Supreme Court Speaks on Willful Blindness (6/2/11)

In Global Tech Appliances, Inc. v. SEB, ___ U.S. ___ (6/1/11), the Supreme Court spoke on willful blindness as meeting a statutory requirement of knowledge.  (The concept goes by several names; I have used "conscious avoidance" for the concept in several entries in this blog.)  The Court addressed the concept in a civil patent infringement case where the statute required that the party know that the induced acts constituted patent infringement.  The part on willful blindness in a criminal context is short, so I quote it in full (Slip Op 10-12):

The doctrine of willful blindness is well established in criminal law. Many criminal statutes require proof that a defendant acted knowingly or willfully, and courts applying the doctrine of willful blindness hold that defendants cannot escape the reach of these statutes by deliberately shielding themselves from clear evidence of critical facts that are strongly suggested by the circumstances. The traditional rationale for this doctrine is that defendants who behave in this manner are just as culpable as those who have actual knowledge. Edwards, The Criminal Degrees of Knowledge, 17 Mod. L. Rev. 294, 302 (1954)(hereinafter Edwards) (observing on the basis of English authorities that “up to the present day, no real doubt has been cast on the proposition that [willful blindness] is as culpable as actual knowledge”). It is also said that persons who know enough to blind themselves to direct proof of critical facts in effect have actual knowledge of those facts. See United States v. Jewell, 532 F. 2d 697, 700 (CA9 1976) (en banc).

IRS Ratchets Up Its Focus on the Enablers (6/2/11)

Observers of the IRS offshore financial account initiative have known for a long time that the IRS had its sights on enablers (persons who promoted and enabled taxpayers into offshore accounts for U.S. tax evasion purposes). In the template letter required in the two programs, participants were required to identify enablers. Then IRS then took that information and built databases of names and relationships that could identify the signficiant enablers. At least anecdotally, practitioners observed that the IRS seemed to be particularly interested in enablers who had some U.S. presence -- particularly, as in the case of the UBS enablers, those who moved into and out of the country in stealth mode to sell their evasion services. This is probably not new to most of the professional readers of this blog.

In a very good article, a Bloomberg Business Week reporter discusses some of the IRS's efforts. The article is David Voreacos,The IRS Grills Taxpayers on Offshore Accounts, Bloomberg Businessweek (6/2/11). It is not a long article and is well-written, so I just link to it for you. 

Economic Substance Doctrine Tax Felonies (6/1/11)

I write today to provide viewers access to Jasper Cummings' article, Jasper L. Cummings, Jr., Economic Substance Doctrine Felonies, 131 Tax Notes 977 (May 30, 2011) and 2011 TNT 104-10 (5/31/11). (This article is provided with the permission of Tax Analysts.)  Mr. Cummings writes on the use of the economic substance doctrine in criminal tax cases. Most particularly, he writes about Mr. R. J. Ruble who was convicted in the first round of Son-of-Boss criminal prosecutions. In that case, Ruble, a tax lawyer, was convicted along with John Larson and Bob Pfaff who provided financial services in the conceptualization and implementation of the shelters. Two prominent subsequent shelter prosecutions have also used the economic substance doctrine in the charges to the jury.

First, let me disclose that I represented one of the dismissed defendants in the sprawling prosecution that ended up in the conviction of Messrs. Ruble, Larson and Pfaff. Once my client was dismissed along with 12 others before trial, I no longer had an immediate interest in the case but I did observe the progress of the proceedings through conviction and appeal and now pending petition for certiorari in the Supreme Court. I was particularly interested in whether and how the economic substance doctrine would be presented to the jury.

The State of the John Doe Treaty Request to Switzerland (6/1/11)

U.S. double tax treaties have an exchange of information provision. After the U.S. put the full court press on UBS (John Doe Summons and criminal investigation), the matter was finally resolved with a deferred prosecution agreement for UBS (with a whopping fine) and an agreement with the Swiss government that it would process a John Doe treaty request -- i.e., a request for U.S. taxpayers identified only by characteristics (e.g., size of account and use of non-U.S. entities)). Because, prior to that time, Switzerland interpreted the US - Swiss double tax treaty restrictively, this solution required a treaty protocol. At more or less the same time, efforts at more transparency from tax haven jurisdictions were pursued by OECD and G-20 Ministers of Finance. The result is that Switzerland is trying to give the appearance of opening the kimono. (That is different than actually opening the kimono.)

All of this is laid out (or at least suggested) in the Joint Committee on Taxation, Explanation of Proposed Protocol to the Income Tax Treaty Between the United States and Switzerland (JCX-31-11), May 20, 2011. I recommend this report as an excellent summary of the issues with Switzerland and an historical summary of the developments in this area.

OVDP 2009 FAQ 35 (5/30/11)

This blog will open a discussion of the IRS application of FAQ 35 of OVDP 2009. I received comments on this subject with respect to the other blog entries and thought it was time to devote a blog entry to the subject so that comments can be more easily located. The issue is nicely addressed in Charles P. Rettig and Kathryn Keneally, The Last, Best Chance to Disclose Foreign Financial Accounts and Assets—The 2011 Offshore Voluntary Disclosure Program and Beyond!, Journal of Tax Practice and Procedure 33, 43-44 (Feb.-March 2011)

In practice, FAQ 35 of the 2009 OVDP provided an opportunity to explain unique circumstances supporting an offshore penalty resolution different that as specified in the 2009 OVDP. Specifically,

Voluntary disclosure examiners do not have discretion to settle cases for amounts less than what is properly due and owing. These examiners will compare the 20 percent offshore penalty to the total penalties that would otherwise apply to a particular taxpayer. Under no circumstances will a taxpayer be required to pay a penalty greater than what he would otherwise be liable for under existing statutes. If the taxpayer disagrees with the IRS’s determination, as set forth in the closing agreement, the taxpayer may request that the case be referred for a standard examination of all relevant years and issues. At the conclusion of this examination, all applicable penalties, including information return penalties and FBAR penalties, will be imposed. If, after the standard examination is concluded the case is closed unagreed, the taxpayer will have recourse to Appeals.

John Doe Summonses & Statutes Of Limitations (5/27/11)

This week, a district court denied an IRS request for an order authorizing issuance of a John Doe Summons.  Readers will recall that Section 7609(f) permits the IRS to issue John Doe Summonses seeking tax related information and documents about unknown taxpayers. These taxpayers are unknown, so the IRS cannot give notice to the taxpayers who can then contest the summons. So, Congress required that a federal district judge approve the issuance of the summons.

The IRS sought the court order authorizing it to serve a John Doe summons to the California Board of Equalization for certain a certain discrete record set that would help the IRS identify persons making gift transfers to non-spouse related parties which, the IRS imagined, might have compliance issues with the gift tax. I won't get into the details of the focus of the IRS's interest, since the principal focus would be civil compliance initiatives. The judge refused to authorize the summons, finding that the IRS had not shown that the information and documents were not otherwise reasonably available. Further, although dismissing the motion for authorization without prejudice on the basis stated, the Court cautioned that, if the IRS were to repackage the motion, the court had some serious concerns about whether the IRS could otherwise qualify.  The opinion is here.

Tax Obstruction Crimes -- Section 7212 and Klein Conspiracy (5/26/11)

Today, I pick up a thought I threw out in a comment in my blog entry titled "Jury speaks in the Daugerdas Case -- Guilty! (5/24/11)" regarding the overlapping tax obstruction under Section 7212 and the Klein conspiracy crimes and convictions. Here are Judge Pauley's instructions on these crimes in Daugerdas. I present the tax obstruction charge first, although it was presented second in the charge to the jury:

Tax Obstruction Charge (Section 7212)

Counts 20 and 21: Corruptly Endeavoring to Obstruct and Impede the Functions of the IRS

Count 20 of the Indictment charges that, from in or about 1994 to in or about October 2005, defendants Guerin, Field, Brubaker, and Parse corruptly obstructed and impeded, and endeavored to obstruct and impede, the due administration of the Internal Revenue Laws.

Count 21 charges that, from in or about 1994 to in or about October 2005, defendant Daugerdas corruptly obstructed and impeded, and endeavored to obstruct and impede, the due administration of the Internal Revenue Laws.

Jury speaks in the Daugerdas Case -- Guilty! (5/24/11)

I have blogged previously on various aspects of the Daugerdas trial. See here. The jury has just spoken. Guilty. I link below to some of the early articles from the web. The pundits will speak and this is just a preliminary and limited report.  For more information, see the articles linked below.

Update 5/25/11 9:50 AM:
From the USAO SD NY Press Release (setting aside the puffing):

DAUGERDAS, 60, of Wilmette, Illinois; GUERIN, 50, of Elmhurst, Illinois; and FIELD, 53, of Naples, Florida were each convicted of conspiring to defraud the IRS and to evade taxes, and of corruptly endeavoring to obstruct and impede the internal revenue laws. The defendants were also convicted on multiple counts of tax evasion relating to the use of various tax shelters for specified clients, and of mail fraud. DAUGERDAS also was convicted of tax evasion based on his use of fraudulent tax shelters to eliminate or reduce his personal income tax liabilities between 1999 and 2001. PARSE 49, of Elmhurst, Illinois, was found guilty of mail fraud and obstructing internal revenue laws.

On the conspiracy charge, each defendant faces a maximum penalty of 5 years in prison; 3 years' supervised release; a fine of the greatest of $250,000 or twice the gross gain to the defendant or twice the gross loss to the IRS; and restitution. On the mail fraud charge, each defendant faces a maximum penalty of 20 years in prison. Each count of tax evasion carries a maximum penalty of 5 years in prison; 3 years' supervised release; a fine of the greatest of $250,000 or twice the gross gain to the defendant or twice the gross loss to the IRS; and costs of prosecution. Each defendant also faces a maximum penalty of 3 years in prison; 1 year supervised release; and a fine of the greatest of $250,000 or twice the gross gain to the defendant or twice the gross loss to the IRS on the charge of corruptly endeavoring to obstruct and impede internal revenue laws.

Another UBS Client is Sentenced - 1 Yr Home Detention (5/24/11)

Taxpayer: Harry Abrahamsen
Banks : UBS AG
Entities: Yes
Guilt: By Plea Agreement - FBAR violation (one count)
Incarceration (in months): 0
Home Detention: 1 year
Probation: 3 years (apparently including the home detention)
FBAR penalty: $300,000 +
Fine: ?
Court: D NJ
Judge: Denis Cavanaugh
Age at sentencing: 69

Articles:
USAO D NJ Press Release

His daughter, Lucille Abrahamsen Jackson, was sentenced yesterday.  See blog on her sentencing here.

Supreme Court to Decide Whether Tax Crimes Other Than Tax Evasion Are Aggravated Felonies Under Immigration Law (5/24/11)

On May 23, 2011, the Supreme Court granted certiorari in Kawashima v. Holder, 615 F.3d 1043 (9th Cir. 2010) about which I have previously blogged here. The question presented is:

Whether, in direct conflict with the Third Circuit, the Ninth Circuit erred in holding that Petitioners' convictions of filing, and aiding and abetting in filing, a false statement on a corporate tax return in violation of 26 U.S.C. §§ 7206(1) and (2) were aggravated felonies involving fraud and deceit under 8 U.S.C. § 1101(a)(43)(M)(i), and Petitioners were therefore removable.

The following discussion of the issue is from my Federal Tax Crimes book:

Immigration status may be affected by conviction of an “aggravated felony.” Conviction of an aggravated felony will require deportation. An aggravated felony is defined to include an offense that:

(i) involves fraud or deceit in which the loss to the victim or victims exceeds $10,000; or

(ii) is described in § 7201 of the Internal Revenue Code of 1986 (related to tax evasion) in which the revenue loss to the Government exceeds $10,000; . . . n1

Another UBS Client is Sentenced to Probation (5/23/11)

Taxpayer: Lucille Abrahamsen Jackson
Banks : UBS AG
Entities: Yes
Guilt: By Plea Agreement - Tax Perjury (one count)
Incarceration (in months): 0
Probation: 1 year
FBAR penalty: $379,688
Fine: ?
Court: D NJ
Judge: Denis Cavanaugh
Age at sentencing: ?

Articles:
USAO D NJ Press Release

To OVDI or Not to OVDI - That is the Question (Of Quiet Disclosures and Doing Nothing) (5/23/11)

We have had a lot of discussion in the threads of other topics discussing some of the rough edges in the OVDI 2011 initiative (and its predecessor OVDP 2009 initiative).  The alternatives to participating are (i) quiet disclosure for some number of years or (ii) do nothing.  In either event, the U.S. account owner and signatories will have to comply in the future (include the income and answer the FBAR question on the 1040s and file the FBARs).  The question is, with those alternatives, should a taxpayer OVDI or not?  While each specific case is dependent upon the unique facts involved, the question I would like readers to address in comments is the issues the taxpayer and the practitioner should address in making the decision whether to OVDI.  To start that discussion, I quote the following from Charles P. Rettig and Kathryn Keneally, The Last, Best Chance to Disclose Foreign Financial Accounts and Assets—The 2011 Offshore Voluntary Disclosure Program and Beyond!, Journal of Tax Practice and Procedure 33 (Feb.-March 2011):

There are many considerations before a taxpayer should determine whether to participate in the 2011 OVDI. Is the taxpayer a realistic candidate for a criminal prosecution referral by the IRS or prosecution by the Department of Justice? (If so, the determination to participate should be simple and quick). Can that prospect somehow be reduced or eliminated by filing amended or delinquent returns and FBARs in lieu of a direct participation in the OVDI? (and what would be the potentially applicable penalties upon a examination of such returns and FBARs?). Could the government carry the burden of demonstrating that the taxpayer “willfully” violated the FBAR filing requirements? Since the OVDI asserts an offshore penalty based on foreign financial accounts and asset valuations, would the actual offshore penalty determination somehow be less outside the OVDI if limited to financial accounts? Will the government pursue noncompliant taxpayers through the required judicial process following assessment of an FBAR penalty? n9 Might the FBAR related mitigation guidelines set forth in the Internal Revenue Manual (IRM) somehow benefit the taxpayer outside the framework of the 2011 OVDI? Do these mitigation guidelines have any continued viability? How will various of the FAQs under the 2011 OVDI be interpreted in specific taxpayer situations?

OVDI 2011 FAQ 52 5% In Lieu of Penalty Experience (5/20/11)

FAQ 52 of the 2011 OVDI provides a 5% in lieu of penalty under the following conditions:

1. Taxpayers who meet all four of the following conditions: (a) did not open or cause the account to be opened (unless the bank required that a new account be opened, rather than allowing a change in ownership of an existing account, upon the death of the owner of the account); (b) have exercised minimal, infrequent contact with the account, for example, to request the account balance, or update accountholder information such as a change in address, contact person, or email address; (c) have, except for a withdrawal closing the account and transferring the funds to an account in the United States not withdrawn more than $1,000 from the account in any year covered by the voluntary disclosure; and (d) can establish that all applicable U.S. taxes have been paid on funds deposited to the account (only account earnings have escaped U.S. taxation). For funds deposited before January 1, 1991, if no information is available to establish whether such funds were appropriately taxed, it will be presumed that they were.

2. Taxpayers who are foreign residents and who were unaware they were U.S. citizens.

New Policy on Comment Moderation (5/20/11)

Beginning yesterday, I have adopted a new policy on comment moderation.  I have always moderated comments on this blog to prevent inappropriate comments.  I have not moderated for relevancy of the comments to the blog entry involved.  The result is that the comments sometime veered into issues that were not relevant to the blog entry involved.  I have decided to restrict comments to comments that are relevant to the particular blog entry.  There are several reasons for this.  First, it is distracting to readers who usually read a blog entry and its comments because of the topic of the blog entry rather than off topic diversions of other readers. Second, as best I understand how the search feature works in this blog, it picks up only the blog entry itself and not the comments.  Thus, off topic comments will be orphaned unless appended to a relevant blog entry.  Third, and related, by appending comments to blog entries for which the comments are relevant, the comments can be most useful to all readers and are likely to draw more useful responding comment.

A Botched Foreign Account Quiet Disclosure Draws Criminal Charges (5/19/11)

The U.S. Attorney for Masschusetts filed an information against Michael F. Schiavo. The information is here. The gravamen of the misdeed recounted in the information is that Mr. Schaivo attempted a quiet disclosure for his foreign account but that, in that attempted quiet disclosure, he was less than truthful and complete. But, the information seems to say more than that. Readers can analyze the complete information at their leisure. I shall just cut and paste some of the key paragraphs that I think are relevant to professionals and students interested in this subject.

2. At all times material to this Information, HSBC Bank Bermuda Limited ("HSBC Bank Bermuda") (formerly The Bank of Bermuda, Ltd.) was a Bermuda bank headquartered in Hamilton, Bermuda. Beginning in at least in or about 2003 and continuing to at least 2008, Schiavo maintained an account at HSBC Bank Bermuda in which the balance ranged from approximately $65,000 to $150,000.

Be Careful When Using Pattern Jury Instructions -- a Tax Evasion Example (5/17/11)

In my Federal Tax Crimes book, I advise readers that pattern jury instructions for the Circuit in which a case is tried are a good beginning point for (i) understanding the elements of tax and tax related crimes and (ii) fashioning proposed instructions in a criminal tax case. However, I do caution that pattern jury instructions can be wrong or misfocused. Incident to grading examinations in the class on Tax Fraud class that I co-teach at the University of Houston Law School, I have just discovered an instance of that type of problem in the Fifth Circuit pattern jury instructions for tax evasion (which are quoted in my Federal Tax Crimes book and in the LEXIS-NEXIS Tax Crimes book). This particular error was mine (originating in an earlier version of my Federal Tax Crimes book and being uncritically brought forward), so this is my mea culpa or errata for these books; corrections will appear in the next editions. But here I will present the Fifth Circuit Pattern Instruction and also present a correct instruction from the patterned from Judge Pauley's charges to the jury in the ongoing Daugerdas case.

First the Fifth Circuit Pattern Instruction:

Fourth Circuit Speaks Again on Conscious Avoidance / Willful Blindness (5/12/11)

In United States v. Poole, 640 F.3d 114 (4th Cir. 2011), the court addressed the concept of "willful blindness," also called by similar names, such as conscious avoidance, deliberate ignorance, etc. For prior blogs on the concept, see here. I start with basic concept of willfulness.

Conviction of most tax crimes, including the Section 7206(1) aiding and assisting involved in Poole, requires that the Government prove that the defendant acted willfully. Willfulness in this context is the “voluntary, intentional violation of a known legal duty.” United States v. Pomponio, 429 U.S. 10, 13 (1976).  (This statement of willfulness is sometimes referred to as Cheek willfulness because the Supreme Court reiterated the standard in Cheek v. United States, 498 U.S. 192 (1991).  In Bryan v. United States, 524 U.S. 184 (1998), the Court said that this meaning of willfulness requires that the "Government prove that the defendant acted with knowledge that his conduct was unlawful” (quoting Ratzlaf v. United States, 510 U.S. 135, 137 (1994)). (Bryan also held "In certain cases involving willful violations of the tax laws, we have concluded that the jury must find that the defendant was aware of the specific provision of the tax code that he was charged with violating" (citing Cheek), but that formulation was probably overexuberance for the concept of willfulness; I'll just stick here with intentional violation of a known legal duty as the test.)

Court Blurs Analysis of the Fifth Amendment and Document Production (5/12/11)

In United States v. Nugyen (SD TX 5/5/11), the court considered the Government's petition to enforce IRS summonses. The individuals asserted blanket claims of Fifth Amendment privilege to answer questions and produce documents. In its analysis, the court somehow got off track with respect to the document production.

1. Since Hubbell and indeed its predecessor Fisher, there has been no Fifth Amendment privilege for the contents of documents. The documents were not produced under compulsion and hence any "testimony" in them is not subject to the privilege.  The Fifth Amendment privilege for compulsory production of documents arises from testimony inherent in the act of producing documents under compulsion. (This is often called the Act of Production doctrine.)  Testimony inherent in the act of production can include the existence and possession of the documents, the witnesses' mental acts of having to identify and cull documents identified in a generalized and overbroad summons, authenticity, etc.