On Procedural Due Process in FBAR Pre-Assessment Procedures (5/4/15)

I recently wrote on the Moore case involving a challenge to a mutli-year FBAR nonwillful penalty.  See Court Approves FBAR NonWillful Penalty Merits But Wants Further Development of APA Issues (Federal Tax Crimes Blog 4/3/15), here.  One of the issues I noted but did not discuss was the procedural due process issue.  Les Book has a great discussion of this issue in Procedural Due Process and FBAR (Procedurally Taxing 5/4/05), here.

Court Holds that Civil Agent Did Not Continue Investigation Too Long and Even If Deceptive Did Not Prejudice Defendant (5/2/15)

In United States v. Hee, 2015 U.S. Dist. LEXIS 54971 (D. Haw. Apr. 27, 2015), here, the Court denied various defense motions.  I discuss here the denial of the motion to dismiss the indictment based upon the alleged improper use of the civil tax audit to conduct the criminal tax investigation.  Tax crimes enthusiasts will know that this general genre of argument is based on United States v. Tweel, 550 F.2d 297 (5th Cir. 1977), here, and its progeny.  Hence, the court starts its analysis as follows:  "The court's analysis of Hee's claim of improper revenue agent conduct begins with United States v. Tweel, 550 F.2d 297 (5th Cir. 1977)."  First, the facts, highly summarized.

Two IRS agents were in the initial stages of conducting audits of corporations related to the defendant, Hee.  The had limited initial contact with each other.  One of them noticed early, however, that "there was a $324,684 difference between" the payments reported by one corporation to the other and the income reported by the other corporation.  "This difference turned out to stem from different accounting methods for reflecting management fees."  So, no fraud there.

Five months into the audit, one of the agents discussed the possible referral of the case to CI with her On the Job Instructor, her manager and the fraud technical advisor.  The FTA "said 'no,' indicating that the information Carey presented did not demonstrate corporate fraud and that more facts were needed before anyone could say that Hee might be liable for fraud. Carey was told to consider examining Hee's personal tax returns."

The agent then visited with the corporation's CPA, on the POA, who allegedly told the agent:  "Mr. Hee and he had talked about keeping receipts and other forms of documentation, and that 'Mr. Hee was aware of the requirements,' but choose to 'close deals with handshakes' and would rather 'play the odds' of being audited rather than keep records."

The agent then received permission to audit Hee's personal returns.

Another CPA, also on POA, then called the agent's acting manager and made the allegation that the agent had told him -- the POA - that Hee had committed fraud.  In a later discussion between the acting manager and the agent, the agent disputed the statement, saying that he had told the POA that "things look bad, and that we should try to solve as many things at my level as possible."  Apparently in a subsequent call with the POA, the POA "conceded" that the agent had not referred to fraud.

The agent then later met with the FTA and agreed to write up the referral to CI on Form 2797, "Referral Report of Potential Criminal Fraud Cases."  (Although not discussed in the case, for the procedures on the preparation of this form, see IRM 25.1.3 Criminal Referrals, here.)

At that point, the agent did not continue the investigation.

Finally:

On November 4, 2009, Yanagihara [the POA] left a voicemail for Carey [the agent] asking about the status of the audits of Waimana Enterprises and Clearcom. Carey returned the call. Instead of discussing the status of the audits, Carey told Yanagihara, "Hi Danielle, this is Crystal Carey from the IRS, returning your earlier phone call regarding Waimana Enterprises and Clearcom. In regard to time frames, my manager has asked me to work on another time sensitive matter, and I will have to get back in contact with you at a later date regarding resolution of the Waimana and Clearcom exams."

Birkenfeld CNBC Interview (4/30/15)

CNBC has this interview of Brad Birkenfeld.  Eamon Javers, Why did the US pay this former Swiss banker $104M? (CNBC 4/30/15), here.

Mr. Birkenfeld was the UBS banker who blew the whistle on UBS and thereafter the other Swiss banks plying the U.S. tax evasion market.  He received a $104 million whistleblower award and a prison sentence.  But what he really wants is some form of vindication in addition to $104 million.

But Birkenfeld, 50, a big man with a brash style and a temper, isn't done with the U.S. Department of Justice. He's on a quest, he said, to force the government to explain why it was so aggressive in prosecuting him, but let nearly everyone else involved in the scam get off with light penalties or none at all. 

Now Birkenfeld is telling his story exclusively to CNBC. Wealthy, out of prison and soon to be removed from federal probation, he says he's now free to explain how he came to be the man who ended the tradition of bank secrecy and got rich in the process.

Hale Sheppard Article on Form 8938 (4/30/15)

Hale Sheppard, here, has published an article titled "Form 8938 and Foreign Financial Assets:  A Comprehensive Analysis of the Reporting Rules after IRS Issues Final Regulations," here.  It is published in the March/April issue of the International Tax Journal.  The article (i) analyzes the new/final regulations for Form 8938, describing both the changes accepted and rejected by the IRS, (ii) divides and organizes the complicated rules into manageable portions, addresses the confusing overlap between Form 8938 and the FBAR, and (iv) incorporates guidance from multiple sources, aiming to be a “one-stop shop” for all things Form 8938.  Here is an excerpt from the beginning:

General Rule and Overview

The general rule in Code Sec. 6038D(a) looks innocuous, but it is loaded with defined terms, conditions and nuances. This tax provision contains the following mandate:

Any individual who, during any taxable year, holds any interest in a specified foreign  financial asset shall attach to such person’s return of tax imposed by subtitle A for such taxable year the information described in subsection (c) with respect to each such asset if the aggregate value of all such assets exceeds $50,000 (or such higher dollar amount as the Secretary may prescribe). 

That statutory language is daunting, even for seasoned tax professionals. When faced with such density and complexity, it helps to separate the language into manageable pieces. Below is a breakdown of rules under Code Sec. 6038D, which might serve as a checklist for those conducting their own Form 8938 evaluation.

• any specified individual (“SI”)
• who holds an interest
• during any portion of a tax year
• in a specified foreign financial asset (“SFFA”)
• must attach to his timely Form 1040 or Form 1040NR
• a complete and accurate Form 8938
• if the aggregate value of all SFFAs
• exceeds the applicable filing threshold

Hale then provides some details for navigating the statute and the checklist.

The Stored Communications Act and Emails: An Overview (4/25/15)

I have just posted a guest blog entry on the Microsoft Appeal in In re Warrant to Search a Certain E-Mail Account, 15 F. Supp. 3d 466 (S.D.N.Y. 2014), here,  appeal docketed, No. 14-2985 (2d Cir. Aug. 12, 2014).  Peter D. Hardy and Carolyn H. Kendall, Guest Blog on Stored Communications Act Reach to Cloud Storage Outside the U.S. (Federal Tax Crimes Blog 4/25/15), here.  The case is very important and the discussion an excellent introduction to the issues presented in the case.

The case arises from the Stored Communications Act (SCA), 18 USC 8 U.S.C. §§ 2701-2712.  I thought I would offer here a broader introduction to the SCA.  The following is from a draft of a larger publication that I recently worked on.  I omit the the footnotes but will provide links to the key cases and statutes in the following discussion.  I also omit the discussion of the issue which Peter and Carolyn discuss in the earlier blog entry:

Emails 

Emails have played and will continue to play a prominent role in the larger prosecutions for white collar (including tax) crimes. In many cases, they are the mother lode for investigators and prosecutors.

If the Government wants emails stored on a target’s or subject’s computers, it can obtain them from the target or subject voluntarily (often not likely), by subpoena or summons, or by search warrant. Similarly, if the Government wants a target or subject’s emails stored on the systems of an entity with whom the target or subject is related (e.g., by employment relationship), it can obtain them from the entity if the entity cooperates, or, if not, by compulsory process such as subpoena or summons, or by search warrant.  A target or subject may, however, use unrelated third-party electronic communications services, such as Gmail or Hotmail, for email needs.  Emails stored with that third party are available to the target or subject who can provide them to the Government, but the Government may not be able to obtain that cooperation, so the issue is whether and how the Government may gain access to the emails from the provider of the service. Normally, under the Third-Party Doctrine, the Government may obtain records in the hands of a third party (i.e., not the target or subject who is being investigated) by the third party’s voluntary surrender or by compulsory process (subpoena or summons) to the third party without a search warrant.   This doctrine, if applicable, would provide the Government fairly easy access to emails stored with email services such as Gmail and Hotmail.

Recognizing potential privacy concerns with electronic communications, Congress enacted the Stored Communications Act  providing users privacy protections, with sanctions, for electronic communications stored with electronic communications services (“ECS”).   In giving these protections, Congress also provided for Government access under the following rules in § 2703, here:

• By subpoena (investigative or trial subpoena, including an administrative subpoena (a subset of which is the IRS summons)) to the ECS:   (i) basic subscriber and transactional information;  and (ii) contents of communications in electronic storage with a ECS for more than 180 days.  
• By § 2703(d) Order  issued by a court when the Government provides “specific and articulable facts showing that there are reasonable grounds to believe” that the records sought “are relevant and material to an ongoing criminal investigation:”(i) all records subject to production by subpoena;  and (ii) any other any other “record or other information” concerning a user other than “the contents of communications,” such as historical logs of the email addresses in contact with the user. 
• By SCA Warrant issued by a court under the probable cause showing procedures for search warrants under the Federal Rules of Criminal Procedure:  (i) all records subject to production under a § 2703(d) order (and therefore also a subpoena); and (ii) contents of communications in electronic storage with a provider for fewer than 181 days, 

The subpoena and the § 2703(d) Order require prior notice to the subscriber or customer, but the SCA Warrant does not.

Guest Blog on Stored Communications Act Reach to Cloud Storage Outside the U.S. (4/25/15)

This blog entry is an offering by guest authors Peter D. Hardy, here, and Carolyn H Kendall, here, of Post & Schell PC.  Peter and Carolyn practice in the Internal Investigations & White Collar Defense and Data Protection/Breach Practice Groups of the law firm of Post & Schell P.C., in Philadelphia, PA.  Peter, a principal in the firm, is the author of a legal treatise entitled Criminal Tax, Money Laundering, and Bank Secrecy Act Litigation (Bloomberg BNA 2010), and is a former federal prosecutor.  Carolyn, an associate at the firm, co-authored the 2014 Supplement to Criminal Tax, Money Laundering, and Bank Secrecy Act Litigation.

Please note that downloadable copies of the key documents are at the end of the blog and links to the cited cases, statutory sections and procedure rules are at the end of the blog discussion.

Domestic Search Warrants for Emails Stored Abroad:

The Government Seeks to Expand its Ability to Collect Foreign Evidence

An appeal now under consideration by the Second Circuit arising out of a drug investigation may have substantial consequences for the government’s general ability to obtain evidence stored abroad – and such consequences certainly would extend to the continuing efforts by the Department of Justice and the Internal Revenue Service to gather evidence of undisclosed foreign assets held by U.S. taxpayers.  The appeal illustrates how increasingly sophisticated technology may curb the government’s investigative options or, alternatively, how creative and aggressive legal claims by the government may allow it to obtain foreign evidence through domestic courts, including emails generated by individuals who do not reside within the U.S.

In December 2013, the government obtained a warrant in the Southern District of New York for the contents of an email account hosted by Microsoft, which the government alleged had been used in narcotics trafficking.  The warrant, issued pursuant to the Stored Communications Act (SCA), 18 U.S.C. §§ 2701-2712, directed Microsoft “to disclose” the contents of the email account that were within Microsoft’s “possession, custody, or control.”  Microsoft stores its customer data in “the Cloud,” which in this case happened to be Microsoft’s datacenter in Dublin, Ireland.  Microsoft stored the account’s content there based on the account-holder’s representation that he was located outside the U.S.  Realizing that the warrant sought content from Dublin, Microsoft moved to vacate the warrant as an impermissible extraterritorial warrant.  The district court denied the motion, and Microsoft renewed its challenge before the Second Circuit, which is expected to hear argument this summer.  Given the potential ramifications in all kinds of criminal investigations of permitting the government to obtain sensitive information stored offshore by serving an SCA warrant on an entity in the U. S., this case is one to watch.  In this post, we lay out some of the issues currently before the Second Circuit.  A later post will address the Second Circuit’s ruling, once it has been published.

District Court Proceedings 

Search warrants of course represent a powerful investigative tool.  Federal Rule of Criminal Procedure 41(b)(5) allows for the issuance of search warrants only for property located within the U.S., or within a U.S. territory, possession, commonwealth, embassy, or consulate.  Rule 41 simply does not allow for the seizure of property located in a foreign country.

Ninth Circuit Reverses Barry Bonds Obstruction Conviction (4/21/15; revised 4/24/15)

The Ninth Circuit, in an en banc decision, just reversed Barry Bonds [Wikiepedia entry here] conviction for obstruction under 18 USC § 1503's omnibus clause, here, for his grand jury testimony.  United States v. Bonds, 2015 U.S. App. LEXIS 6708 (9th Cir. 2015), here. This is an important decision for tax crimes both for the grand jury context for § 1503 obstruction but also because § 7212(a), here, tax obstruction, has the same omnibus clause.  The analysis may further affect other statutory interpretations in the areas of false statements under 18 USC 1001(a), here.

When I posted on the opinion shortly after its release three days ago, I did a substantial amount of cutting and pasting because I did not have time to offer a good summary and synthesis.  So, I am revising the blog entry to delete the substantial quotations and offer more limited quotations with some of my own analysis.

First, the context.  The grand jury was investigating the use of sales enhancing drugs in sports and whether the proceeds from sales of the drugs were being laundered.  The investigation was focused on the persons providing drugs to athletes.  Athletes were not the targets of the investigation, but some were expected to testify to further the investigation.  Hence, a judicial order of immunity -- conferring use and derivative use immunity -- was given Bonds.  The grant of immunity effectively shielded Bonds from being prosecuted except for his own criminal footfaults in giving the immunized testimony.  Pursuant to the order, Bonds testified for about 3 hours.  The Government secured an indictment for false statements and obstruction based upon the testimony.  In the criminal trial, the jury acquitted on the false statement charges and convicted only for the obstruction charge.

The Q&A [referred to in the opinions as Statement C] and follow-through on which the conviction for obstruction was based (this is from Judge Kozinski's concurring opinion):

Q: Did Greg[, your trainer,] ever give you anything that required a syringe to inject yourself with?
A: I've only had one doctor touch me. And that's my only personal doctor. Greg, like I said, we don't get into each others' personal lives. We're friends, but I don't—we don't sit around and talk baseball, because he knows I don't want—don't come to my house talking baseball. If you want to come to my house and talk about fishing, some other stuff, we'll be good friends. You come around talking about baseball, you go on. I don't talk about his business. You know what I mean?
Q: Right.
A: That's what keeps our friendship. You know, I am sorry, but that—you know, that—I was a celebrity child, not just in baseball by my own instincts. I became a celebrity child with a famous father. I just don't get into other people's business because of my father's situation, you see.
Defendant was again asked about injectable steroids immediately following this exchange and a few other times during his testimony. He provided direct responses to the follow-up questions. For example, he was asked whether he ever "injected [him]self with anything that Greg . . . gave [him]." He responded [4]  "I'm not that talented, no." The government believed that those answers were false but, as noted, the jury failed to convict defendant on the false statement counts.

Bonds appealed.  The three Ninth Circuit judges originally hearing the appeal unanimously affirmed the conviction.  United States v. Bonds, 730 F.3d 890 (9th Cir. 2013), here.  The reasoning was that the testimony was evasive and misleading and thus within the scope of 18 USC 1503 even if true.

Bonds then requested en banc review.

The Ninth Circuit granted the en banc review and issued the following per curiam opinion (short enough to quote in full):

During a grand jury proceeding, defendant gave a rambling, non-responsive answer to a simple question. Because there is insufficient evidence that Statement C was material, defendant's conviction for obstruction of justice in violation of 18 U.S.C. § 1503 is not supported by the record. Whatever section 1503's scope may be in other circumstances, defendant's conviction here must be reversed. 

A reversal for insufficient evidence implicates defendant's right under the Double Jeopardy Clause. See United States v. Preston, 751 F.3d 1008, 1028 (9th Cir. 2014) (en banc) (citing Burks v. United States, 437 U.S. 1, 11, 98 S. Ct. 2141, 57 L. Ed. 2d 1 (1978)). His conviction and sentence must therefore be vacated, and he may not be tried again on that count. 

REVERSED.

The Economic Rational Actor Model (4/22/15)

I offer today a good, succinct explanation of what is commonly called the standard deterrence model for the economically rational actor for tax obligations.  Kathleen DeLaney Thomas, The Psychic Cost of Tax Evasion, 56 B.C. L. Rev, 618 (2015), here.  I quote her brief explanation (pp. 623-626), omitting all except two footnotes:

A. Standard Deterrence Theory: The Rational Actor Model 

Standard deterrence theory, as applied to tax compliance, assumes that taxpayers are rational actors seeking to maximize their expected utility. Accordingly, a taxpayer who is deciding whether to comply with the tax law will weigh the expected cost of tax evasion against the cost of complying and choose the cheaper option. The cost of complying is simply the amount of tax owed. The cost of evasion, however, is somewhat more complex. If a taxpayer evades and is caught, she will have to pay the tax owed and will also have to pay a penalty, which is usually some fraction of the tax owed (e.g., twenty percent). Together, this penalty added to the tax owed can be thought of as the total fine for evasion (F). There is a chance, however, that the IRS will not detect the taxpayer’s evasion, in which case the taxpayer incurs no cost. Thus, the expected cost of tax evasion is the total fine for evasion discounted by the probability of detection (P): 

Cost of Compliance = Tax Owed
v.
Expected Cost of Evasion = P x F19 

For example, if the probability of detection were one percent (which is the current overall audit rate) and the penalty for evasion were twenty percent of the tax due, the expected cost of evading $100 of tax would be the $100 of tax due plus a $20 penalty (F = $120), discounted by one percent chance of being detected (P). The resulting $1.20 expected cost would be substantially cheaper than the cost of complying (i.e., the $100 of tax owed). In that case, a rational taxpayer would cheat. 

A policymaker seeking to deter a rational taxpayer from evading tax can do so by raising the expected cost of evasion, with the goal of making it more expensive than the cost of compliance. It follows from the model that raising either the probability of detection or the penalty for evasion, or some combination of the two, can increase the expected cost of evasion. In the context of tax compliance, this means higher tax penalties, raising the audit rate, or finding some other method to increase the rate of detection. 

At first glance, raising tax penalties appears to be a simple and potentially cost-effective solution for increasing tax compliance. Current civil tax penalties in the United States range from just twenty percent to seventy-five percent of the tax due, resulting in sub-optimal expected penalties if the risk of detection is small. n22 If Congress increased nominal penalties significantly, it could potentially deter tax evasion without investing more re-sources in ferreting out noncompliant taxpayers.
   n22 In the example in the text above, the expected penalty for evading $100 of tax was just $1.20 when the risk of detection was one percent and the penalty was twenty percent.

More on the Allen Issue - Oral Argument in BASR (4/17/15)

With too much time on my hands, I decided to listen to the oral arguments in the Court of Appeals for the Federal Circuit in  BASR Partnership v. United States, 113 Fed. Cl. 181 (9/30/13 Filed; As Revised 10/29/13), here.  The oral argument may be downloaded here.  For background discussion of the case, see BASR Briefs On Issue of Unlimited Statute of Limitations for NonTaxpayer Fraud (Federal Tax Crimes Blog 8/26/14), here.  I will give some off-the-cuff impressions after the oral argument.

Here is how I slice and dice it (perhaps simplistically):

1.  The issue is whether § 6501(c)(1), here, applies to nontaxpayer fraud.

2.  The plain meaning of § 6501(c)(1) requires fraud but does not textually differentiate between the taxpayer's fraud and any other persons' fraud.  That does not resolve the issue stated in #1, because textual reading does not always control.  I cannot predict whether the Court of Appeals for the Federal Circuit will go outside the bounds of the text.

3.  Much of the oral argument dealt with esoterica of the TEFRA partnership provisions.  I think that is pretty much irrelevant if, as the Government argues and the Court of Federal Claims has already held, Section 6501 is the applicable statute of limitations, then any minimum statute of limitations in § 6229, here, shorter than the § 6501 statute is irrelevant.  But that simply begs the questi§ 6501(c)(1), properly interpreted, applies to nontaxpayer fraud.

4.  I previously thought it relevant that the Government's reading of § 6501(c)(1) might moot § 6229(c)(1)'s prescription of a 6-year statute for fraud on the partnership return not involving the partner committing the fraud.  If § 6501(c)(1) nevertheless prescribes an unlimited statute for a partnership fraudulent item flowing through to the nonfraudulent partner's return, then § 6229(c)(1)'s 6-year statute is irrelevant because it will always be shorter than the § 6501(c)(1) unlimited statute.  On more reflection, this concern seems to be a superficial one. Congress' enactment of a provision that, depending upon the interpretation of an earlier enacted statute, might be rendered irrelevant does not mean that the earlier enacted provision should be interpreted to avoid the irrelevancy.  All the subsequent enactment shows is that Congress in the subsequent enactment either did not think of its interaction with the earlier statute or misconstrued the scope of the earlier statute.  It does not mean that the earlier statute properly interpreted cannot apply as properly interpreted.  Stated alternatively, Congress did not by § 6229(c)(1) amend § 6501(c)(1), so the issue should be how § 6501(c)(1) should be interpreted in the absence of § 6229(c)(1).  And, even if Congress in enacting § 6501(c)(1) had said in the legislative history that it meant to amend § 6501(c)(1) or based its language in § 6229(c)(1) on an assumption that § 6501(c)(1) would not apply, then the enactment would have no effect on the interpretation of § 6501(c)(1).

Swiss Banks Scramble to Mitigate U.S. Penalties (4/17/15)

BloombergBusiness has an article describing the banks actions to mitigate the penalty under the U.S. DOJ Program for Swiss Banks.  Giles Broom and David Voreacos, Swiss Banks Strong-Arm Clients in U.S. Tax-Evasion Endgame (BloombergBusiness 4/14/15), here.  From my perspective, the interesting excerpts are:

Faced with the threat of penalties that could bankrupt some of them, almost 100 of the country’s banks are calling thousands of U.S. clients in an 11th-hour push to get them to disclose any offshore accounts they may be hiding. Customers are being asked to prove they have paid any taxes due, according to a dozen lawyers for banks or their customers. Some have even had their accounts partially blocked to force them to comply, according to the Swiss banking ombudsman. 

As the U.S. government’s largest crackdown on offshore tax evasion enters its final stretch, the banks are trying to reduce any fines they face. Under the amnesty program, if banks can’t show clients paid any taxes owed, the government will assume they didn’t -- and fines will be larger. U.S. prosecutors have already put one bank out of business over tax evasion: Wegelin & Co., Switzerland’s oldest private bank, closed in 2013 after being indicted. 

* *  * * 

Several banks are using tactics clients consider as strong-arming, such as blocking funds or threatening to reveal names, said Thierry Boitelle, a lawyer with Bonnard Lawson in Geneva. He has advised U.S. taxpayers and Swiss private banks involved in the program.
“We have seen banks making withholdings on U.S. client accounts,” he said. “They’re holding back 25 to 30 percent of the funds to compensate for potential fines.” 

Switzerland’s banking ombudsman said it received a “handful” of complaints of accounts being frozen. Banks ascribe such actions to uncertainty over whether a client controlled an account or because he tried to withdraw all holdings in cash instead of making wire transfers, said deputy ombudsman Rolf Wuest. 

Still Resisting 

As clients aren’t legally required to help, many banks have agreed to pay legal costs that sometimes reach tens of thousands of dollars, lawyers say. 

In some cases, customers are still resisting, saying they paid banks high fees for holding money in confidence. 

“Some clients felt that they were misled by the bank as far as secrecy was concerned, and that’s left them with no reason to cooperate,” said Leigh Kessler, a former tax prosecutor now at Rosenberg Martin Greenberg LLP, a Baltimore firm advising some Americans who received calls. 

Customers who are tax compliant can also be uncooperative, said Larry Campagna, tax attorney for Chamberlain, Hrdlicka, White, Williams & Aughtry. The Houston-based firm has represented about 100 clients in connection with the program. 

“They would say, ‘I’m finished with this bank,’” he said. “‘I’m right with my government, I don’t care what happens to the bank. Go jump in the lake and don’t call me again.’”

JAT Comment:  I had thought the window had long passed that the Swiss banks could get the proof required to mitigate the penalties.  But, recently, at least one bank has made inquiries that, while not acknowledging that the bank was seeking penalty mitigation, that seemed to the focus of the inquiries.

Pinkerton and Sentencing for Jointly Undertaken Activity; Proposed Sentencing Guidelines Amendment (4/17/15)

Note to readers:  I posted this entry at the end of a long blog yesterday.  (That blog entry is here.)  I thought that the subject might not get the appropriate attention there and decided to lift it up to a separate blog entry.  In its summary order in United States v. Platt, 2015 U.S. App. LEXIS 6157 (2d Cir. 2015), here, the Court addressed the application of relevant conduct to jointly undertaken activity using the relevant conduct concept of the Sentencing Guidelines.

The trial court sentenced the defendants based on the activities of other persons who implemented the scheme.  The trial court relied on a spreadsheet prepared by the Government and did not make particularized findings to support the inclusions in the spreadsheet.  The Court of Appeals remanded for those findings, but had some interesting comments regarding the process.

The background for the comments is Pinkerton co-conspirator liability.  United States v. Pinkerton, 328 U.S. 640 (1946), here.  (This blog has discussed Pinkerton liability often; for the blog entries sorted by relevance, see here.) For purposes of criminal conviction, one conspirator can be prosecuted for the reasonably foreseeable criminal conduct of co-conspirators within the scope of the conspiracy.  For purposes of sentencing, though, the inclusion of financial loss from other persons' conduct is more restricted (I digress on that issue below, but first offer the analysis if the Second Circuit in the Platt opinion on which this blog entry is based):

Under Section 1B1.3(a)(1)(B) "[a] district court may sentence a defendant based on the reasonably foreseeable acts and omissions of his co-conspirators that were taken in relation to a conspiracy." United States v. Getto, 729 F.3d 221, 234 (2d Cir. 2013). However, to hold a defendant accountable for jointly undertaken criminal activity, a district court must first "make a particularized finding of the scope of the criminal activity agreed upon by the defendant" and, in addition, make a particularized finding that relevant co-conspirator conduct was foreseeable to the defendant. Studley, 47 F.3d at 574. 

At sentencing, the district court committed procedural error by failing to make particularized findings concerning whether the conduct of other gifting table participants fell within the scope of defendants' agreement, and whether this conduct was foreseeable to defendants. The district court relied on a spreadsheet prepared by the government that listed gains to other table participants, but excluded individuals who lacked an "established association"—or "material connection" in the district court's understanding—with defendants. The court further excluded gains to individuals where "it was unclear whether they were operating substantially independently" of defendants, and [17]  only partially including gains where "it was unclear whether part of the[] foreseeable gains [of other table participants] should be excluded." The court thereby eliminated from the loss amount calculation gains to some participants with apparently tenuous connections to defendants but neither explained what constituted a material connection nor clearly indicated whether the gains attributed to defendants were foreseeable. Accordingly, we conclude that the district court's findings did not comply with the requirement of Studley to make particularized findings relating to "the scope of the specific conduct and objectives embraced by the defendant[s'] agreement," Studley, 47 F.3d at 574 (quoting U.S.S.G. § 1B1.3, cmt. n. 2) (emphasis omitted), and "as to whether the activity was foreseeable to the defendant[s]," id.

Second Circuit Summary Order Covering Batson Issue (Striking Women on Jury), Refusal to Grant Immunity to Defense Witnesses, Relevant Conduct for Co-Conspirators (4/16/15)

The Second Circuit issued a summary order (nonprecedential) that I think is good reading for law students and lawyers (at least lawyers young in their practices).  United States v. Platt, 2015 U.S. App. LEXIS 6157 (2d Cir. 2015), here.

Highly summarized, the defendants, Jill Platt and Donna Bello, organized a pyramid scheme promoted to women using the conceit of "gifts" in table offerings (such as dessert, entree, etc.)  All income is taxable, but gifts are excluded from taxable income.  Hence, the participants in the scheme (including the defendants) claimed that the cash they received were gifts and thus not taxable.  They were wrong.

The defendants were convicted for defraud / Klein conspiracy (18 USC 371, here), tax perjury (§ 7206(1), here), wire fraud (18 USC § 1343, here), and conspiracy to commit wire fraud (18 USC § 1349, here).  All except the conspiracy charges were multiple counts of conviction.

The opinion summarizes the defendants' arguments and its holdings in the following introductory paragraph:

On appeal, defendants contend that the government's use of peremptory strikes to eliminate female members of the venire violated Batson v. Kentucky, 476 U.S. 79 (1986); the district court abused its discretion by admitting the testimony of attorney William O'Connor and by declining to compel immunity for three defense witnesses, thereby also violating defendants' constitutional right to present a defense; and the district court abused its discretion in admitting the expert testimony of Dr. Kenneth Kelly. We find these arguments to be without merit and accordingly affirm the judgments of conviction. However, defendants also challenge their sentences, contending that the district court penalized them for exercising their right to trial and imposed sentences that were otherwise procedurally and substantively unreasonable. We find that the district court erred by failing to make the particularized findings required by United States v. Studley, 47 F.3d 569 (2d Cir. 1995), and remand the case for resentencing.

This disposition is a summary order, hence it is nonprecedential in the Second Circuit.  Still, it is a good presentation of the points it covers.  So, let's take a look at the analysis.

1.  The Batson Claim for Peremptory Challenge of Women.

The Supreme Court has held under Batson [Batson v. Kentucky, 476 U.S. 79 (1986), here] and its progeny that the Equal Protection Clause prohibits the government from using its peremptory challenges to exclude potential jurors for a discriminatory purpose. See 476 U.S. at 89; J.E.B. v. Alabama ex rel. T.B., 511 U.S. 127, 146 (1994) [here] (extending Batson to discrimination in the selection of jurors on the basis of gender). 

Without elaborating on the analysis further, suffice it to say that the district court accepted the prosecutor's gender neutral explanations of its strikes of women.  Finding no abuse of discretion, the Court affirmed the district court's decision.

Great Article on U.S. Indicted Swiss Bankers (4/16/15)

Jesse Drucker has this article today:  America’s Most-Wanted Swiss Bankers Aren’t Hard to Find (BloombergBusiness 4/16/15), here.  The article is very good.  He traveled around Switzerland to find and talk with Swiss bankers who have been indicted by the U.S. for assisting U.S. taxpayers hide their incomes in Swiss banks.  I will include some excerpts just to get you interested, but I strongly encourage readers of this blog to click the link above for the full article.

For decades, Switzerland has occupied an outsize role in the world of shady international finance. The country’s strict secrecy laws have made it the offshore banking destination of choice for U.S. tax evaders, Russian oligarchs, Nigerian kleptocrats, and Brazilian money launderers. According to research by Gabriel Zucman, an assistant professor at the London School of Economics, Swiss banks still hold at least $2 trillion that customers haven’t declared to tax authorities in their home countries. “You’re not a self-respecting Swiss bank if you don’t have some dodgy money floating around your system,” says Martin Kenney, an attorney in the British Virgin Islands who specializes in international fraud. 

* * * * 

Swiss authorities, however, have refused to hand over any bankers—and the U.S. hasn’t asked for them. At least 21 financial advisers in Switzerland under U.S. indictment remain at large, making them fugitives in the eyes of the American government. Their acts aren’t considered crimes under Swiss law, so the country won’t extradite or prosecute them. Several still work in the Swiss financial industry, offering tax advice and other services. Some still have U.S. clients. 

* * * * 

At least four I talked to have decided to face the music: pleading guilty in the U.S. and cooperating with prosecutors. What persists is an indignation about being targeted for just following orders—and a sense that, despite their indictments, the Swiss banking system remains dirty.

For related blog entries, see

• Article on Swiss Enabler Fugitives Avoiding U.S. Indictments (Federal Tax Crimes Blog 12/26/14), here.
• Senators Urge Extradition of Indicted Swiss Bank Enablers (Federal Tax Crimes Blog 3/18/14), here.
• Switzerland as Club Fed for Swiss Enablers of U.S. Tax Crimes (Federal Tax Crimes Blog 10/24/13), here.

A Prosecutor's Ethical Obligations to Disclose Exculpatory Evidence Held Broader than Brady Obligation (4/15/15)

In In re Kline, 2015 D.C. App. LEXIS 141 (D.C. Court of Appeals Apr. 9, 2015), here, the D.C. Court of Appeals upheld a finding that, although a failure to disclose potentially exculpatory evidence might not be a Brady violation, it can violate the disclosure requirement for prosecutors under local bar rules.  The opening paragraph lays out the issue and the resolution:

This matter comes before us upon the Report and Recommendation of the Board on Professional Responsibility ("the Board"). The Board recommended that a 30-day suspension be given to Andrew J. Kline ("Kline") after finding that Kline violated Rule 3.8 (e) of the District of Columbia Rules of Professional Conduct ("Rule 3.8 (e)"). Rule 3.8 (e) prohibits a prosecutor in a criminal case from intentionally failing to disclose to the defense any evidence or information that the prosecutor knows or reasonably should know tends to negate the guilt of the accused. Bar Counsel takes no exception to the Report and Recommendation of the Board. Kline argued, inter alia, that he did not violate Rule 3.8 (e) because his ethical duties are coextensive with the duties imposed under Brady v. Maryland, 373 U.S. 83, 83 S. Ct. 1194, 10 L. Ed. 2d 215 (1963). Specifically, Kline relies on the "material-to-outcome" standard recognized by the United States Supreme Court in Brady's progeny to argue that a prosecutor cannot violate Rule 3.8 (e) unless there is a reasonable probability that the information or evidence withheld made a difference in the outcome of the trial. We hold that Kline's interpretation of Rule 3.8 (e), which incorporates a retrospective materiality analysis, is not the appropriate test for determining whether a prosecutor has violated Rule 3.8 (e). We also hold that Bar Counsel proved by clear and convincing evidence that Kline intentionally failed to disclose information in violation of the rule. However, we conclude that given the confusion regarding the correct interpretation of a prosecutor's obligations under the rule, sanctioning Kline would be unwarranted.

The case contains a good discussion of the restricted scope of Brady -- to an ex post facto evaluation of whether the failure to disclose was material to the outcome.  The bar rule, in contrast, is a forward looking prophylactic rule that necessarily cannot be tested by whether it is material to an outcome that has not even occurred:

In short, although significant overlaps exist in a pretrial versus post-trial ethical analysis, it makes little common sense to premise a violation of an ethical rule on the effect compliance with that rule may have on the outcome of the underlying trial, because there can be "no objective, ad hoc way" for a prosecutor "to evaluate before trial whether [evidence or information] will be material to the outcome." See Lewis, 408 A.2d at 307. For that reason, it is important not to use Brady as a "canon of prosecutorial ethics." Commonwealth v. Tuma, 285 Va. 629, 740 S.E.2d 14, 20 n.2 (Va. 2013).

The Court earlier also made this significant comment analysis:

Further, as the Supreme Court recognized in Kyles, "[t]he rule in Bagley (and, hence, in Brady) requires less of the prosecution than the ABA Standards for Criminal Justice, which call generally for prosecutorial disclosures of any evidence tending to exculpate or mitigate." Kyles v. Whitley, 514 U.S. 419, 437, 115 S. Ct. 1555, 131 L. Ed. 2d 490 (1995). The Supreme Court reiterated that basic tenet in Cone, noting that "[a]lthough the Due Process Clause of the Fourteenth Amendment, as interpreted by Brady, only mandates the disclosure of material evidence, the obligation to disclose evidence favorable to the defense may arise more broadly under a prosecutor's ethical or statutory obligations." Cone v. Bell, 556 U.S. 449, 470 n.15, 129 S. Ct. 1769, 173 L. Ed. 2d 701 (2009) (citations omitted).

This violation occurred while Kline was an AUSA working on local prosecutions.  Other jurisdictions have rules that are similar and similarly interpreted.

It might be worth including some type of forward looking request under the local bar rules in addition to requests for Brady disclosures (which under the analysis above is a bit of a non sequitur before trial).  I would think that most prosecutors would not want to take the risk that a retrospective Brady violation may be found and thus would tend, even apart from a bar rule, to err on the side of caution and disclose possibly exculpatory evidence.

Of course, unlike a Brady violation which can give a convicted defendant relief, a bar violation does not per se give the defendant relief.  It merely punishes the prosecutor.

Thanks to the White Collar Crime Prof Blog article:  Solomon Wisenberg, District of Columbia Court of Appeals Makes It Official: Prosecutor's Duty To Disclose Exculpatory Evidence Is Broader Than Brady (White Collar Crime Prof Blog 4/10/15), here.

Must Overt Act Within the Applicable Conspiracy Statute of Limitations Be Alleged in the Indictment? (4/15/15)

The general conspiracy statute, 18 USC 371, here, often deployed in tax crimes prosecutions, requires an overt act in furtherance of the conspiracy and at least one overt act must be in furtherance of the conspiracy.  What is not settled is whether the indictment must allege at least one such overt act within the applicable statute of limitations period for the conspiracy alleged.  All courts agree that the prosecution may prove overt acts not alleged in the indictment in order to meet the requirement that the element of the conspiracy crime is met.  The question is whether at least one of the overt acts within the applicable statute of limitations must be alleged in the indictment to avoid dismissal of the indictment.  And to drill down further, if the allegation requirement is necessary, what if the prosecution does not prove the overt act alleged but proves another unalleged overt act within the statute of limitations?  I don't have the answers to these questions directly, but offer the following from a recent case (United States v. Magalnik, 2015 U.S. Dist. LEXIS 46820 (WD VA 2015)):

The statute of limitations is an affirmative defense that must be raised by a defendant. See Biddinger v. Commissioner of Police of City of New York, 245 U.S. 128, 135, 38 S. Ct. 41, 62 L. Ed. 193 (1917). Once a defendant does so, however, "[t]he government bears the burden of proving that it began its prosecution within the statute of limitations period." United States v. Wilson, 118 F.3d 228, 236 (4th Cir. 1997). It is well-settled that, in order to obtain a § 371 conviction, the government must prove at trial that an overt act in furtherance of the charged conspiracy occurred within the applicable limitations period. Head, 641 F.2d at 177. Disagreement exists, however, as to whether a timely act must be alleged in the indictment itself. Some courts hold that an indictment that fails to allege a timely overt act is subject to dismissal on its face. See United States v. Davis, 533 F.2d 921, 929 (5th Cir. 1976) (error to deny motion to dismiss conspiracy indictment where the indictment failed to allege a overt act within the limitations period, because "for purposes of the statute of limitations the overt acts alleged in the indictment and proved at trial mark the duration of the conspiracy"); United States v. Stoner, 98 F.3d 527, 533 (10th Cir. 1996) ("[A]n indictment must allege that the conduct constituting the conspiracy fell within the statute of limitations, and an indictment that does not contain such allegations is subject to dismissal on its face."). Other courts hold that the government can satisfy the statute of limitations by proving a timely overt act at trial, even where the acts alleged in the indictment are untimely. See United States v. Frank, 156 F.3d 332, 339 (2d Cir. 1998) ("[T]he statute of limitations may be satisfied by proof of an overt act not explicitly listed in the indictment, as long as a defendant has had fair and adequate notice of the charge for which he is being tried, and he is not unduly prejudiced by the asserted variance in the proof."); United States v. Schurr, 794 F.2d 903, 907-908 (3d Cir. 1986) ("[It is well settled that the government can prove overt acts not listed in the indictment, so long as there is no prejudice to the defendants thereby, [and] [t]here would appear to be no reason that the government could not satisfy its requisite showing under the statute of limitations by means of an overt act not listed in the indictment").

See also When Does the Conspiracy End? (Federal Tax Crimes Blog 12/10/13), here.

IRS CI Publishes Annual Report and Some Statistics (4/15/15)

IRS CI has issued its annual report.  IRS Criminal Investigation, Annual Business Report: Fiscal Year 2014 Operations, here.  Many of the key statistics appear also on the IRS CI website here.  For further drill down by program, see here, and the 10-year statistics are here.  The IRS Data Book presents annual statistics in a different but very useful format, here.

I have been keeping data drawn primarily from the IRS statistics.  I attach my latest spreadsheet here (zip file).  I have links in the spreadsheet to show the sources for the data.

The most interesting spreadsheet is Sheet1.  The data in Sheet1 indicate that for legal source prosecutions over the period from 2005 though 2014, the conviction rate is 84.7%.  (That is convictions over indictments for legal source prosecutions.) I won't try to correlate that the DOJ Tax's claims of a 95% (or thereabouts) conviction rate.  I know DOJ Tax's claims relates to all crimes it prosecutes and not just legal source tax crimes and DOJ Tax may prosecute some crimes not accounted for in the IRS data.

The conviction rate substantially increased in 2014, but (i) the single year numbers do not as easily smooth out year to year differences in the components (year of indictment and year of conviction) as do multi-year numbers and (ii), even focusing on 2014, there was a larger number of indictments in 2013 over 2012 and 2014, so the larger number of indictments in 2013 may have disproportionately contributed to the convictions in 2014.

DOJ Tax Press Release Warning of Consequences of Not Reporting and Paying Tax (4/14/15)

DOJ Tax issued this press release yesterday.  Justice Department Reminds Taxpayers that No One Is Above the Law or Below the Radar (DOJ Tax 4/13/15), here.  In the press release, DOJ Tax warns taxpayers of the legal risks of not properly reporting and paying taxes and trots out examples of ordinary taxpayers being prosecuted and punished.  This press release is not directed specifically to the offshore account phenomenon, probably since DOJ Tax has proclaimed the offshore initiative often and the overwhelming majority of taxpayers facing the April 15 deadline do not have offshore accounts .  But, of course, the point is that tax evasion is the problem whether ordinary / onshore or through offshore accounts.

IRS Reminder for U.S. Taxpayers Living Outside U.S. and for Special Reporting for All Taxpayers with Certain Foreign Assets (5/13/15)

The IRS has issued a reminder to U.S. taxpayers living abroad or, if living in the U.S.,  have foreign reporting assets.  See IRS Reminds Those with Foreign Assets of U.S. Tax Obligations (IR 2015-70 April 10, 2015), here.

The opening is:

The Internal Revenue Service  today reminded U.S. citizens and resident aliens, including those with dual citizenship who have lived or worked abroad during all or part of 2014, that they may have a U.S. tax liability and a filing requirement in 2015.

Topics Covered:

• Most People Abroad Need to File
• Special Reporting for Foreign Accounts and Assets
• RS Simplifies Reporting for Canadian Retirement Accounts
• Report in U.S. Dollars
• Expatriate Reporting
• Choose Free File or E-File
• More Information Available