Judge Pauley Continues to Impress - the Conscious Avoidance Instruction (5/13/11)

I have given Judge Pauley kudos in his distillation of the issues the jury should resolve in the context of tax evasion and the prosecutors' "various theories" to slam the defendants into the slammer even where the gravamen of the case -- tax evasion -- would not support their guilt.  I write again on his rejection of the proscutors' attempt to find another way to confuse the jury into a guilty verdict that might not be obtained with a clear focus on the defendants' criminal culpability in the Daugerdas case. 

The Government frequently trots out the conscious avoidance instruction (also known as the ostrich instruction, the deliberate ignorance instruction, and so forth) as yet another way the jury can find the defendant(s) guilty where the Government has not proved that the defendant(s) intentionally violated a known legal duty.   I have previously written on this subject here.  I quote judge Posner in those previous blogs for how the instruction can be misleading.  Here is what Judge Pauley had to say about it in the context of the Daugerdas case -- prosecution of tax shelter promoters with innocent taxpayers:

With respect to the conscious avoidance charge, this Court declines to give the jury such a charge. A conscious avoidance charge requires a factual predicate that "the evidence is such that a rational juror may reach the conclusion beyond a reasonable doubt that the defendant was aware of a high probability of the fact in dispute and consciously avoided confirming that fact." United States v. Ferranini, 219 F.3d 145 at 155 (2d Cir. 2000).

Blogger Server Downtime and Posts Lost (Hopefully Temporarily) (5/13/11)

Readers:

Blogger, the Blog provider, had downtime over the last 24 hours. You may have noticed that. It appears now to be up and running, except that the two latest blogs have not reappeared. Those blogs are:

5/12/2011 10:53 AM Court Blurs Analysis of the Fifth Amendment and Document Production
5/12/2011 12:16 PM Fourth Circuit Speaks Again on Conscious Avoidance / Willful Blindness

If these blogs do not reappear in the next day or so, I will repost them. I have earlier drafts of them that may not be as polished as the final that was posted and is now missing, so maybe I will find time to polish them the drafts. Please bear with me.

Thanks,

Jack Townsend

Even More on Principals, Accomplices, Causers and Pinkerton Conspirators - the Daugerdas Case (5/10/11)

I have previously written on derivative criminal liability for the enablers in the tax shelter game (lawyers, CPAs, financial wizards). See here. I have just today read the transcript for the instruction conference on 5/5/11 in the Daugerdas criminal case.  Daugerdas involved the same basic pattern as the Larson and Coplan cases (previously discussed here and here). That pattern is the prosecution of the enablers but not the taxpayers (or taxpayer advisors), with even a concession that for purposes of the submission to the jury the taxpayers are not guilty of the crime of evasion. In these cases, the prosecutors trot out several redundant or just not applicable theories of liability as if they were different than criminal liability for the underlying criminal offense of tax evasion.  They are not.

Judge Pauley, the trial judge in Daugerdas, gets it. My bullet point summary of the charging conference is: (i) the prosecutors may have abandoned 2(a) accomplice liability, (ii) Judge Pauley wants to conflate 2(b) causer liability directly into the substantive offense, and (iii) Judge Pauley is not enamored with Pinkerton liability. Judge Pauley defaults to the real issue -- either these defendants are guilty as direct principals of tax evasion or they are not guilty of tax evasion at all (regardless of what theory is used).

An Outlier Foreign Bank Account Sentencing (5/10/11)

I recount below the key objective facts in the most recent sentencing, but caution that this sentencing is outside the mainstream for the current initiative -- i.e., more or less ordinary high net worth U.S. tax cheats who have legal source income stashed in overseas banks. The defendant in this case, one Arthur Allen Ferdig, operated a Ponzi Scheme through Tradex. The plea agreement is for the tax offense only but appears animated chiefly by his nontax skullduggery.  The plea agreement describes the nature of his tax offense as:

NATURE OF THE OFFENSE

4. Defendant understands that for defendant to be guilty of attempting to evade and defeat income tax, in violation of Title United States Code, Section 7201, defendant must have willfully attempted to evade or defeat the assessment and payment of a tax due and owing with respect to income received by defendant during the year 2002 by, among other things, committing an affirmative act of evasion. Defendant admits that during the year 2002, defendant knowingly received income from Tradex, a business that defendant operated and failed to report that income. Defendant admits that his failure to report income resulted in a tax due and owing to the Internal Revenue Service. Defendant acted with the specific intent to violate the law. Defendant admits that defendant is, in fact, guilty of this offense as described in the first superseding information.

The Net Worth Method and Negating Nontaxable Sources (5/3/11)

I have just re-read United States v. Fox, 2010 U.S. App. LEXIS 21386 (2010), a nonprecedential decision. (I know, one should not re-read or cite nonprecedential cases; they should just lapse into oblivion.)  But I did.

In that case, the defendant was convicted of five counts of tax evasion. The Government used the net worth method of proof. The net worth method requires that the Government prove opening and closing net worth and then account for the difference in the intervening accounting periods. Unlike, in civil cases, though, this accounting does not need to be a precise exercise because, for tax evasion, all the Government need show is some -- perhaps some substantial -- tax evaded without any need for establishing a precise or even an estimated amount of the total tax evaded. And the Government must also show some likely source of taxable income or at least negate nontaxable income. Even though this is a nonprecedential decision, I wonder whether the readers think this is an odd paragraph (case citations omitted):

Lawyer Turns In Client with Swiss Bank Account (4/30/11)

The Tax Court recently decided Estate of Saunders v. Commissioner, 136 T.C. No. 18 (2011) which establishes important precedent for valuing contingent claims against the estate for purposes of calculating the estate tax. That holding is not relevant to the subject of this blog, but the nature of the claim being valued is relevant.

The decedent (Mrs. Saunders) was the surviving spouse of a lawyer (Mr. Saunders) who represented a client who had a Swiss bank account. Mr. Saunders reported that fact to the IRS, apparently without the permission of and in violation of his duty to the client, a Mr. Stonehill. The client then suffered an investigation, the precise scope of which is not stated, but apparently involved the IRS, the FBI, the State Department and DOJ. Extensive tax litigation then resulted. In that litigation, the client was represented by another lawyer. In the litigation (which included FOIA litigation), the client's lawyer

obtained numerous previously classified documents from the Internal Revenue Service (IRS), Federal Bureau of Investigation, State Department, and Department of Justice. Among the documents Heggestad received during the FOIA litigation was an April 27, 1960, memorandum by IRS agent James H. Griffin (the Griffin memo). The Griffin memo suggested that Saunders had acted as a secret IRS informer against the interest of his client, Stonehill.

Prosecutor's Disclosure of Tax Records; of Section 6103 and Rule 6(e) (4/23/11)

In Lampton v. Diaz, 639 F.3d 223 (5th Cir. 2011), decided 4/18/11, the Fifth Circuit succinctly stated the issue addressed and holding in its opening paragraph:

In Imbler v. Pachtman, 424 U.S. 409, 430 (1976), the Court held that prosecutors retain common-law immunity from suit for all actions "intimately associated with the judicial phase of the criminal process." This appeal raises the issue of whether that absolute immunity extends to a prosecutor's post-trial transfer of private federal tax records to a state ethics commission. Concluding that it does not, we affirm the denial of a motion to dismiss.

In order to understand the issues I want to discuss in this blog, it is important to have a clear fix on the facts. I will quote the Fifth Circuit's summary of the facts and procedural history, but the facts and procedural history are more nuanced. For more detail, see the district court's opinion, Lampton v. Diaz, 2010 U.S. Dist. LEXIS 44738 (SD Miss. 2010). The Fifth Circuit's statement of facts is:

Another UBS Client is Sentenced (4/23/11)

Taxpayer: Ernest Vogliano
Banks : UBS AG
Entities: Yes
Guilt: By Plea Agreement - Klein conspiracy (one count) and tax perjury (five counts)
Incarceration (in months): 0
Probation: 2 years
FBAR penalty: $940,381
Fine: $10,000
Court: SD NY
Judge: Thomas Griesa
Age at sentencing: 80

Articles:
Reuters
Wall Street Journal

I will update the spreadsheet tomorrow.

The Williams Offshore Account Saga Continues - You Win Some, You Lose Some (4/28/11)

I have previously blogged on the saga of Joseph B. Williams who earned income offshore and played the offshore game (offshore financial accounts and entities). Presented chronological key events in his saga are:

1. Williams earlier pled guilty to a Klein conspiracy and one count of tax evasion for the years 1993 through 2000. The conviction related to income rolling through his foreign financial accounts.

2. In the income tax phase of this saga (involving the years 1993-2000), the Tax Court earlier held that he was collaterally estopped by his conviction by plea for tax evasion for those years, so that the statute of limitations was open and he was subject to the fraud penalty. Williams v. Commissioner, T.C. Memo. 2009-81. I previously blogged on this Collateral Estoppel after Tax Evasion Conviction (4/17/09).

3. The United States then sued Williams to obtain judgment on an FBAR penalty assessment, but Williams then pulled off a stunning victory because, the district court found, the IRS had not proved willfulness. United States v. Williams, 2010 U.S. Dist. LEXIS 90794 (ED VA 2010).  See my prior blog Government Fails to Prove Willfulness in FBAR Civil Case (9/2/10).

4. Yesterday, the Tax Court decided the next phase of the Mr. Williams saga -- the income tax phase. Williams v. Commissioner, T.C. Memo. 2011-89.

I write to review yesterday's decision.

Of Principals, Accomplices, Causers and Pinkerton Conspirators

I have drafted an article on concepts of criminal liability in the federal system. The crime I address is tax evasion. Tax evasion has three elements -- tax due and owing, an affirmative act, and willfulness of the actor. The actor liable for this crime is usually the taxpayer but others may also be liable even when the taxpayer is innocent (or at least not guilty). The setting for discussion is the promotion of tax shelters such as involved in the spate of Son-of-Boss shelters in the late 1990s and early 2000s. The Government finds these shelters offensive and has prosecuted multiple promoters related to KPMG, E & Y, BDO Seidman and Jenkens & Gilchrist in the promotion of such SOB shelters. My theses are:

1. In the setting addressed in the article (promoters prosecuted with guilty or innocent taxpayers), the conduct required to make the promoter defendants principals in the crime of tax evasion is the same conduct that would make them derivatively liable as accomplices and causers and perhaps, depending on the facts, as Pinkerton conspirators as well. Stated alternatively, the conduct required to make them principals directly in the commission of the crime is the same conduct that would make them derivatively liable, and vice-versa. If they are not direct principals in the commission of the crime, they are not liable under any derivative theory, and vice-versa.
2. If the first thesis is valid, then instructing the jury as to the derivative theories of criminal liability for the crime of tax evasion is not helpful.
3. Indeed, instructing the jury on these alternative theories -- particularly if they are presented as something different from principal liability -- risks jury confusion and erosion of confidence in the system.

Before sending the article out for consideration of publication, I would greatly appreciate the critique of any reader having the time and interest to read the article. For a copy of the draft article, readers can email me at jack@tjtaxlaw.com.

Court Holds Criminal Statute of Limitations Commences on Due Date of Return and Summons Suspends for Husband but not Wife

In United States v. Buckler, 2011 U.S. Dist. LEXIS 39839 (WD KY 2011), the court made two holdings relevant for this blog in a criminal tax prosecution of husband and wife.

First, the Court held that the criminal statute of limitations for a return filed before the normal due date of the return (April 15 for individuals) commences on the normal due date (April 15), thus making the indictment timely. The Court cited for this proposition Section 6513(a) and United States v. Habig, 390 U.S. 222, 225 (1968). Section 6513(a) provides that "For purposes of section 6511," which deals with claiming refunds, (i) the statute of limitations commences on the due date rather than an earlier filed date and (ii) the due date "shall be determined without regard to any extension of time granted the taxpayer and without regard to any election to pay the tax in installments." Section 6531, dealing with criminal statutes of limitation, provides that "for the purpose of determining [such] periods of limitation . . . the rules of section 6513 shall be applicable." In Habig, the defendant sought to interpret the bold faced provision of Section 6513(a) to mean that it applied to returns filed after the due date, so that returns filed during the extension period required a due date commencement of the civil and criminal statute of limitations. The Habig Court rejected that argument, holding that returns filed after the due date have their statutes of limitation commence on the date of filing rather than the earlier due date of the return. In Buckler, the return was filed before the normal due date and hence fell squarely within the rule that the return is deemed filed on the normal due date of the return.

Justices Jackson and Frankfurter on Duty for Taxes (4/18/11)

Justice Robert H. Jackson had, prior to serving on the Supreme Court as the chief United States prosecutor for the Nuremburg Trails, has served both as general counsel of the Treasury where his responsibilities included the IRS and as Assistant Attorney General heading the Tax Division. I received the following email today from Professor John Q. Barrett of St. John's Law School and Fellow of the Robert H. Jackson Center, Inc.. I thought readers would be interested in this email and received permission from Professor Barrett to pass it along. (I have some links at the end for readers desiring to see more on Justice Jackson and some may want to join Professor Barret's email list as well.)

For the Jackson List:

In summer 1962, Justice Felix Frankfurter, age 79 and disabled by a stroke, retired from the Supreme Court of the United States after 23 years of service.

As a retired Justice, Frankfurter kept his mind and interested eyes on many matters.  In winter 1964, for example, he spotted, or someone called to his attention, a quotation that an official U.S. Internal Revenue Service (IRS) form attributed to his late colleague Robert H. Jackson (who once had been the Revenue bureau’s chief counsel).  According to the IRS, Jackson once said or wrote—no source was specified—that “[t]he United States has a system of taxation by confession.  That a people so numerous, scattered and individualistic annually assesses itself with a tax liability, often in highly burdensome amounts, is a reassuring sign of the stability and vitality of our system of self-government.”

Summons Production Ordered from Law Firm for Client Documents in Its Possession (4/14/11)

In United States v. Sideman & Bancroft, LLP (ND CA 4/8/11 - No. 3:11-cv-00736), the court enforced a summons issued to the taxpayer-target's criminal defense attorneys, Sideman & Bancroft LLP ("Sideman"). The facts were: The taxpayer had delivered the documents in question to her return preparer, an enrolled agent. Then, while the return preparer held the documents, the IRS obtained a search warrant for the taxpayer's residence and business premises. The documents were within the description contained on the search warrant, but, of course, the IRS did not find the seize the documents because they were at the return preparer's office. But the agent did find documents referring to the return preparer.  During the execution of the search warrant, the taxpayer talked with the return preparer and then went to the return preparer's office to sign one of the returns. After the taxpayer left, the return preparer realized that she had documents within the scope of the search warrant. She called the taxpayer's attorney, a Richard Guadagni to advise and have them delivered to the IRS. Guadagni took possession of the documents later that day but delivered them to the taxpayer's new attorney, Jay Weill with Sideman. The return preparer said that she would not have given the documents to Guadagni if she had known he would not deliver them to the IRS. Apparenltly, the return preparer advised the IRS of the description of the documents and, using the description, the IRS summonsed from Sideman.

HSBC India Developments (4/14/11)

As expected, in tax filing season, DOJ Tax takes actions to encourage taxpayers to do the right thing.  There are two HSBC India developments. We previously covered the John Doe summons to HSBC India here. The new developments are:

1. One depositor in HSBC India, Vaibhav Dahake, who was indicted previously (see discussion of indictment here). Dahake pled guilty to one count of conspiracy on April 11, 2011 pursuant to a plea agreement he had entered November 18, 2010. (I speculate that the timing of the actual plea in court was related to the HSBC John Doe summons proceeding, or, perhaps, had something to do with the HSBC related enablers.)  The plea agreement is here, and a Reuters article is here. The plea agreement is fairly standard, with the stipulated sentencing factors being: (i) a tax loss between $30,000 and $80,000 producing a BOL of 14, (ii) sophisticated means 2 level upward adjustment, (iii) acceptance of responsibility 3 level (2+1) downward adjustment and (iv) deriving an offense level of 13. One unusual provision is the following related to immigration:

A Q&A with Jeff Neiman (4/14/11)

Readers of this blog will recognize Jeff Neiman's name. Jeff was formerly the AUSA in SD FL who took a lead role in the Government's initiatives against UBS and some of its depositors. Jeff recently left his position to enter the private practice of law. Jeff's experience on the other side will offer his clients and other lawyers unique insights into the Government's continuing initiatives and how best to maneuver around the traps in the initiatives. I offer here a Q&A with Jeff:

Q: Why did you decide to leave for private practice?
A: After nine years as a federal prosecutor, I figured if there ever was a time to give defense a shot, this was it. I am grateful for the experience and the relationships that I developed while working for the government, but personally I was ready for a new challenge.

Imposing FBAR Civil Penalties on Foreign Financial Institutions

An anonymous poster alerted me to Lynnley Browning's article, Overseas Banks Could Face Novel Penalty From U.S. (New York Times 4/12/11). The poster suggested that I do a blog on the topic of the article -- whether the U.S. could assert the FBAR penalties against the foreign financial institutions ("FFI") in addition to or in lieu, perhaps, of the U.S. taxpayer having foreign financial accounts. I address that issue today, but caution readers that my answer is based on only limited research -- the statute and some additional research in the types of criminal liability that enablers can draw in the context of tax evasion. I plan to have an article on the latter issue in the near future, but that research informs the discussion I present here.

First, I start with the statute. The penalties are found in 31 USC 5321(a)(5)(A) which provides:

(5) Foreign financial agency transaction violation.
(A) Penalty authorized. The Secretary of the Treasury may impose a civil money penalty on any person who violates, or causes any violation of, any provision of section 5314 [31 USCS § 5314].

More on the Simon Conviction (4/9/11)

I previously report on United States v. Simon involving convictions for four tax perjury counts (§ 7206(1)), three FBAR counts (31 U.S.C. §§ 5314, 5322), eight mail fraud counts (§ 1341), and four financial aid fraud counts (20 U.S.C. § 1097). (For my blogs on Simon, see here.)  Because of the facts and the other counts of conviction, Simon is outside the mainstream of the criminal cases being brought in the Government's current civil and criminal juggernaut against offshore account holders.

I had not previously reported the actual sentence in Simon. The sentence is 6 years. I picked up the sentence from a recent decision denying bail pending appeal. United States v. Simon, 2011 U.S. Dist. LEXIS 37001 (N.D. IN 2011), here. This decision did not report the various sentencing factors, hence my spreadsheet (downloadable to the right) is incomplete.

I review here the decision on bail.

HSBC Targeted in Offshore Banking Juggernaut - John Doe Order Granted!!! (4/7/11)

The IRS has issued a "John Doe" Summons with the U.S. District Court in SF, according to a DOJ news release here.  Readers will remember that this was an opening salvo in the spat with UBS that led to a deferred prosecution agreement, $780 million  payment to the U.S., and the turn over of a bunch -- 4,500 -- names.  It is uglier and likely to get uglier for HSBC.  And how about the other banks?

Just curious because I was thinking about it today.  Why doesn't DOJ just get a John Doe grand jury subpoena and cut to the quick?

Update 4/8/11:  The order allowing the John Doe Summons was granted (see here).  (Editorial comment: I hope none of my readers are surprised.)