifth Amendment to the United States Constitution. Little asserts that at the time of the events charged in the indictment he was a U.K. citizen and a lawful permanent resident of the U.S. He argues that the statutes and regulations requiring U.K. citizens with permanent residence status under U.S. immigration law to file U.S. income tax returns and FBARs, when read in conjunction with the U.S./U.K. Tax Treaty (the "Treaty"), are ambiguous, such that a person of ordinary intelligence lacks notice as to what constitutes compliance with the law. The Court finds that none of the relevant statutes or regulations, whether read in isolation or together, or in conjunction with the Treaty, are so ambiguous that they could properly be found unconstitutionally vague as applied to the charged conduct. Defendant's motion for partial dismissal of the indictment is thus denied.

The standard for void for vagueness is stated:

"As generally stated, the void-for-vagueness doctrine requires that a penal statute define the criminal offense with sufficient definiteness that ordinary people can understand what conduct is prohibited and in a manner that does not encourage arbitrary and discriminatory enforcement." United States v. Rybicki, 354 F.3d 124, 129 (2d Cir. 2003) (quoting Kolender v. Lawson, 461 U.S. 352, 357, 103 S. Ct. 1855, 75 L. Ed. 2d 903 (1983)). Because the First Amendment is not implicated, the Court assesses Little's challenge as applied, i.e., "in light of the specific facts of the case at hand and not with regard to the statute's facial validity." Id. (quoting United States v. Nadi, 996 F.2d 548, 550 (2d Cir. 1993)). Courts examine as-applied vagueness claims in two steps: "a court must first determine whether the statute gives the person of ordinary intelligence a reasonable opportunity to know what is prohibited and then consider whether the law provides explicit standards for those who apply it." Rubin v. Garvin, 544 F.3d 461, 468 (2d Cir. 2008) (quoting Farrell v. Burke, 449 F.3d 470, 486 (2d Cir. 2006)). The "novelty" of a prosecution does not bolster a vagueness challenge, for the lack of a prior "litigated fact pattern" that is "precisely" on point is "immaterial." United States v. Kinzler, 55 F.3d 70, 74 (2d Cir. 1995). 

"A scienter requirement may mitigate a law's vagueness, especially where the defendant alleges inadequate notice." Rubin, 544 F.3d at 467 (citing Vill. of Hoffman Estates v. Flipside, Hoffman Estates, Inc., 455 U.S. 489, 499, 102 S. Ct. 1186, 71 L. Ed. 2d 362 (1982)). Where "the punishment imposed is only for an act knowingly done with the purpose of doing that which the statute prohibits, the accused cannot be said to suffer from lack of warning or knowledge that the act which he does is a violation of law." United States v. Tannenbaum, 934 F.2d 8, 12 (2d Cir. 1991) (quoting Screws v. United States, 325 U.S. 91, 102, 65 S. Ct. 1031, 89 L. Ed. 1495 (1945) (plurality opinion)) (Bank Secrecy Act provision requiring reporting by financial institutions not void for vagueness when applied to an individual because the Act defined financial institutions to include "[a] person who engages as a business in dealing in or exchanging currency" and defendant knew he was "committing a wrongful act.")

Sumner Redstone Owes the Gift Tax from 1972 But Not the Civil Fraud or Negligence Penalties (12/13/15)

In Redstone v. Commissioner, T.C. Memo. 2015-237, here, Sumner Redstone was found liable for "a gift tax deficiency of $737,625 for the calendar quarter ending September 30, 1972."  That's right 1972.  The interest alone on that deficiency will be several, perhaps many times the principal amount of the tax.  (But astute readers will know that Sumner Redstone, a media mogul (see Wikipedia entry here), can pay all of it with little difficulty.)  That was the bad news for Mr. Redstone.  The good news is that the Tax Court relieved him from the civil fraud penalty (then 50%) and the accuracy related penalty (then 5%).  (I am not sure if, for the period in question, these civil penalties drew interest from the due date of the return as they do now.)  The disposition of the penalty issues makes the case interesting, for the determination of the substantive gift tax liability seemed to be relative straight-forward despite the passage of time since 1972.

I will refer to the players involved in the drama by their first names to distinguish them.  The father was Michael "Mickey" Redstone.  I'll call him Mickey, as does the Court.  There were two sons relevant here -- Edward and Sumner.  This opinion does not say a whole lot about Edward's education and experience, but it does say some things about Sumner's because, presumably, that is relevant to what he knew or should have known about the substantive tax liability back in 1972 and hence liability for the penalties.  The Court says cryptically:

Sumner graduated from Harvard College in 1944 and Harvard Law School in 1947. He practiced law for several years, including a stint in the Tax Division of the U.S. Department of Justice, before starting work in 1954 for the family business.

The Wikipedia entry fleshes this out just a bit:

After completing law school, Redstone served as special assistant to U.S. Attorney General Tom C. Clark (who later served as Associate Justice of the Supreme Court of the United States from 1949 to 1967)[3] and then worked for the United States Department of Justice Tax Division in Washington, D.C. and San Francisco, and thereafter entered private practice. 

From just these bare facts, one might surmise that Sumner was familiar with the tax law and the basic tax concepts that the Tax Court applied to determine that, on the facts, Sumner was liable for the gift tax in question.  One of those concepts is surely that transfers of value with a donative intent is a gift, potentially subject to gift reporting and tax.  But, Sumner pleaded ignorance -- certainly lack of intent in avoiding the civil fraud and negligence penalties.  Not only did he not have an intent to evade his tax liability, but he also was not negligent because he relied on this tax advisers and a memorandum from one tax adviser, which Sumner could not produce.

Well, let's get into the fact to set this up.  At some point, after Sumner left the practice of law to join the family business, the three created a corporation in which the three of them were nominal equal shareholders - 100 shares each.  The father contributed to that corporation disproportionately to the two sons, contributing almost 48%, with each son contributing around 26%.  (OK, there might have been a gift at that time from Mickey to the two sons or at least to someone; read on.)

Another BullShit Tax Shelter Bites the Dust (9/12/15)

We have yet another great opinion attacking bullshit tax shelters for what they are -- bullshit.  See Bank of N.Y. Mellon Corp. v. Commissioner, ___ F.3d ___, 2015 U.S. App. LEXIS 15993 (2d Cir. 2015), here.  The opinion is by Denny Chin (Wikipedia, here), a truly outstanding judge.

First, here is the unofficial summary:

Appeals and cross‐appeal heard in tandem from a judgment of the United States Tax Court (Kroupa, J.) and an opinion and order of the United States District Court for the Southern District of New York (Stanton, J.) applying the ʺeconomic substance doctrineʺ to transactions involving foreign tax credits.   The Tax Court considered the effect of foreign taxes in its pre‐tax analysis and denied the claimed foreign tax credits as lacking economic substance, but allowed interest expense deductions for the loan associated with the transactions.   The district court held that the economic substance doctrine applies to transactions involving foreign tax credits generally and that foreign taxes are to be included in calculating pre‐tax profit.  
    AFFIRMED.

Well, that's pretty cryptic.  I won't try to summarize the complex facts whereby the parties involved tried to exploit the tax regimes of the countries involved.  The Court summarizes its holdings in the Conclusion as follows:

The Court summarizes all of its holdings in the conclusion:

CONCLUSION 

Accordingly, the decisions of the district court and Tax Court are AFFIRMED. To summarize: 

(1) We reject AIG's contention that foreign tax credits, by their nature, are not reviewable for economic substance. The purpose of the "economic substance" doctrine is to ensure that a taxpayer's use of a tax benefit complies with Congress's purpose in creating that benefit. Accordingly, we hold that the "economic substance" doctrine can be applied to disallow a claim for foreign tax credits. 

(2) In determining whether a transaction lacks economic substance, we consider: (a) whether the taxpayer had an objectively reasonable expectation of profit, apart from tax benefits, from the transaction; and (b) whether the taxpayer had a subjective non-tax business purpose in entering the transaction. Gilman, 933 F.2d at 147-48. In our Circuit, we employ a "flexible" analysis where both prongs are factors to consider in the overall inquiry into a transaction's economic substance. 

(3) The focus of the objective inquiry is whether the transaction "offers a reasonable opportunity for economic profit, that is, profit exclusive of tax benefits." Gilman, 933 F.2d at 146 (internal quotation marks omitted). We conclude, as a matter of first impression in this Circuit, that foreign taxes are economic costs and should thus be deducted when calculating pre-tax profit. We also conclude that it is appropriate, in calculating pre-tax profit, for a court both to include the foreign taxes paid and to exclude the foreign tax credits claimed. In so holding, we agree with the Federal Circuit in Salem and disagree with decisions of the Fifth and Eighth Circuits (Compaq and IES, respectively). 

(4) Under the subjective prong, a court asks whether the taxpayer has a legitimate, non-tax business purpose for entering into the transaction. 

(5) As to AIG's transactions, we hold that there are unresolved material questions of fact regarding the objective factors -- i.e., the economic effects of the cross-border transactions and the reasonableness of AIG's expectation of non-tax benefits. There are also material questions of fact regarding AIG's subjective business purpose for entering the cross-border transactions. Because a reasonable factfinder could resolve these questions in favor of the government and conclude therefrom that the cross-border transactions lacked economic substance, the district court did not err in denying AIG's motion for partial summary judgment. 

(6) As to BNY's transactions, we hold that the Tax Court correctly concluded that the STARS trust transaction lacked economic substance. We also hold that the Tax Court did not err in concluding that the $1.5 billion loan from Barclays had independent economic substance, and that BNY was therefore entitled to deduct the associated interest expenses. Accordingly, we affirm the Tax Court's judgment in its entirety.

I now want to focus on the economic substance holding related to the the foreign tax credit manipulation that the Fifth Circuit and the Eighth Circuit had blessed in Compaq Comput. Corp. v. Commissioner, 277 F.3d 778 (5th Cir. 2001); and IES Indus., Inc. v. United States, 253 F.3d 350 (8th Cir. 2001).  Essentially, in calling the tax shelters in the instant cases bullshit, the Court was, in kinder judicial language, calling Compaq and IES bullshit as well.  So, let's see how it did that:

Kostelanetz & Fink Publication on Criminal Tax Topics (3/3/15)

Kostelanetz & Fink has published its Semi-Annual Publication, here.  Readers of this blog will know that the firm and its practitioners are at the forefront of tax controversy practice, including criminal tax practice and OVDP related practice.  Their publications are worth notice.  The key articles for the subject of this blog are:

Tax Planning on the Edge Part II: Ethical Standards in the International Tax Arena, by Bryan C. Skarlatos.  Bryan's bio is here.

Be sure and go to page 16 which appears to be a continuation of the article and discusses United States practitioners evading foreign taxes and foreign practitioners evading U.S. taxes.

Déjà vu All Over Again: Re-Trial After Conviction,  by Sharon L. McCarthy.  Sharon's bio is here.

I particularly found Sharon's article interesting.  The article recounts her representation of Dinis Field, a co-defendant in the Daugerdas case which involved tax shelters of the bullshit category.  Readers of this blog will recall that the Daugerdas defendants were convicted in what proved to be the first trial of Daugerdas and related defendants,  including Field.  But, because of jury misconduct, the case was re-tried.  On the re-trial, Mr. Field was acquitted.  Sharon recounts particular stratgies that she believes contributed to the successful representation of Mr. Field.   The reason I found all of the major tax shelter criminal cases in NYC particularly interesting was that I represented one of the defendants in the first of those cases brought against 19 KPMG related defendants.  We did not have a first or second trial for my client and 12 others who were dismissed for prosecutorial abuse.  Still, every lawyer who has a first trial end in conviction would always love the opportunity for a re-do.  Sometimes the outcome is the same, but sometimes not.  It was not for Mr. Field and his lawyer, Sharon.

The subtopics in Sharon's article should give an idea of the article.

Motion Practice and Subpoenas

[As an aside, I just read today in Bryan Garner's periodic email that the word subpoena has an alternative spelling, subpena.  See LawProse Lesson #201: "Subpoena" vs. "subpena" [which I think will  appear shortly on his blog, here].  Bottom-line, spellings sometimes come into fashion and go out.  There was a time when subpena was fashionable and was oft-used, for example, in federal statutes.  It is less popular nowadays, with the spelling subpoena being the preferred spelling.]

Limiting Instructions.

Although it is not said specifically, apparently at Sharon and her co-counsel moved early and often that limiting instructions be given to the jury that certain potentially negative evidence about certain acronymed tax shelters was irrelevant to the cases involving their clients.  Then, "in summation, [] we were able to explain to the jury that significant portions of the government’s case, and the testimony of 14 witnesses, were completely irrelevant to Denis Field."

DOJ Tax Tough Talk About the Violating Trust Fund Tax Withholding and Payment Obligations (2/27/15)

Liability for trust fund taxes are omnipresent in businesses.  Trust fund taxes are the taxes that an employer is required to withhold from an employee's compensation and to account for and pay over to the IRS.  The trust fund taxes include income tax withholding and FICA and Medicare tax withholding. In concept, they are deemed paid to the employee for services, taken back from the employee, held for a short period in trust, and paid to the IRS to satisfy the employee's tax obligations.  Here is a good summary of the trust fund tax and the trust fund recovery penalty ("TFRP") which serves as a principal incentive on employers to withhold (from Collins v. United States, 848 F.2d 740, 741-42 (6th Cir. 1988)):

The Internal Revenue Code requires employers to withhold social security and federal excise taxes from their employees' wages. [§§ 3402(a), 3102(a).] The employer holds these monies in trust for the United States.§ 7501(a) [here]. Accordingly, courts often refer to the withheld amounts as “trust fund taxes”; these monies exist for the exclusive use of the government, not the employer. Payment of these trust fund taxes is not excused merely because as a matter of sound business judgment, the money was paid to suppliers in order to keep the corporation operating as a going concern – the government cannot be made an unwilling partner in a floundering business. 

The Code assures compliance by the employer with its obligation to pay trust fund taxes by imposing personal liability on officers or agents of the employer responsible for the employer's decisions regarding withholding and payment of the taxes. Slodov v. United States, 436 U.S. 238  (1978).   To that end, § 6672(a) [here] of the Code provides that “[a]ny person required to collect, truthfully account for, and pay over any tax . . . who willfully fails” to do so shall be personally liable for “a penalty equal to the total amount of the tax evaded, or not . . . paid over.” § 6672(a). Although labeled as a “penalty," § 6672 does not actually punish; rather, it brings to the government only the same amount to which it was entitled by way of the tax.  

Personal liability for a corporation's trust fund taxes extends to any person who (1) is "responsible" for collection and payment of those taxes, and (2) "willfully fail[s]" to see that the taxes are paid. 

In addition to the TFRP which is a civil liability only, Section 7202, here, imposes a parallel criminal penalty for those individuals who are responsible within the employer organization to attend to the withholding, accounting for and paying over.

Failure to withhold, account for and pay over is a common phenomenon with businesses encountering cash flow difficulties.  The person or persons within the organization who determine which creditors get paid rob Peter to pay Paul -- i.e., they divert the withheld tax [or deemed withheld] to other creditors (sometimes to themselves).  In many, perhaps most of these cases, they intend only a temporary diversion -- hoping to keep the business afloat, steady the ship, and produce cash flow sufficient to pay the trust fund taxes and any penalties for delinquent reporting and payment.  Sometimes (many times in the aggregate across the economy) the business goes under and the trust fund taxes are not paid.  This sets up the potential for the TFRP and, in some of the more egregious cases, criminal liability under Section 7202.

Tax practitioners deal frequently with clients who are facing IRS action or potential action against them individually for their employer's nonpayment of trust fund penalties.  Often clients will say that the potential civil liability for the TFRP is bad enough, but they certainly don't like the risk of criminal prosecution.  I have had clients ask me if I can illustrate when conduct crosses the line from civil TFRP liability only into potential criminal prosecution.

Another UBS Depositor Sentence; Consideration of the Role of Potential Deportation (1/8/15)

I write today on a recent sentencing for Gabriel Gabella.  Judge Jack Weinstein, U.S. district judge for ED NY, a giant among great judges, imposed the sentence.  (Weinstein's Wikipedia entry is here.)  The sentencing decision is quoted in full below.  See United States v. Gabella, 2014 U.S. Dist. LEXIS 176367 (ED NY 2014).  The USAO EDNY's press release on the  plea of guilty is here.  The guilty plea announcement succinctly sets forth the key background:

Gabriel Gabella, a former client of the Swiss bank UBS AG, pleaded guilty today at the federal courthouse in Brooklyn, New York, to a felony information charging him with concealing ownership of his Swiss UBS AG bank account from the United States by willfully failing to file a Report of Foreign Bank and Financial Accounts (FBAR). When sentenced, Gabella faces a statutory maximum of five years’ incarceration for his crime. In the plea agreement he entered today, Gabella agreed to pay a civil penalty of $3,140,346, which is half the value of his unreported Swiss bank account in 2007, for the willful failure to file the FBAR. Gabella also agreed to make restitution of $239,012 to the Internal Revenue Service for federal income taxes he failed to pay for 2005, 2006 and 2007 by hiding his ownership of his UBS account. 

Judge Weinstein imposed a sentence of three years of probation, with a fine $50,000.   Here is the opinion in full (caption omitted):

I. Introduction 

On June 18, 2014, Gabriel Gabella pled guilty to one count of willful failure to file a report of foreign bank and financial accounts. 31 U.S.C. §§ 5314, 5322(a). 

On December 9, 2014, Gabella was sentenced to a term of three years of probation and fined $50,000. The proceeding was videotaped in order to develop an accurate record of the courtroom atmosphere, as well as the factors and considerations that a district court must evaluate in imposing a sentence in accordance with section 3553(a) of Title 18. See In re Sentencing, 219 F.R.D. 262, 264-65 (E.D.N.Y. 2004) (describing the value of video recording for the review of sentences on appeal). 

II. Offense Level and Category 

The total offense level is 17. The criminal history category is I, yielding a guidelines imprisonment range of 24-30 months. U.S.S.G. Ch. 5 Pt. A. 

III. Law

Penalties and Corporate America's Shenanigans (10/1/14)

Michael Lewis continues to amaze.  See Michael Lewis, The Secret Goldman Sachs Tapes (BloombergView 9/16/14), here.  He is not the story.  He is the story-teller.  One who hears stories from others and says something meaningful about their story.  The story here is from a bureaucrat, Carmen Segarra, the hero of the piece.  The big issue here could be characterized as capture of the regulators, but that may be a bit too facile as the articles cite.  See also Nolan McCarthy, Five things the Goldman tapes teach us about financial regulation (Washington Post Monkey Cage 9/03/14), here.

The story here is about how Goldman Sachs, the larger than life financial institution, works its will with the regulators who are supposed to restrain its will.  It is probably not a story about the evil giant, GS.  GS is not evil (in my opinion).  It is big, it is powerful, it has friends in the right places.  The regulators know that.  That is the evil.  But that is life.  The job of Government is to mitigate that evil by diligence of the type that, allegedly, did not happen with GS.

I won't try to summarize the story.  I can't do that as well as Michael Lewis or Carmen Sagarra in the This American Life episode.  536: The Secret Recordings of Carmen Segarra (This American Life 9/26/14), here.  (For those who prefer reading, the transcript is here.)

The story is about regulators with the Federal Reserve regulating GS.  In reading this story, I could not help but think about this episode in the context of IRS audits.  I have spoken often about bullshit tax shelters.  Basically, fraudulent shelters playing on complexity to discourage regulators (IRS agents) from having the will to get to the bottom of the bullshit.  Many of those shelters were implemented by the titans and exemplars of corporate America.  Those who knew better.  Some of the bullshit shelters were caught and splayed before the public when the taxpayers were so brazen as to litigate in a public forum.  But the GS episode makes me wonder how many were not caught or may have received a pass for some of the reasons laid out in the saga of the Federal Reserve and GS.

In this regard, here are some excerpts from the WP Monkey Cage article summarizing the PRI Sagarra episode.

Request to Readers for Help on Copyright Violations and Plagiarism (9/6/14)

I write today to note that I am aware that certain other tax professionals have published works (such as blogs) that have copied or paraphrased, often with minimal changes, significant portions of my blog entries without quotations or attribution of the source.  Such or paraphrasing copying can be either or both copyright violations or plagiarism.  I know that some readers of this blog read other materials available on the web and thus might have some opportunity to identify such behavior and advise me of it either by comment on this blog or by email to jack@tjtaxlaw.com.

I think it helpful to give some short definition of the key terms -- copyright violations and plagiarism.

Copyright Violations

Copyright violations are violations of the U.S. law governing copyrights.  The Wikipedia Entry, here, titled "Copyright law of the United States of America," offers a good summary of the U.S. law, with appropriate links for further study.

Copyright law law is complex,  but in part relevant to this request for help, the key to copyright law  is that ideas are not protected but expressions of ideas are protected.  "Others are free to express the same idea as the author did, or use the same facts, as long as they do not copy the author's original way of expressing the ideas or facts."

As Judge Posner explains in his book, The Little Book of Plagiarism, 12-13 (Knopf Doubleday Kindle Edition 2009):

Copyright law does not forbid the copying of ideas (broadly defined to include many features of an expressive work besides its precise words or other expressive details, such as genre, basic narrative structure, and theme or message), or of facts. Only the form in which the ideas or the facts are expressed is protected.

Further from the Wikipedia link:

A paper describing a political theory, for example, is copyrightable; it may not be reproduced without the author's permission. But the theory itself (which is an idea rather than a specific expression) is not copyrightable. Another author is free to describe the same theory in their own words without infringing on the original author's copyright. In fact, the second author does not even need to credit the original author (although failing to credit the source of an idea may be plagiarism, an ethical transgression).

One way subsequent authors attempt to avoid copyright violations is to paraphrase, so that, they hope, they are merely expressing the idea (not copyrightable) and not the earlier author’s expression of the idea (copyrightable).  But, as Wikipedia notes, here, in its entry on Paraphrasing of copyrighted material:

Attempts to Commit Tax Crimes (5/23/14)

I deal today with a little discussed feature of criminal procedure.  Federal Rules of Criminal Procedure Rule 31, here, provides:

(c) Lesser Offense or Attempt. A defendant may be found guilty of any of the following: 

(1) an offense necessarily included in the offense charged; 

(2) an attempt to commit the offense charged; or 

(3) an attempt to commit an offense necessarily included in the offense charged, if the attempt is an offense in its own right.

It is well established law that a defendant may be convicted of a lesser included offense in lieu of the offense charged.  I focus on subsection (2) -- conviction of an attempt to commit the offense charged.

In United States v. Johnson, 2014 U.S. App. LEXIS 8834 (4th Cir. 2014), here, the defendant was "convicted by a jury of four counts of violating the Internal Revenue Code ("IRC"); one count of corruptly obstructing or impeding, or endeavoring to obstruct or impede, the due administration of the IRC, in violation of 26 U.S.C. § 7212(a), and three counts of willfully failing to file income tax returns, in violation of 26 U.S.C. § 7203."  On appeal, one of his claims was that the trial court had improperly constructively amended the § 7212(a) charge.  Section 7212(a), here, is tax obstruction.  The statute, here, is:

§ 7212 - Attempts to interfere with administration of internal revenue laws
(a) Corrupt or forcible interference
Whoever corruptly or by force or threats of force (including any threatening letter or communication) endeavors to intimidate or impede any officer or employee of the United States acting in an official capacity under this title, or in any other way corruptly or by force or threats of force (including any threatening letter or communication) obstructs or impedes, or endeavors to obstruct or impede, the due administration of this title, shall, upon conviction thereof, be fined not more than $5,000, or imprisoned not more than 3 years, or both, except that if the offense is committed only by threats of force, the person convicted thereof shall be fined not more than $3,000, or imprisoned not more than 1 year, or both. The term “threats of force”, as used in this subsection, means threats of bodily harm to the officer or employee of the United States or to a member of his family.

As recounted by the Court of Appeals, § 7212(a) "criminalizes both successful and unsuccessful attempts to impede the IRS."  In this case, the § 7212(a) Count, Count One, was titled "Corrupt Endeavor To Obstruct, Impede, and Impair the Due Administration Of the Internal Revenue Code" but the text of Count One charged that the defendant "did corruptly obstruct and impede the due administration of the Internal Revenue Code."  [Actually, there was a typo, but I include what the correct text should have been.]  So, focusing only on the text of the charge and not the title (like a caption which usually is not controlling), the defendant was charged with a completed act of obstruction.  The court nevertheless:

instructed the jury on the meaning of the word "endeavor," defining it as "any effort or any act or attempt to effectuate an arrangement or to try to do something, the natural and probable consequences of which is to obstruct or impede the due administration of the Internal Revenue laws." 

The defendant complained that this broadened the scope of the charge actually made.

On Civil Forfeiture in Criminal Tax Cases (5/1/14)

Writing from his bully pulpit in the Washington Post, Fox News pundit, George Will pillories the IRS for a civil forfeiture action.  See George F. Will, The heavy hand of the IRS seizes innocent Americans’ assets (Washington Post 4/30/14), here.  Of course, Will's key stated premise is that this happened to "innocent Americans."  I cannot speak to their innocence.  I think an unstated premise is that the IRS, the DOJ and the court approving the warrant were not administering the civil forfeiture law as Congress had intended the law, which it wrote, to be administered.  Will's main complaint is about an IRS gone wild, a frequent punching bag for him.  I am surprised that he lets DOJ and the courts off so easily; after all they had to approve the warrant.  I am not sure the article gives a great deal of comfort that it is well researched factually and legally and fairly presented.  Such fulminations are often hastily offered to pillory a target the writer does not like.  Not uncommonly, as with claims about Benghazi, Lois Lerner, and Cliven Bundy, the claims are, let's just say, exaggerated.

Nevertheless, whether or not Will's article is fair reporting or even fair comment, I thought it would be helpful for readers to know a little about civil forfeiture as related to federal tax crimes.  Civil forfeiture is usually not deployed in run of the mine criminal tax cases.  In cases with some material criminal tax component, civil forfeiture will be related to money laundering issues.  And, of course, the IRS has significant investigative responsibilities for money laundering crimes.

Will's article links to a good article, Sarah Stillman, Taken (New Yorker 8/12/13), here.  It is a long read and the anecdotes in the article recounts significant abuse related to state and local government seizures.  Moving past the anecdotes, I include certain excerpts about the civil forfeiture laws and process:

Forfeiture in its modern form began with federal statutes enacted in the nineteen-seventies and aimed not at waitresses and janitors but at organized-crime bosses and drug lords. Law-enforcement officers were empowered to seize money and goods tied to the production of illegal drugs. Later amendments allowed the seizure of anything thought to have been purchased with tainted funds, whether or not it was connected to the commission of a crime. Even then, forfeiture remained an infrequent resort until 1984, when Congress passed the Comprehensive Crime Control Act. It established a special fund that turned over proceeds from forfeitures to the law-enforcement agencies responsible for them. Local police who provided federal assistance were rewarded with a large percentage of the proceeds, through a program called Equitable Sharing. Soon states were crafting their own forfeiture laws. 

Revenue gains were staggering. At the Justice Department, proceeds from forfeiture soared from twenty-seven million dollars in 1985 to five hundred and fifty-six million in 1993. (Last year, the department took in nearly $4.2 billion in forfeitures, a record.) The strategy helped reconcile President Reagan’s call for government action in fighting crime with his call to reduce public spending. In 1989, Attorney General Richard Thornburgh boasted, “It’s now possible for a drug dealer to serve time in a forfeiture-financed prison after being arrested by agents driving a forfeiture-provided automobile while working in a forfeiture-funded sting operation.”

Switzerland as Club Fed for Swiss Enablers of U.S. Tax Crimes (10/24/13)

Following through on the arrest and detention of Raoul Weil (see Ex Top UBS Banker Arrested; Likely to be Extradited (10/21/13), here), Reuters has an interesting article on the effect of the U.S. criminal initiative against Swiss enablers of U.S. tax cheats.  See Michael Shields and Katharina Bart, Arrest chills Swiss bankers' travel plans (Reuters 10/23/13), here.  Some excerpts are:

Seeing one of their select number hauled in handcuffs before a foreign court may prompt Swiss bankers to call their lawyers before they ring travel agents to book a winter break. 

* * * * 

"Maybe we'll all be taking our vacations in Ticino and Graubuenden," one senior private banker told Reuters, making light of concerns among his peers about travelling abroad by talking up the charms of Switzerland's picturesque mountains. 

* * * * 

It is unclear why Weil, 54, chose to cross the border, five years after he was publicly indicted by U.S. prosecutors. Switzerland does not extradite its own citizens in cases of tax fraud. But Italy, which acted on an Interpol warrant, has given the United States six weeks to seek Weil's transfer for trial. 

* * * * 

It is unclear how many Swiss risk arrest. Some may be the subject of U.S. indictments not made public. The U.S. Justice Department did not answer a request for the figures. Martin Naville, chief executive of the Swiss-American Chamber of Commerce in Zurich, thinks the number may be in the low dozens. 

Yet, he says, hundreds more have curbed their itineraries, avoiding setting foot on U.S. territory if not others, for fear of being caught up in the Justice Department's dragnet. 

"I would say there are 1,000 people who are currently not travelling to the United States because they are afraid," said Naville, whose forum maintains close ties to both Swiss and American business leaders and senior bankers. 

* * * * 

Naville said Swiss bank staff who had had few dealings with U.S. clients probably had little to fear. "But," he added, "If you have somebody who had 200 of those clients, had been very aggressive in pushing and peddling specific structures in overseas dominions and everything, that person is at risk."

Another Seggerman Family Member Pleads to Charges Related to Foreign Bank Accounts (8/29/13)

Yesterday, Henry Seggerman pled guilty tax charges (noted below).  The USAO SDNY press release is here.  Seggerman is one of several siblings in a prominent (perhaps the same as wealthy) family who have been charged and pled guilty.  In my spreadsheet, I have previously missed the charges and pleas of the other family members except Suzanne Seggerman.  I have now added the others to the spreadsheet and will be posting the spreadsheet later this week.

I have not yet obtained the plea agreement but will try to track it down and post updates as appropriate.

Here are the key data:

Taxpayer: Henry Seggerman
Charges:  Conspiracy (1), Tax Perjury (1), Aiding and Assisting (1)
Maximum Possible Sentence:  11 years.
Tax Loss:  ?
FBAR Penalty: ?
Bank: ?
Entities:  Yes
Court:  SDNY
Judge:  Alvin K. Hellerstein (Wikipedia entry here)

Key excerpts from the USAO SDNY press releasae:

Manhattan U.S. Attorney Preet Bharara said: “Henry Seggerman and three of his siblings inherited and continued a family tax fraud scheme. Now, four members of this family stand convicted of tax crimes. We will continue to aggressively investigate and prosecute U.S. taxpayers, and those that assist them, in evading their obligations by hiding money in secret offshore accounts.” 

SEGGERMAN was the son of a prominent New York businessman (“the Businessman”) who, upon passing away in May 2001, left an estate valued in excess of $24 million, more than half of which was maintained in secret and undeclared foreign bank accounts. Working with a Swiss lawyer and others, the Businessman arranged for over $12 million in the undeclared accounts to be left to his surviving spouse and five of his children, including SEGGERMAN. As a result of the successful implementation of that plan, and to hide the undeclared funds from the IRS, SEGGERMAN, who, together with three of his siblings, was an executor of his father’s estate, signed a tax return for his father’s estate that falsely under-reported the gross assets of the Businessman’s estate. In particular, the estate tax return fraudulently failed to report over $5 million left to the Businessman’s wife and over $7.5 million to be split among five of his children.
In addition, the Swiss lawyer thereafter assisted SEGGERMAN’s siblings, including Suzanne Seggerman, Yvonne Seggerman, and Edmund Seggerman, in setting up undeclared Swiss bank accounts to hold the money left to them by their father. SEGGERMAN assisted his brother in surreptitiously transferring funds from the brother’s Swiss account to a bank account for a foundation controlled by SEGGERMAN, who thereafter filtered the funds to the brother in the United States, labeling the transfer as “loans.”

Stop the Indictment; My Client Wants Off (1/31/13)

I was inspired initially to write this blog by a recent article in Champion.  Jon May, Stopping the Train Before It Leaves the Station: Convincing Prosecutors Not to Charge Your Client, 36 Champion 34 (2012), here (posted with permission).  I include pertinent quotes from the article in my discussion which deals with the topic in a tax crimes context.  Mr. May cites an article  by a prominent tax crimes defense attorney dealing with the same subject in a tax setting.  The article is Nathan J. Hochman, formerly AAG of DOJ Tax.  The title of the article is: Everything You Wanted to Know About How to Obtain a Prosecutorial Declination of a Federal Tax Case but Were Afraid to Ask, J. Tax Prac. & Proc. 31 (Dec 2009 - Jan 2010), here.  I will weave themes from  both of these articles into this blog entry.  I am sure that my select summary here probably does not do justice to these articles, so I do strongly recommend those articles for those having the interest or need.

Readers who are tax professionals will know that there are several opportunities to stop a federal tax indictment.  These are (following the general progression of from the IRS through indictment):  (1) if in a civil audit (often referred to as an eggshell audit), to avoid having the civil agent refer the case to CI; (2) if in a CI investigation, to convince the principal CI Special Agent not to recommend to his superiors that the case be referred to DOJ Tax CES; (3) then, in a meeting with CI Special Agent in Charge or his delegate and the CI Counsel, to convince them not to refer the case to DOJ Tax CES, (4) then at DOJ Tax CES, to convince the reviewing attorney not to authorize the indictment; and (5) then with the AUSA or DOJ Tax attorney who will actually present the case to the grand jury to convince him or her that the indictment should not be sought or pursued.  Others are involved in the process as well (DOJ Tax CES decision makers and the AUSA's boss in the local district), so all presentations should be made with them in mind.  But the foregoing principal steps are the ones where there is an opportunity to stop the indictment.

Mr. May's article starts with the truism that, if you wait until the indictment, you have probably already lost. Here is Mr. May's introduction to that truism (footnote omitted and emphasis supplied):

Most [criminal] cases in federal court are not defendable. This is the reason 97 percent of cases in federal court end up as pleas. Of the 3 percent that go to trial, probably 50 percent are not defendable either, but the client is a level 42 and has nothing to lose. Now we are down to 50 percent of the 3 percent. Those are the cases that can be won. So why would defense attorneys want to disclose their defense to the government and lose the opportunity for surprise?