Summary of Tax Crimes for Tax Procedure Class (3/31/22)

 This past Tuesday, I was a guest lecturer at Jim Malone’s UVA Law Class on Tax Procedure.  My subject was tax crimes.  I circulated in advance a pdf summary of the topic here (which I have changed slightly as indicated in red).  The summary is taken from the corresponding section of my Federal Tax Procedure Book Practitioner Edition but stripping out the footnotes and modifying the text as I thought appropriate).  Readers of this blog can download the summary here.  SSRN links to download either the Student or Practitioner Editions of the book are here. 

More District Court Thrashing Around on Arbitrary and Capricious Calculation of Willful FBAR Penalties (3/30/21)

I have written before on the saga of Timberly Hughes.  Court Sustains Willful FBAR Penalty for Two of Four Years (Federal Tax Crimes Blog 10/15/21), here.  Hughes is back in the news, so to speak.  In United States v. Hughes (N.D. Cal 18-cv-05931-JCS 3/29/22), here, Magistrate Judge Spero is trying to wrap up the case so that it goes to the District Judge and then, apparently, to the Ninth Circuit.  (The docket entries in CourtListener are here.)

 In high level summary:

1. The court confirms that for the two years it previously found nonwillful, that while losing on the willful penalty for the 2 years, there would be no nonwillful penalty for those years.  The court says (p. 3, n 4):

   n4 “The United States does not seek nonwillful penalties against Ms. Hughes for 2010 and 2011, though the United States reserves its right to appeal the Court’s  willfulness determination as to 2010 and 2011.” Pl.’s Reply (dkt. 168) at 2

I have never thought about whether nonwillful and willful penalties can be assessed and litigated in the alternative (something like a lesser included offense concept).  Since the IRS never assessed the nonwillful penalty, I suppose it is out of time to assert assess.  I don't know whether such alternative assessments and/or litigation could be made under the statutes or procedures.  For example, in the Hughes case, applying the nonwillful penalty to the years the court found were not willful.

2. The Court found that there were errors in the calculations and methodology in several respects and remanded to the IRS to reconsider the penalties.  There is no discussion of potential statute of limitations issues from a recalculation and reassessment.  The issue is whether a new assessment would be permitted or only an adjustment downward to the prior assessment.  I am not sure whether the normal APA remand to the agency holds or forces open the statute of limitations (sort of the way a petition to the Tax Court in a deficiency cases suspends the statute of limitations so that the correct number after litigation gets assessed).

3.  In paragraph 2 my prior blog here, I discussed a potential glitch where the IRS uses its methodology to quantify the willful penalty by spreading the amount quantified at 50% of the single high amount over the willful years.  The example I gave was a high amount of $2 million over four willful years and for simplicity assumed that high amount was static at all times during the year.  The maximum penalty authorized by the statute would be 50% per year, for an aggregate of $4 million.  Under the IRS policy to apply only a 50% to the high amount for all willful years (that's not each year), the willful penalty would be the same $1,000,000, but applied to each of the four years.  Now, with two years dropping out, does $500,000 allocated to the now nonwillful years drop off or can the IRS re-allocate the lost $500,000 to the years in which the willful penalty was sustained.  I don’t know.  And, if you vary the amounts so that only in one year the high amount was $2 million, you can get weird results to this type of issue.  And what if in that varying scenario, the high amount were in a year judicially determined to be nonwillful?

District Court Rejects Claim That Supreme Court Expansion of Defraud Conspiracy Is In Error (3/24/22; 3/27/22)

In United States v. Lucidonio,   (ED PA Criminal NO. 20-211 3/9/22), GS here and CL here and g, Lucidonio was charged with the Klein / defraud conspiracy (18 USC §371) counts of aiding and assisting (§ 7206(2)). The Court denied his motion to dismiss those counts. The denial addresses some major themes in tax crimes, and it is short. I recommend that tax crimes fans read the opinion. Perhaps read even more than once.

The opinion addresses two contexts tax crimes targets should consider the potential sweep of conduct subject to the crimes. First, there is the conspiracy charge in 18 USC 371. That statute includes two types of conspiracies:

(i)                The offense conspiracy to commit a specific statutory offense. The offense conspiracy requires the Government to prove that the object was to commit the conduct that meets each element of the offense. For example, for conspiracy to commit tax evasion, the Government must prove an intent to commit each element of the crime of tax evasion. The elements are of tax evasion are:  (i) substantial tax due and owing; (ii) an affirmative attempt to evade; and a willful attempt to evade.  Sometimes proving the elements of the conspiratorial object offense can be a burden, hence we turn to the other conspiracy in § 371.

(ii)              The defraud conspiracy (often called a Klein conspiracy in a tax setting). On the face of the statute, the object of the defraud conspiracy must be “to defraud the United States.”  Defraud normally in the criminal law means to take something of value from its rightful owner (or some variation). There is no reason to believe that, upon the original enactment of the predecessor of § 371 this crime in these words, Congress had any other definition of defraud for this element of the defraud conspiracy. Yet, as interpreted by the Supreme Court, the defraud conspiracy certainly means to cheat or attempt to cheat the Government out of property or money, but it also means to interfere with or obstruct lawful governmental functions “by deceit, craft or trickery, or at least by means that are dishonest” even if no fraud is the object. Hammerschmidt v. United States, 265 U.S. 182, 188 (1924).  Through interpretation, Hammerschmidt effectively grafted into the defraud conspiracy criminalization of conduct beyond fraud onto the defraud conspiracy. For treatments showing Hammerschmidt’s embrace of a formulation of the crime beyond the normal meaning of defraud, see United States v. Coplan, 703 F.3d 46, 66 (2d Cir. 2012), cert. denied, 571 U.S. 819 (2013); John A. Townsend, Tax Obstruction Crimes: Is Making the IRS's Job Harder Enough, 9 Hous. Bus. & Tax. L.J. 255 (2009), here; see also United States v. Caldwell, 989 F.2d 1056 (9th Cir. 1993) (opening with the question: “We consider whether conspiring to make the government's job harder is, without more, a federal crime.”)  [Note: The defraud conspiracy as spun by Hammerschmidt may apply in other agency contexts, but its specific application in a tax context is usually referred to as a Klein conspiracy after the leading tax case apply the defraud conspiracy after Hammerschmidt.  See DOJ CTM 23.07[2][a] Generally.)] In short, the defraud conspiracy as currently interpreted, goes beyond the original meaning of the statutory text because the word defraud in the criminal statutes did not have that meaning until spun by the Supreme Court culminating in Hammerschmidt. 

In every practical sense, the Supreme Court added to the conduct that Congress required for the defraud conspiracy. Just stating that concept seems contrary to the oft-made statement that only Congress can create the elements of criminal statutes. Of course, it has always been the law that courts can spin the elements of criminal statutes, but just how much spinning is allowable. How far can courts wander from the statutory text?

That was the claim Lucidonio and others before him have unsuccessfully sought for the Hammerschmidt spin. The most prominent attack came in United States v. Coplan, 703 F.3d 46 (2d Cir. 2012), cert. denied, 571 U.S. 819 (2013). The Second Circuit questioned the Hammerschmidt spin on the defraud conspiracy but felt obligated to apply because it was the higher court’s spin; the Supreme Court denied cert thus carrying forward the Hammerschmidt spin as law. Coplan, 703 F.3d at 62. Recognizing that reality, Lucidonio made the argument to preserve the possibility that either his case or some other case while his was still alive might get the Supreme Court to reverse the Hammerschmidt spin. (See Slip Op. p.  6 n. 2).

Lucidonio claimed that the Hammerschmidt spin was inconsistent with United States v. Davis, ___ U.S. ___, 139 S. Ct. 2319 (2019), SC here & GS here, and the concepts discussed and applied there. I urge readers considering this issue to review that case carefully because the conclusion of the Davis majority outside the context of tax crimes seems inconsistent with the Hammerschmidt spin on the defraud conspiracy.

For those interested in the issue of how far a court, even the Supreme Court can wander from the text of the criminal law elements, I recommend careful reading of Davis. This is a teaser from the introduction of the opinion (authored by Justice Gorsuch or his clerks (I have an anecdote on that at the end of this blog entry):

District Court Rejects Summary Judgment for FBAR Civil Willful Penalty (3/12/22; 3/13/22)

In United States v. Schik, 2022 U.S. Dist. LEXIS 41025 (SD NY 3/8/22), CL here, the Court denied the Government’s Motion for Summary Judgment for the FBAR willful penalty. In other cases with more or less similar facts (although Schik has some unusual facts, as I note below), the Government has been able to convince courts that objectively proved facts on the Motion for Summary Judgment (particularly answering “No” to the Schedule B question about foreign accounts) met the expansive civil definition of willfulness for FBAR purposes. But, probably because of the unique facts, the Court rejected the notion that a “No” answer suffices for willfulness on summary judgment. A key excerpt: 

            When Congress included penalties for “willful violations” of Section 5321(a)(5), it explicitly delineated between failures to report that are and are not willful. Willfulness, therefore, must mean something more than mere negligence. The Government’s suggested reading of the word—that willfulness should be found categorically even when an unsophisticated taxpayer did not know of an obligation to report and relied on a tax preparer— would abrogate that distinction. See Lowe v. SEC, 472 U.S. 181, 208 n.53 (1985) (a court “must give effect to every word that Congress used in the statute”); see also United States v. Schwarzbaum, 2020 WL 1316232, at *8 (S.D. Fl. Mar. 20, 2020) (“Imputing constructive knowledge of filing requirements to a taxpayer simply by virtue of having signed a tax return would render the distinction between a non-willful and willful violation in the FBAR context meaningless.”); Jones v. United States, 2020 WL 4390390, at *9 (C.D. Cal. May 11, 2020) (in the FBAR context, “signing a tax return on its own cannot automatically make the taxpayer’s violation ‘willful’ as that would collapse the willfulness standard to strict liability.”).

So, what were the unique facts? The Court has a good discussion in the case (pp. 2-5), but the Introduction to Schik’s opposition to the Motion offers a concise summary (See Dkt entry 38 here):

INTRODUCTION

            Defendant Walter Schik (“Mr. Schik” or the “Defendant”) hereby opposes the Motion for Summary Judgment filed by the government because there are numerous disputed issues of material fact in this case. The origination of Mr. Schik’s foreign bank accounts was not the nefarious scheme portrayed in the government’s brief, and the facts and circumstances present in Mr. Schik’s case are readily distinguishable from the cases cited by the government. Mr. Schik was born and grew up in eastern Europe before immigrating to the U.S. after experiencing the horrors of the Holocaust. This deeply traumatic experience has affected Mr. Schik’s entire life and, as relevant in this case, he justifiably believed that it was important to always maintain some funds in Switzerland, a neutral country during World War II, so that they could be accessed in the event of further religious persecution or some other catastrophe. This was Mr. Schik’s sole intent when he established the foreign accounts at issue; there was no intent to evade U.S. tax or reporting obligations. After the accounts were opened, Mr. Schik relinquished almost all control over the accounts to a local asset manager, David Beck, and he did not participate in investment decisions and did not have any understanding about how Mr. Beck structured the accounts. Mr. Schik, who lacks almost any formal education, had no knowledge concerning the offshore asset reporting requirements of U.S. taxpayers; his accountant during the relevant time period did not advise him concerning foreign accounts; and Mr. Schik did not believe that it was necessary to discuss non-U.S.-based accounts with his accountant. As soon as Mr. Schik became aware of his reporting obligations, he applied to the IRS’s Offshore Voluntary Disclosure Program (“OVDP”) and, even after he was inexplicably rejected from the OVDP, he nevertheless proceeded to file amended tax returns (and thereby incriminated himself and exposed himself to criminal prosecution) and pay back tax and interest on the income from his foreign accounts. These  [*2] factors raise numerous questions of fact with regard to Mr. Schik’s knowledge and intent. Therefore, summary judgment should be denied.

Follow On Cases After Criminal Tax Convictions--Daugerdas and Larson (2/8/22)

Two recent cases have evoked memories of criminal prosecutions for promoters of abusive tax shelters:  United States v. Daugerdas, 2022 U.S. App. LEXIS 2776 (2d Cir. 1/31/22), Summary Order, CA2 here and G.S. here; and Larson v. Commissioner, T.C. Memo. 2022-3, G.S. here.

I have discussed Daugerdas’ criminal prosecution and conviction in many blog entries. See here. Daugerdas was a lawyer promoter of Son of Boss tax shelters. He made a lot of money in the fraudulent shelters and, as one consequence, brought down his law firm, Jenkens & Gilchrist. At his sentencing, the Court imposed a sentence of 180 month period of incarceration and major financial penalties in the form of forfeiture of $164,737,500 and restitution of $371,006,397. Daugerdas had previously exhausted his direct appeal and 18 U.S.C. § 2255 remedies. This time, while still incarcerated, he sought relief for the monetary penalties by a writ of audita querela, a writ in criminal cases used to cover matters that could not be addressed in the other remedies he pursued. The Court held that the writ querela was not available because “Daugerdas could have sought relief through other legal avenues.”  As to both of the other remedies—direct appeal and § 2255—even though it was not certain that he could obtain relief, he had the opportunity to pursue relief.

One interesting argument Daugerdas raised was the potential for relief under the holding of Honeycutt v. United States, ___ U.S. ___, 137 S. Ct. 1626 (2017), G.S. here. Honeycutt held that, because of the language of the criminal forfeiture statute, a criminal defendant could not have forfeiture imposed for conduct for which the financial benefit went to other co-conspirators rather than Honeycutt. However, the principle of Honeycutt does not apply to restitution. (See 137 S.Ct. at 1634-1635.)  Co-conspirators can be held jointly and severally liable for restitution for losses within the reasonable scope of the conspiracy. See e.g., United States v. Veasey, (5th Cir. 1/28/21) Unpublished, CA5 here, and G.S. here (where the defendant raised the possibility for relief from restitution based on Honeycutt protectively in the event Honeycutt was applied to restitution during the appeal, see Slip Op. 27); and DOJ CTM, 44.03[2][b] Scheme, Conspiracy, or Pattern, here, pp. 14-16.

Second Circuit Affirms Tax Court that IRS Withdrawal of Certification of Seriously Delinquent Tax Debt to Secretary of State Makes § 7435 Proceeding Moot (2/1/22)

In Ruesch v. Commissioner, 25 F. 4th 67 (2d Cir. 1/27/22), GS here, the Court affirmed the Tax Court's holding that the § 7345 proceeding was moot where the IRS withdrew the "seriously delinquent tax debt" certification to the Secretary of State. The Tax Court opinion is Ruesch v. Commissioner, 154 T.C. 289 (2020), TC here at Dkt #25 and GS here.

In addition to holding that the § 7345 proceeding was mooted by the withdrawal of the certification, the Tax Court also held (from the syllabus):

Held: We do not have jurisdiction, under IRC sec. 7345 or otherwise, to consider in this case petitioner's challenge to her underlying liability for the penalties.

 The Second Circuit addressed that issue as follows (emphasis supplied by JAT):

   Even if the Tax Court had jurisdiction to assess the validity of Ruesch's underlying debt, Ruesch had already received the only relief she could obtain under the statute, namely, reversal of her certification as an individual with "seriously delinquent tax debt." See 26 USC § 7345(e)(2). Since there was no further relief the Tax Court could have provided under the statute, and since the statute provided Ruesch's only claimed basis for relief, it should have determined that Ruesch's remaining claims were moot. n3
   n3 We note that Ruesch may yet have the chance to challenge her underlying liability in Court. That liability is currently the subject of an IRS appeals process that has still to run its course. See 26 USC § 6320. After receiving a final determination through that process, Ruesch will be able, if necessary, to "petition the Tax Court for review of such determination (and the Tax Court shall have jurisdiction with respect to such matter)." Id. § 6330(d)(1); see id. § 6320(c). If Ruesch continues to object to the IRS's position regarding her underlying liability, she will eventually have her day in Court. For now, however, there is nothing further for our Court or the Tax Court to do.

 Two points about this:

Court Rejects Ineffective Assistance of Counsel Claim Based On Counsel's Delay In Preparation and Filing of Amended Returns (1/29/22)

In Evdokimow v. United States, No. 19-14130 (NLH), 2022 U.S. Dist. LEXIS 13110 (D.N.J. Jan. 25, 2022), CL here and GS here, the court rejected Evdokimow ‘s request for relief “to vacate, correct, or set aside his federal sentence pursuant to 28 U.S.C. § 2255.”  Evdokimow raised several claims for relief, all related to ineffective assistance of counsel.  All of Evdokimow’s unsuccessful claims are interesting but I focus on the first one considered in the opinion, which the district court titles “Correction of Petitioner’s Returns” (Slip Op. 9-12.)

Evdokimow’s argument was that his lawyer, Kridel, after learning of the criminal investigation, failed to have Evdokimow’s amended returns filed promptly “had a crushing impact on Evdokimow’s defense at trial, as Evdokimow was, as set forth above, barred from introducing evidence that he had amended his returns based entirely upon the delay between the time Evdokimow learned of the government’s investigation and the time his amended returns were filed, which this Court held to be too long to be considered ‘prompt;’ the Third Circuit affirmed the conviction on that basis.”

There was a substantial delay in filing amended returns.  In the criminal trial, the defense wanted to submit proof of the filing of amended returns to permit the jury to infer his good faith and lack of criminal intent with respect to the original returns.  The Government opposed the proffer, and the court rejected the proffer on motion in limine and again at trial.  Evdokimow raised the issue on the appeal from the conviction, but the Court of Appeals rejected the argument.  United States v. Evdokimow, 726 Fed. Appx. 889, 2018 U.S. App. LEXIS 6564 (3rd Cir. 2018) CA3 here & GS here, which I discuss in Court of Appeals Affirms Exclusion of Amended Returns and Payments after Start of Criminal Investigation (Federal Tax Crimes Blog 3/20/18), here.

In this § 2255 proceeding, the district court held that the argument did not meet did not meet the requirements of Strickland v. Washington, 466 U.S. 668, 687 (1984) that the petitioner show “(1) defense counsel’s performance was deficient and (2) the deficiency actually prejudiced the petitioner.”  The Court reiterated its holding from trial held that (i) proof of subsequent filing of the amended returns, even if filed more promptly, would have had “slight probative value” on the issue of his intent when filing the original returns forming the basis for the tax evasion charge and (ii) that slight probative value was “substantially outweighed by the potential for prejudice and confusion to the jury.”

Ninth Circuit Clarifies Affirmative Act for Evasion of Assessment After Return Filed Can Restart Statute Of Limitations (1/27/22)

In United States v. Orrock , 23 F.4th 1203 (9th Cir. 1/26/22), CA9 here and GS here, the Court resolved potential confusion in the 9^th Circuit as to whether the evasion of assessment statute of limitations runs from (i) the first date that all elements of the crime existed (often in evasion of assessment cases when the taxpayer files the return) or (ii) a later date where the taxpayer committed an affirmative action of evasion (e.g., lie in an audit or, as in Orrock, file some false related return). The Court held that the latter date could, in effect, restart the statute of limitations. In other words, if the taxpayer had done no affirmative act after filing the return, the statute of limitations applies from the date of filing the return. If the taxpayer does an affirmative act after filing the return, the statute of limitations is in effect “refreshed.”

I am surprised that this could really be a continuing issue. I think that, in the 9^th Circuit cases that appeared to create uncertainty on the point, there was just confusion that has now been clarified.

I offer on this subject the following from Michael Saltzman and Leslie Book, IRS Practice and Procedure, ¶ 12.02[1][c][iv] Affirmative act of evasion (Thomsen Reuters 2015) (some footnotes omitted) (note: I am the principal author of Chapter 12,  titled Chapter 12: Criminal Penalties and the Investigation Function):

We discuss statutes of limitations below, but it is important to note here that the statute of limitations begins to run on the date of the last affirmative act of evasion. To illustrate, assume the taxpayer files a false return with intent to evade tax. That filing alone can be the affirmative act. If it is the only affirmative act, then the statute of limitations runs from the date of filing. There can be later affirmative acts with respect to a previously filed return. For example, if, incident to an audit of the return, a taxpayer makes a false statement to the agent in order to hide the original fraud on the return, then the statute of limitations on evasion will run from the date of the false statement.n104 Although the affirmative act element and the willfulness element of tax evasion are stated as separate elements, the elements are related in that the affirmative act element requires a willful intent to evade motivating the affirmative act. Stated otherwise, if the affirmative act element is satisfied, then wouldn't the willfulness element necessarily be satisfied? The cases discussing the issue are sparse, but the logic seems compelling.
   n104 United States v. Beacon Brass Co., 344 US 43 (1952) . The false statement is also a separate crime under 18 USC 1001. The Ninth Circuit, in an opinion many practitioners believe was wrongly decided, held that where the filing of a false return was an act of evasion of assessment, the crime was complete and started the statute of limitations, so that subsequent false statements in audit to avoid assessment were not separate acts of evasion starting a new statute of limitations. United States v. Galloway, 125 AFTR2d 2020-803 (9th Cir. 2020) (unpublished). The reasoning is not consistent with Beacon Brass where a taxpayer’s later false statements in the course of an audit effectively refreshed the statute of limitations.

 I will revise that footnote in the next cumulative supplement to the Saltzman treatise.

11th Cir. Remands For IRS To Re-Determine FBAR Penalties After Affirming Original Calculation Was Arbitrary And Capricious (1/26/22)

In United States v. Schwarzbaum, 24 F. 4th 1355 (11th Cir. 1/25/22), CA11 here and GS here, the Court affirmed the district court’s holdings that (i) Schwarzbaum was liable for the FBAR civil willful penalty and (ii) that the IRS calculation of the willful penalty was arbitrary and capricious. Based on the latter holding, the Court remanded for the IRS to recalculate the penalty.

The first holding—liability for the willful penalty—is consistent with the consensus holdings expanding the element of willfulness for the civil penalty beyond the strict meaning it has for the criminal penalty. Specifically, the willful penalty can apply to reckless conduct. However, in making that holding, the Court footnoted some of its reasons for the reckless conclusion (Slip Op. 13 n8):

   n8 Schwarzbaum argues that the district court’s finding that he recklessly violated the FBAR reporting requirements, even though his CPAs had advised him in previous years that he need not report accounts lacking a U.S. connection, conflicts with United States v. Boyle, 469 U.S. 241 (1985), in which the Supreme Court said: “When an accountant or attorney advises a taxpayer on a matter of tax law, such as whether a liability exists, it is reasonable for the taxpayer to rely on that advice.” Id. at 251 (emphasis omitted).
       Boyle concerned a different tax statute and did not provide the legal standard for willfulness in the FBAR context. Moreover, the Supreme Court’s statement in Boyle is readily distinguishable. While it may be generally reasonable for a taxpayer to rely on professional advice, it is no longer reasonable once the taxpayer has realized—as Schwarzbaum should have, once he read the FBAR instructions—that he has been receiving bad advice.

The second holding—arbitrary and capricious calculation with its consequence of remand to the IRS for recalculation—is, for me, the troublesome part of the opinion. The district court and the Court of Appeals applied the APA arbitrary and capricious test for review of agency actions. 5 U.S.C. § 706(2)(A). The statute states that the willful penalty per unreported account “shall not exceed” the greater of $100,000 or 50% of the amount in the account in the unreported account on the reporting date (June 30 for the years involved). The IRM has a formula that determines the maximum willful penalty that it will assess at 50% of the highest amount in the accounts in all willful years. The IRM then allocates that penalty in equal portions over the willful years. For example, assume that the person had $900,000 static amount in an account over 3 years and their respective reporting dates that was willfully not reported on timely FBARs. The IRS could theoretically assess $450,000 per year for an aggregate of $1,350,000. The IRM nevertheless provides a formula for a lesser penalty of 50% of the highest amount in all willful years ($450,000) and applying that amount over all three years in proportion to the high amounts in the accounts for each year provided that the amount allocated for each year cannot exceed the maximum the statute allows (50% of the amount on the reporting date for the year). This formula will always result in the penalty for a year never exceeding the amount the statute permits the IRS to assess. Indeed, the example illustrates this perfectly because the IRS could have assessed $1,350,000, but under the formula, the penalty is substantially less, $450,000. In effect, the IRS has (in mind) exercised its discretionary authority to impose a lesser penalty than it could have. I discuss this aspect in District Court Muddles an FBAR Willful Penalty Case (Federal Tax Crimes Blog 3/22/20; 3/24/20), here; see par. 4 of that blog. (I should note that, depending upon the numbers assumed in the account for high amounts and reporting date amounts, the IRM formula could be affected, but the formula would always limit the amount that could be assessed for each year to 50% of the unreported account amount(s) on the reporting date.)

5th Circuit Reverses Conviction to Have Court Calculate the Foreign Evidence Request Final Action for Statute of Limitations Suspension and, Properly Instructed, Have Jury Determine Whether Criminal Act Occurred in Statute of Limitations as Suspended (1/13/22)

In United States v. Pursley, 22 F.4th 586 (5th Cir. 1/13/22), CA5 here and GS here, the Court reversed Pursley’s judgment of conviction on conspiracy and tax evasion counts because

• the district court had not calculated the statute of limitations suspension period for foreign evidence requests under 18 U.S.C. § 3292; and
• the district had not instructed the jury that it must find an overt act/affirmative act within the applicable statute of limitations period as extended by § 3292.

The Court remanded to have the district court (i) calculate the suspension period under § 3292 and (ii) if after that calculation, there are acts that a jury could find were committed in the applicable statute of limitations (calculated with the suspension), to retry the case and submit the issue to the jury as to whether there were such acts.

For an introduction to § 3292, I offer the following from my 2013 Tax Crimes book which was the last time I considered it in detail (John A. Townsend, Federal Tax Crimes, 2013 pp. 463-466 ( 2013 SSRN: https://ssrn.com/abstract=2212771) (note I copy and paste the text without the footnotes, so those wanting the footnotes should download the pdf file; I think this remains a fair summary of the law even today):

b. Foreign Country Evidence.

             In a world where international commerce, often of the illegal sort and often assisting tax fraud, is increasing exponentially, key evidence may be overseas.  Because long delays may be encountered in gathering foreign evidence, 18 U.S.C. § 3292 in some cases permits the statute of limitations to be suspended during the period between the U.S. request for foreign evidence and the production of that evidence by the foreign authority.  The key elements for this tolling are:

3rd Circuit Rejects Argument to Extend Marinello Pending Proceeding Requirement for Tax Obstruction to the Defraud Klein Conspiracy (1/10/22)

In United States v. Desu, 23 F.4th 224  (3rd Cir. 1/7/22), CA3 here and GS here, the Court affirmed a conviction of Desu for “tax fraud.”  The Court rejected several arguments but apparently wrote the precedential opinion to clarify the standard of review for an “an evidentiary hearing as provided in Franks v. Delaware, 438 U.S. 154 (1978).”  The Franks hearing is a general process in criminal cases rather than related to tax, so I don’t discuss it here.

The Court did address, rather perfunctorily, a tax crimes issue that has been discussed several times on this blog – whether the Supreme Court’s decision in Marinello v. United States, ___ U.S. ___, 138 S. Ct. 1101 (2018), holding that a pending administrative proceeding is required for tax obstruction can apply to and limit the tax defraud conspiracy (the Klein conspiracy) that arguably is sufficiently similar to tax obstruction as to warrant a pending administrative proceeding limitation.  The consensus of the holdings in other courts (district and circuit) has been that that aspect of Marinello does not apply to the defraud Klein conspiracy.

The Court rejected the argument.  The Court’s reasoning is short so I copy and paste pp. 231-232 (omitting a footnote):

III

     A

            Desu next argues that the two counts in the indictment alleging violations of 18 U.S.C. § 371 fail to state an offense. In those counts, the government alleges that Desu conspired “to defraud the IRS by impeding, impairing, obstructing, and defeating the lawful government functions of the IRS to ascertain, compute, assess, and collect income taxes,” a crime known as a Klein conspiracy. App. 94, 100. Desu claims that [*8] both counts fail to state an offense under Marinello v. United States, 138 S. Ct. 1101 (2018). In Marinello, the Supreme Court held that to convict someone of obstructing or impeding the administration of the Internal Revenue Code under 26 U.S.C. § 7212(a), the government must prove that a ‘“nexus’ [existed] between the defendant’s conduct and a particular administrative proceeding, such as an investigation, an audit, or other targeted administrative action.” Id. at 1109. Desu claims that both counts fail to state an offense because they do not allege that an investigation was pending when he committed the conspiracies as required by Marinello in the separate but similar statute. 

Court Enters Stipulated Order to Prevent Alienation of Swiss Account Holdings (12/27/21; 12/30/21)

I recently blogged on an order in United States v. Scharzbaum (S.D. Fla. Dkt # 18-cv-81147-BLOOM/Reinhart) to repatriate Swiss account funds based on the district court’s holding that a U.S. person was subject to the willful penalty. District Court Upholds Repatriation Order for FBAR Willful Penalty While Liability on Appeal (11/4/21; 11/5/21)), here.  The parties continue to fight about whether the repatriation order should be stayed pending the outcome of the appeal. The pleadings on that commotion may be viewed on CourtListener, here, but Schwarzbaum summarizes his position in the Motion to Stay

If, on the other hand, the Court refuses to stay its Order and Mr. Schwarzbaum is forced to liquidate his foreign investment accounts before the appeal is  concluded, he faces the threat of significant and irreparable harm. Mr. Schwarzbaum would be required to pay the transaction costs [*2] and income taxes associated with the liquidation and transfer of his assets into the United States. If this Court's decision is subsequently overturned, Mr. Schwarzbaum would not be able to secure a refund of those taxes, nor could he force the United States to make him whole for the costs and taxes he never should have been required to pay. To avoid this untenable result, the Court should stay its Repatriation Order pending conclusion of the appeal.

Update on 12/30/21 1:30pm:  On 12/20/21, the Court granted Schwarzbaum's Motion to Stay Pending Appeal.  See CL here.

 In United States v. Monica Harrington (D. Colo. 1:21-cv-02601-RBJz), CL Docket Entries here,  the Government sought a preliminary injunction against Monica Harrington to require her to repatriate funds in a Swiss account.  See Docket entry # 1, here.  This request relates to an FBAR collection action against Monica Harrington’s husband, George Harrington, who allegedly transferred ownership of the account to his wife to avoid the U.S. collecting in the event the U.S. prevails in the FBAR collection suit.  The FBAR collection case against the husband is still pending.  United States v. George Harrington (D. Colo 1:19-cv-02965), CL Docket Entries here.

FinCEN Adopts Immediately Effective Final Rule Omitting the Regulations Statement of the 2004 Willful Penalty Prior to the 2004 Statutory Amendment (12/26/21)

Readers may recall that the FBAR willful penalty, as amended in 2004, provides a maximum penalty of the greater of $100,000 or 50% of the amount in the account on the reporting date.  31 U.S.C. §5321(a)(5)(C).  Prior to 2004, the maximum willful penalty was $100,000.  After the 2004 amendment, FinCEN did not amend the regulation, 31 CFR § 1010.820(g), to reflect the change in the statute.  After the amendment, creative lawyers pursued the argument that, by leaving the regulation in tact, FinCEN exercised its discretion under the amended statute to maximize the FBAR willful penalty at $100,000 and thus could not assert a higher penalty under the amended statute.  That argument finally failed.  E.g., Norman v. United States, 942 F.3d 1111, 1117-1118 (Fed. Cir. 2019).

FinCEN has deleted subsection (g), thus eliminating any confusion (real or feigned) about the effect of the statutory amendment.  The Final Rule states that it is immediately effective on the date issued (12/23/21).  See 86 FR 72844, 72844-72845, here.

I have no idea why FinCEN took so long to make that deletion.

JAT Notes:

What is the effect of stating an effective date of 12/23/21?  Why didn’t FinCEN just state that the effective date was the 2004 amendment effective date?  Certainly, the deleted subsection (g) had been effectively deleted by 2004 amendment, as recognized by the court opinions prior to 12/23/21.

While I can't provide a definitive answer as to FinCEN's reasoning, I will step through my analysis.:

District Court for ED VA Dismisses Reverse False Claims Act Proceeding Against Credit Suisse (12/22/21)

In United States Ex Rel. John Doe v. Credit Suisse AG, (E.D. VA. No. 21-CV-00224) Order dated 12/17/21), here, the court dismissed this claim under the False Claims Act’s reverse false claims provision, 31 U.S.C. § 3729(a)(1)(G).  The claim was that the relator, identified anonymously as John Doe, a former employee of Credit Suisse, AG, had information that Credit Suisse had failed to comply with its plea agreement regarding aiding and assisting U.S. taxpayers evade U.S. tax.  See Credit Suisse Pleads to One Count of Conspiracy to Aiding and Assisting (Federal Tax Crimes Blog 5/19/14; 5/20/14), here.  The key basis for the dismissal is that the reverse FCA claim must involve an obligation to the U.S. and here there was no obligation.  At most there was a potential obligation if the Government identified with the information additional claims it could make against Credit Suisse with the information and assess amounts due based on the information.

John Doe, a Birkenfeld-type whistleblower wannabe, claimed to have proof that Credit Suisse had withheld information in violation of the plea agreement that, if disclosed, would have resulted in larger amounts of penalties or other required payments to the U.S. 

 Furthermore, as a basis for dismissal, the court said that

             The Relator's case threatens to interfere with ongoing discussions with Credit Suisse regarding the identification and remediation of remaining Swiss accounts held by U.S. citizens. Civil litigation by the Relator, ostensibly on behalf of the United States and in parallel with the ongoing implementation of the plea agreement, would threaten the Department of Justice's ability to continue working with Credit Suisse in pursuit of uniquely governmental and federal interests. This is sufficient reason to dismiss. See Toomer, 2018 WL 4934070, at *5 (dismissing qui tam where the Government alleged that litigation would consume agency resources and impair its ability to work with the defendant).

            Further, the prosecution of the Relator's qui tam action would place a significant burden on Government resources. Courts have routinely held that preservation of Government resources is a valid purpose for dismissing a qui tam action. See, e.g., Sequoia Orange, 151 F.3d at 1146 (holding that the district court "properly noted that the government can legitimately consider the burden imposed by taxpayers by its litigation, and that, even if the relators were to litigate the FCA claims, the government would continue to incur enormous internal staff costs"); United States ex rel. Stovall v. Webster Univ., No. 3:15-V-03530-DCC, 2018 WL 3756888, at *3 (D.S.C. Aug. 8, 2018) (holding that the Government's "interest in preserving scarce resources by avoiding the time and expense necessary to monitor t[he] action" was a valid Government purpose for dismissal).

Fifth Circuit Affirms Defendant's Waiver of Counsel Conflict of Interest and Punts on Ineffective Assistance of Counsel Claim on Direct Appeal (12/10/21)

In United States v. Fields (5th Cir. 12/10/21) (Unpublished and Nonprecedential), here, Fields was found guilty by the jury “of mail fraud, conspiracy to commit mail fraud and wire fraud, and 13 counts of aiding and assisting in preparation and presentation of false tax returns.”  On appeal, Fields argued that “his attorney labored under several conflicts of interest, that the district court should have rejected his waiver of his right to conflict-free counsel, and that counsel was ineffective in failing to advise him to accept the Government’s plea offer.”

Fields' criminal conduct involved filing about 200 fraudulent returns claiming refunds, some of which were made.  Upon indictment, Fields was represented by three attorneys, one of whom (Dwight Jefferson) during the underlying criminal conduct used his lawyer trust account to cash some of the fraudulent refund checks and deliver the proceeds to Fields net of a fee for his “services.”

The Government raised the issue of possible conflict of interest with Jefferson as Fields’ attorney in the criminal trial.  The district court held two hearings on whether Fields’ validly waived the potential conflict of interest.  In the Fifth Circuit, those conflict of interest waiver hearings are called Garcia hearings.  United States v. Garcia, 517 F.2d 272, 278 (5th Cir. 1975), abrogated on other grounds by Flanagan v. United States, 465 U.S. 259, 263 & n.2 (1984).  Upon the conclusion of those hearings, the district court held that “Fields had validly waived his right to conflict-free representation.”

On appeal, the Fifth Circuit panel held that the district court had properly considered Fields’ waiver and that Fields “has not shown that his waiver was involuntary or unknowing.”  The panel further held:

            Fields has not shown that Jefferson’s belief that the potential conflicts would not affect his representation of Fields was unreasonable. See Rico, 51 F.3d at 511. Jefferson maintained that his testimony was unnecessary to explain the use of his IOLTA or inconsistencies between Fields’s representations to the IRS and his verified pleading in the TRO litigation. Jefferson also explained that Fields would be raising the defense of reliance on the advice of the IRS, rather than advice of counsel and nothing in the record indicates that the defense of reliance on the advice of counsel should have been raised at trial. In addition, the Government explained that it had no reason to believe Jefferson knowingly participated in the fraud, and Fields’s other two attorneys, who were independent of Jefferson, agreed that the conflict was waivable.

[*6]

            Thus, Fields has not shown that any conflict was sufficient to impugn the judicial system or render Fields’s trial inherently unfair, such that his right to conflict-free counsel was unwaivable.

Fifth Circuit Applies FBAR NonWillful Penalty Per Account and Not Per Form (11/30/21)

In United States v. Bittner, 19 F.4th 734 (5th Cir. 11/30/21), CA5 here, and GS here, the Court held that the FBAR nonwillful penalty in 31 USC § 5314 and the underlying regulations  31 CFR §§ 1010.306 and 1010.350 applies on a per account rather than a per form basis, so that, in this case where Bittner had a financial interest in well over 25 accounts per year for each of three years, the per account penalties aggregated $1.77 million.

The Bittner opinion, a unanimous opinion, conflicts with the panel majority opinion in United States v. Boyd, 991 F.3d 1077 (9th Cir. 2021), but draws heavily on Judge Ikuta’s dissenting opinion in Boyd.  See CA9 Holds in Boyd that Nonwillful FBAR Civil Penalty Is Per Form Rather Than Per Account When Correct Delinquent FBA`R Is Filed (Federal Tax Crimes Blog 3/24/21; 3/31/21)), here

Bittner may petition for certiorari, but the Supreme Court may want the issue to bubble around a bit more in the Circuits to see if a consensus can be reached, with all courts then moving to the consensus view.  Alternatively, the Court might take certiorari to resolve the conflict, treating this as one of the few “tax” (or tax-related) cases it must take every year.  It does not appear to me that either of the two alternatives the Court takes would create that much mischief, an affliction the Court not uncommonly exhibits in tax cases.

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

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

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

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

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

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

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

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

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

District Court holds (1) FBAR Penalty Statute of Limitations is Waivable and (2) FBAR Nonwillful Penalty is Per Account (11/8/21)

In United States v. Solomon, No. 20-82236-CIV-CAN, 2021 U.S. Dist. LEXIS 210602 (S.D. Fla. Oct. 27, 2021), CL here, in a nonwillful FBAR collection suit, the Court held:

1. The FBAR assessment statute of limitations is an affirmative defense that may be waived by the person assessed the penalty (no distinction here between willful and nonwillful).  The FBAR assessment statute of limitations has no provision such as § 6501(c)(4) that requires that extensions by agreement must be made while the otherwise applicable period of limitations for tax assessments is still open; perhaps the implication is that, except for that explicit limitation on waivers by agreement, a taxpayer could waive with an untimely agreement. (In this regard, the Solomon court does conclude that the FBAR statute of limitations is not jurisdictional and thus can be waived.)  Accordingly, the execution of the agreement to extend for the FBAR penalties was a waiver of the statute of limitations that had already expired.  (On the jurisdictional issue, see Keith Fogg, IRS Succeeds in Jurisdictional Argument – With a Twist (Procedurally Taxing Blog 11/4/21), here.)

2.  The nonwillful penalty is per account rather than per form, adopting the Government’s position on this issue.  As the court notes in the following footnote (Slip Op. 10 n. 4):

n4 Of the courts that have addressed this issue to date, all but one have rejected the government's view, ruling or otherwise suggesting that a non-willful “violation” of the reporting requirement in 31 U.S.C. § 5314 is the failure to file an annual FBAR report — not the failure to “report” the citizen's interest in each foreign financial account. See United States v. Boyd, 991 F.3d 1077 (9th Cir. 2021) (rejecting government's view); United States v. Bittner, 469 F. Supp. 3d 709 (E.D. Tex. 2020) appeal docketed, No. 20-40612 (5th Cir. Sept. 18, 2020) (same); United States v. Kaufman, 3:18-CV-00787 (KAD), 2021 WL 83478, **8–11 (D. Conn. Jan. 11, 2021) (same); United States v. Giraldi, CV202830SDWLDW, 2021 WL 1016215, *5 n.8 (D.N.J. Mar. 16, 2021) (same). But see United States v. Stromme, No. 20-24800-CIV (S.D. Fla. Jan. 25, 2021) (ECF No. 18 p. 3) (granting judgment in favor of United States for the full amount of penalties sought, agreeing that “each unreported relationship with a foreign financial agency constitutes an FBAR violation”). 

The Court’s analysis is comprehensive and well-reasoned, adopting in part Judge Ikuta's dissent in Boyd.  (That is not to say that the court's conclusion is right, for I think the issue is the type of issue that really can go either way; as I view these "go either way" issues, they proceed in search of a consensus (either in the courts or by statutory amendment) so that similarly situated citizens at some point get treated similarly but until consensus is reached, it is messy.)