Mizrahi Tefahot U.S. Banker Indicted for Enabling Offshore Accounts (4/31/14)

Shokrollah Baravarian, of Beverly Hills, California, a former Mizrahi Tefahot Bank Ltd. banker, was indicted for conspiracy in California.  See DOJ press release here.  Here are the key excerpts:

According to the indictment, Baravarian, a former senior vice president at the Los Angeles branch of a bank headquartered in Tel Aviv, Israel, conspired to conceal the existence of undeclared accounts owned and controlled by U.S. customers in Israel.  The indictment alleges that these accounts were concealed from the IRS by opening them under pseudonyms, code names and the names of nominee entities set up in the British Virgin Islands and the island of Nevis. 

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“The defendant assisted others to hide the true ownership of offshore bank accounts through the use of code names and nominee entities,” said Chief of IRS-Criminal Investigation Richard Weber.  “Our special agents unraveled the complex financial transactions used to disguise the funds in the undeclared accounts.  Those who help others commit tax evasion risk prosecution and substantial monetary penalties.” 

 The indictment further alleges that Baravarian assisted U.S. customers in secretly accessing the funds in their undeclared accounts by obtaining back-to-back loans from the Los Angeles branch of the bank.  According to the indictment, a back-to-back loan was a loan that was secured by funds in an undeclared account in Israel and issued by the Los Angeles branch to a U.S. customer.  Baravarian is alleged to have helped conceal the fact that U.S. customers were using their own funds as collateral by purposely not keeping copies of loan-related documents in the files at the Los Angeles branch.  These documents included Israeli account information and pledge agreements used to secure the loans.  As detailed in the indictment, some U.S. customers obtained back-to-back loans from the Los Angeles branch by transferring funds to Israel from other foreign countries, including Switzerland and China. 

 The indictment further alleges that a banker in Israel would periodically travel to Los Angeles and meet with U.S. customers to discuss their account statements.  Prior to making these trips, the banker would redact the names of the U.S. customers reflected on the account statements. 

Another Credit Swiss Related Bank Enabler Pleads Guilty (4/30/14)

DOJ issued this press release, here, titled:  Swiss Offshore Tax Evasion Enabler Pleads Guilty.   The enabler is Josef Dörig.  The plea is to one conspiracy count, with a maximum incarceration period of 5 years.

Dorig was indicted by superseding indictment in July 2011.  See Criminal Charges for More Swiss Bank Enablers (Federal Tax Crimes Blog 7/21/11), here.  One of his co-conspirators, Andreas Bachmann, pled guilty in March 2014.  See Credit Suisse Banker Pleads Guilty to Tax Conspiracy (Federal Tax Crimes Blog 3/12/14; 3/13/14), here.  (The latter blog names others indicted at the same time in addition to Dorig and Bachmann: Markus Walder, Marco Parenti Adami, Susanne D. Ruegg Meier, Roger Schaerer, Emanuel Agustoni, and Michele Bergantino; Schaerer is the Credit Suisse officer mentioned prominently in the NY probe of tax shelters, see NY State Agency Makes New Moves in Investigation of Credit Suisse (Federal Tax Crimes Blog 4/17/14), here.

Here are the key excerpts (emphasis supplied by JAT):

In a statement of facts filed with the plea agreement, Dörig admitted that between 1997 and 2011, while owning and operating a trust company, he engaged in a wide-ranging conspiracy to aid and assist U.S. customers in evading their income taxes by concealing assets and income in secret bank accounts held in the names of sham entities at a financial institution referred to in the superseding indictment as International Bank (IB), one of the biggest banks in Switzerland and one of the largest wealth managers in the world. 

 According to the statement of facts, from 1972 to 1996, Dörig worked for a subsidiary of IB.  The subsidiary formed, managed and maintained nominee tax haven entities.  Individuals concealed their assets by holding their accounts at IB in the names of these tax haven entities.  During this time, the subsidiary managed and maintained over 100 sham entities for U.S. taxpayers committing tax evasion. 

 Also included in the statement of facts, in 1997, executives at the subsidiary devised a plan to spin off all of these sham entities into a new trust company, Dörig Partner AG, to be owned and operated by Dörig, who was then an employee of the subsidiary.  Dörig was required to make his best efforts to keep the existing accounts at IB open and to ensure that any clients referred to him by IB would open new accounts at that institution.  

 According to the statement of facts, IB promoted Dörig Partner as a provider of various entity structures.  The phone list used in IB’s New York representative office identified Dörig Partner as an external trust expert.  Dörig Partner also sublet space from IB in an office tower where a private bank owned by IB was the major tenant.  

 As part of the conspiracy, Dörig traveled to the United States to introduce himself to new clients he had obtained as part of the spin-off.  In the following years, he traveled to the United States with bankers from IB, including his co-defendants Markus Walder, Marco Parenti-Adami and Michele Bergantino, to meet with existing and prospective clients who already had undeclared accounts at IB but had been identified by the IB’s bankers as potential candidates for the use of a structure. 

Goldman Sachs and Morgan Stanley Swiss Units Join DOJ Program as Category 2 (4/30/14)

It is reported that the Swiss units of Goldman Sachs and Morgan Stanley have joined the deal as Category 2 banks.  Michael J. Moore, Goldman Sachs, Morgan Stanley Swiss Units Seek Tax Deals (Bloomberg 4/29/14), here; and Matthew R. Madara, Goldman Sachs, Morgan Stanley to Divulge Info to DOJ,  2014 TNT 83-5 (4/20/14) (citing a Wall Street Journal article as reporting that they joined as Category 2 banks).

My rhetorical question is whether, being units of U.S. banks, some extra level of punishment beyond the Category 2 penalty should be imposed for this class of misbehavior.  And, it has been speculated that joining as category 2 was protective only, and they may move later to a lower level.  See the Madara article.

I will update the spreadsheet today.  In the meantime, here are the banks that I now show as having joined as category 2 banks.  I show only 52 out of the 106 banks that are said to have joined as Category 2.

Swiss Bank	Category
Aargauische Kantonalbank	2
Bank Coop AG	2
Banque Cantonale de Fribourg	2
Banque Cantonale de Genève	2
Banque Cantonale du Jura	2
Banque cantonale du Valais	2
Banque Cantonale Neuchâteloise	2
Banque Cantonale Vaudois	2
Banque Privee Edmond de Rothschild	2
Barclays Bank plc Geneva Branch	2
Barclays Bank (Suisse) SA	2
Berner Kantonalbank	2
BSI Group	2
Cornèr Banca SA	2
Edmond de Rothschild Group	2
EFG International AG	2
Goldman Sachs (Swiss Unit)	2
Graubündner Kantonalbank	2
Hyposwiss Privatbank Zurich AG	2
Hyposwiss Private Bank Geneve SA	2
Linth Bank	2
Lombard Odier & Cie.	2
Luzerner Kantonalbank	2
Migros Bank AG	2
Morgan Stanley (Swiss Unit)	2
Nidwaldner Kantonalbank	2
Piquet Galland & Cie SA	2
Post Finance	2
Rothschild Bank AG, Zurich	2
Saanen Bank	2
St. Galler Kantonalbank	2
Schaffhauser Kantonalbank	2
Ticino Cantonal Bank	2
Union Bancaire Privee	2
Valiant Holding AG	2
VP Bank (Switzerland)	2
Walliser Kantonalbank	2
Zuger Kantonalbank	2

BNP Paribas and Credit Suisse Reported as Targets for Criminal Prosecution (4/29/14)

It is reported that prosecutors are pushing to indict two banks -- BNP Paribas and Credit Suisse.  Ben Protess and Jessica Silver-Greenberg, U.S. Close to Bringing Criminal Charges Against Big Banks (NYT DealBook 4/29/14), here.  The focus of the investigation is not the current offshore bank brouhaha, where banks (including Credit Suisse) assisted U.S. persons hiding money for tax purposes.  Rather, they relate in BNP Paribas' case to dealing with blacklisted countries and in Credit Suisse's case for its tax shelter activities.

I won't excerpt or summarize the article.  I encourage those interest to read it.  Some fascinating detail.

U.S. Congressman Indicted for Tax Related Crimes (4/29/14)

The federal indictment of U.S. Representative Michael Grimm -- formerly a Marine and an FBI agent -- has been in the news.  See the press release from USAO EDNY, here, and the indictment here.  According to the press release, the charges are:

A 20-count indictment was unsealed this morning in federal court in Brooklyn charging Michael Grimm with five counts of mail fraud, five counts of wire fraud, three counts of aiding and assisting in the preparation of false federal tax returns, one count of conspiring to defraud the United States, one count of impeding the Internal Revenue Service, one count of health care fraud, one count of engaging in a pattern or practice of hiring and continuing to employ unauthorized aliens, two counts of perjury and one count of obstructing an official proceeding.

As explained in the press release, the charges center around Grimm's alleged conduct that had a purpose of evading federal and state taxes related to employees, but also touched other crimes. Tax crimes enthusiasts will know that run of the mill tax crimes also potentially involve mail fraud and wire fraud, but DOJ Tax typically does not charge mail fraud and wire fraud except in the most egregious of cases.  See Tax Division Directive 128, here.  This appears to be an egregious case, at least as alleged in the indictment and in the press release.

The proliferation of charges from a unified pattern of conduct should remind readers that (1) the prosecutors have a grab bag of charges in the IRC and Title 18 and other Titles that can be marshaled in an indictment and (2) a sentencing truism that proliferating charges from a pattern of conduct is not likely to affect the sentence beyond what could have been achieved with a fewer number of charges.  In the latter regard, the press release further states:

If convicted, Grimm faces a term of imprisonment of up to 20 years for each mail and wire fraud charge and for the obstruction charge, up to 10 years of imprisonment for the health care fraud charge, and up to five years of imprisonment for the charge of conspiring to defraud the United States and for each perjury charge. Grimm further faces a term of imprisonment of up to three years for each charge of aiding and assisting in the preparation of a false and fraudulent tax return and for the charge of obstructing and impeding the due administration of the Internal Revenue Laws. Finally, Grimm faces up to six months of imprisonment for engaging in a pattern or practice of hiring and continuing to employ unauthorized aliens, as well as forfeiture, restitution, and fines.

It is hard to imagine that, even if convicted of all counts, the sentence will exceed 10 years -- certainly won't exceed 15 years.

Obviously, cherishing the opportunity for a press sound bit, it is reported that the US Attorney said that Grimm "never met a tax that he did not lie to evade."

Guest Blog: Virtual Tax Evasion: Virtual Currency and the Offshore Account Enforcement Campaign (4/25/14)

This is a guest blog by Peter Hardy and Mehreen Zaman.  See the end of the blog for information on the authors:

The U.S. government has enjoyed remarkable success in undermining offshore bank secrecy practices that previously had existed for centuries, as reflected by a string of criminal prosecutions of both institutions and individuals, as well as the many thousands of voluntary disclosures of traditional offshore bank accounts by U.S. taxpayers in recent years.  However, would-be tax evaders, at least for the moment, may turn to a new but risky way to attempt to circumvent the government’s in-roads into offshore accounts:  virtual currency.

Virtual currency – the most prominent example of which is bitcoin – represents a digital unit of exchange that is not backed by a government.  How virtual currency actually works may be initially difficult to understand, but it ultimately depends on the same fundamental principle underlying any other system of money:  it has real-world worth so long as enough people believe that it will continue to have worth tomorrow, and beyond.  Although virtual currency has encountered serious setbacks within the last year, including stories of investor losses and criminal prosecutions, the fact remains that its use and acceptance is growing in certain parts of the world, and it continues to garner the attention of some wealthy and creative investors. If virtual currency does not collapse under the combined weight of investor risk and regulatory pressure, it is entirely conceivable that some version of virtual currency will take root and become a major medium of exchange across the world.

Currently, virtual currency has some of the same characteristics that once attracted would-be tax evaders to traditional offshore accounts:  relative anonymity and difficult in tracing.  Although it is not impossible to trace a virtual transaction, it is not easy, and it can be particularly hard to trace all of the virtual transactions conducted by a given individual.  The government certainly has recognized its potential for tax evasion, and the IRS issued guidance in March 2014 declaring that virtual currency is taxable as property.

One question that remains is whether the government also will regard the FBAR filing requirements for foreign accounts as applying to holdings of virtual currency.  The possible answers are less than clear, and likely depend upon the particular technology employed by an individual user of virtual currency.  We explore in detail this issue – the collision between an evolving technology and regulations written with something much more concrete in mind – in an article in the Bloomberg BNA White Collar Crime Report, 09 WCR 267 (4/18/14), available here:  http://www.postschell.com/news-events/843-white-collar-principal-peter-hardy-associate-mehreen-zamen-examine-use-virtual.

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Guest bloggers Peter Hardy and Mehreen Zaman are with the Internal Investigations & White Collar Practice at Post & Schell P.C. in Philadelphia.  Their firm bios are here and here, respectively.  Peter previously served as an assistant U.S. attorney in Philadelphia and as a trial attorney in the Criminal Enforcement Section of the Justice Department’s Tax Division in Washington, D.C.  He is the author of Criminal Tax, Money Laundering, and Bank Secrecy Act Litigation, a legal treatise published by Bloomberg BNA (see http://www.bna.com/criminal-tax-money-p17179870254/).

Supreme Court Passes On Exessive Fines Issue with Regard to Restitution in a NonTax Case (4/24/14)

In Paroline v. United States, 2014 U.S. LEXIS 2936 (U.S. Apr. 23, 2014), here, the Court held (from Scotus Blog here):

Each individual — among hundreds and maybe thousands — found guilty of keeping and looking at images of a child being sexually abused must pay the victim something more than a “trivial” sum, but none of them can be required to pay for all that the victim has lost, the Supreme Court ruled Wednesday in a five-to-four decision.

Essentially, the Court read the statute to require proof of proximate cause -- a legal nexus concept applicable in other areas of the law -- to link the offense committed to the harm for which damages are awarded as restitution.  So a single offender, Paroline, may have caused the victim damage but not all of the damage caused by other independent possessors and viewers.

Paroline has no practical immediate applicability to the subject of federal tax crimes.  But, the Court did have some general statements about restitution and the possible application of the Excessive Fines Clause.

The reality is that the victim’s suggested approach would amount to holding each possessor of her images liable for the conduct of thousands of other independently acting possessors and distributors, with no legal or practical avenue for seeking contribution. That approach is so severe it might raise questions under the Excessive Fines Clause of the Eighth Amendment. To be sure, this Court has said that “the Excessive Fines Clause was intended to limit only those fines directly imposed by, and payable to, the government.” Browning-Ferris Industries of Vt., Inc. v. Kelco Disposal, Inc., 492 U. S. 257, 268 (1989). But while restitution under §2259 is paid to a victim, it is imposed by the Government “at the culmination of a criminal proceeding and requires conviction of an underlying” crime, United States v. Bajakajian, 524 U. S. 321, 328 (1998). Thus, despite the differences between restitution and a traditional fine, restitution still implicates “the prosecutorial powers of government,” Browning-Ferris, supra, at 275. The primary goal of restitution is remedial or compensatory, cf. Bajakajian, supra, at 329, but it also serves punitive purposes, see Pasquantino v. United States, 544 U. S. 349, 365 (2005) (“The purpose of awarding restitution” under 18 U. S. C. §3663A “is . . . to mete out appropriate criminal punishment”); Kelly, 479 U. S., at 49, n. 10.  That may be “sufficient to bring [it] within the purview of the Excessive Fines Clause,” Bajakajian, supra, at 329, n. 4. And there is a real question whether holding a single possessor liable for millions of dollars in losses collectively caused by thousands of independent actors might be excessive and disproportionate in these circumstances. These concerns offer further reason not to interpret the statute the way the victim suggests.

Crossing the Line in Tax Planning (4/22/14)

I report today on a civil case that shows how a civil dispute can involve a situation that perhaps should have been a criminal case.  In Moreland v. Koskinen, 2014 U.S. Dist. LEXIS 53308 (ND AL 2014), here, the taxpayers, husband and wife, complained that the IRS had denied their first time homebuyer credit.  (The precise procedural posture of the case is unclear, but I assume it was a refund suit; the taxpayers appeared pro se.)  Essentially, the taxpayers created a paperwork façade to give the appearance of qualifying for the credit, but the facts outside the paperwork showed that they did not qualify.

The law requires that property acquired from a related person does not qualify.  The Morelands and Mollie Holland, another otherwise unrelated taxpayer  (unrelated in the sense of the statutory disqualification), wanted to qualify otherwise unqualified properties.  In order to give the appearance that the properties qualified, they created a paperwork façade to make it appear that the Morelands temporarily owned property disqualified as to Ms. Holland so that she could "purchase" the property from the Morelands and vice-versa.

The key part of the decision is (bold-facing by JAT):

In the present case, the paperwork related to all of the real estate conveyances at issue appears to indicate, on its face, that Kevin Moreland purchased the Killen property from Noble and Donna Holland, who are not related to him in any way. If the technical form of that transaction were the only relevant consideration, Kevin and Melissa Moreland might be entitled to the receive the FTHBC. However, when viewed as a whole and in the light of all of the credible evidence, it is clear that the substance of the transaction was very different from its form. In substance, Noble and Donna Holland engaged in a property swap with Janie Moreland for the purpose of making it appear that their respective children qualified for the First Time Home Buyer Credit. There was no actual transfer of the subject properties. Noble and Donna Holland never took possession of the Killen property, and Kevin and Melissa Moreland never vacated it. Kevin and Melissa Moreland paid Noble and Donna Holland only a very small percentage of the money they purportedly owe for the property, and the Hollands never tried to collect from the Morelands. Similarly, Janie Moreland never took possession of the Leighton property, and Mollie Holland did not even move into that property after it had purportedly been transferred to her. Mollie Holland never paid Janie Moreland anything for the Leighton property, and Janie Moreland has never tried to collect anything from Mollie Holland. 

Stated in terms that are most favorable to the parties involved, the only substantive transactions that took place were the transfer of the Killen property from mother (Janie Moreland) to son (Kevin Moreland), and the transfer of the Leighton property from parents (Noble and Donna Holland) to daughter (Mollie Holland). Stated less charitably, each family, in exchange for the sum of $8,000, concocted a scheme to defraud the United States government via the Internal Revenue Service. Under either construction, plaintiffs are not entitled to the First Time Home Buyer Credit.

The case involved only one set of the taxpayers involved, the Morelands.  The other set also claimed the credit.  The Court described their situation as follows:

Mollie Holland claimed a First-Time Home Buyer Credit ("FTHBC") on her Form 1040EZ Income Tax Return for 2010.29 The IRS granted her the credit, but she decided in early 2014 to return all the money she received because, after further consultation with the IRS, she determined she was not entitled to the credit and that "it wasn't right" for her to retain the money.

Attorney-client Privilege Waiver By Putting State of Mind In Issue -- Reasonableness and Good Faith (4/21/14; 4/26/14)

In AD Investment 2000 Fund LLC v. Commissioner, 142 T.C. No. 13 (2014), here, the Tax Court (Judge Halpern) held that, by putting the taxpayer's intent and good faith in issue to contest the substantial understatement penalty, the taxpayer had waived the attorney-client privilege with respect to the opinion received for this tax shelter ploy.  The opinion is short and direct and definitive for the case.  The tax shelter involved was the Son-of-BOSS shelter, which readers already know is bullshit.  

I need to state the context.  I do this in order to address also the attorney-client privilege as it arose in TIFD III, which I discussed several days ago in a different penalty context.  See GE Ducks Any Penalty for Its Bullshit Tax Shelter -- For Now (Federal Tax Crimes 4/17/14). here.

AD Investment involved the substantial understatement penalty in Section 6662(d)(1), here.  The threshold requirement for that iteration of the accuracy related penalty is that the tax involved with the position exceed a "substantial" amount, defined rather insubstantially as the greater of (i) 10% of the tax required to be shown the return or (ii) $5,000 for individuals and $10,000 for corporations.  AD Investment involved a partnership proceeding, and the existence of the threshold must await partner level proceedings where the tax is actually determined.

Assuming the threshold exists, the penalty applies to the understatement except for the portion of the understatement for which the taxpayer has either (i) substantial authority or (ii) reasonable basis and made a return disclosure of the position.  As the statute now reads, the except clause excluding a portion of the understatement does not apply to tax shelters.  For the year involved, the blanket exclusion of tax shelter items did not apply; in pertinent part, the reduction of the base subject to the penalty applied if the position had substantial authority (an objective test) and the taxpayer reasonably believed that the tax shelter position was more than likely correct (a combined subjective test requiring that the taxpayer believed it and objective test requiring that the taxpayer have reasonably believed it).  The taxpayer in AD Investment averred the presence of these two tests to avoid the penalty.

In addition, the accuracy related penalty, including the substantial understatement penalty, may be avoided if the taxpayer acted with reasonable cause and good faith.  Section 6664(c), here. This is a defense to the application of the accuracy related penalty, although as I shall note below, in some cases, its factors blend into the elements that cause the accuracy related penalty to apply in the first place.  Stobie Creek Investments, LLC v. United States, 82 Fed. Cl. 636, 708 (Fed. Cl. 2008), aff'd, 608 F.3d 1366 (Fed. Cir. 2010).

According to Judge Halpern, the key point in issue was whether the partnership reasonably believed that its position was more likely than not correct.  Under the Regulations, there are two ways to satisfy this requirement.  First, the taxpayer alone makes the determination in good faith.  Second, "The taxpayer reasonably relies in good faith on the opinion of a professional tax advisor."

Under traditional interpretation of attorney-client privilege waiver, there would be a waiver if the taxpayer sought to avoid the penalty under the second ground -- reliance on the opinion of a professional tax adviser.  The partnership -- serving the role of the taxpayer for this purpose -- studiously avoided reliance on the second ground.  Hence, the partnership urged, it had not waived the privilege: "A generalized 'good faith' defense, not specifically relying on the advice of counsel is not a waiver of the attorney-client privilege."  Judge Halpern rejected the argument.

Here is the analysis in full for waiver on the issue of whether the penalty applies, an issue which will turn whether the partnership had a reasonable belief that the position was correct.

GE Ducks Any Penalty for Its Bullshit Tax Shelter -- For Now (4/17/14)

I have previously written on GE's bullshit tax shelter twice blessed by the district court and twice swatted down by the Court of Appeals..  See Second Circuit Strikes Down Another BS Tax Shelter (Federal Tax Crimes Blog 1/24/12); here, and Thoughts on the the Corporate Audit Lottery (Federal Tax Crimes 2/11/12), here.  The irrepressible district court, smarting over two failed attempts to approve a GE raid on the fisc, makes another go at it in TIFD-III-E Inc. v. United States, 2014 U.S. Dist. LEXIS 41472 (D. Conn. 2014), here.  (The judgment entered shortly thereafter is here.)

The Second Circuit had already approved the application of the 20% substantial understatement penalty, but, as it turns out, when pushed to the taxpayer, the tax involved, though large, would not meet the threshold requirement that the understatement be "substantial" -- defined as exceeding "(i) 10 percent of the tax required to be shown on the return for the taxable year."  Section 6662(d)(1)(A)(i), here.

Readers will recall that the 20% accuracy related penalty has another basis -- if the position is due to negligence, which has no threshold limitation.  Section 6662(c), here.  So, the Government made another run to extract from GE some penalty for having played the audit lottery and lost for its bullshit tax shelter.  Again, this time, the district court tilted for GE, thus insulating GE from any cost or penalty for playing the audit lottery.  Why?

The Court opens its opinion as follows:

Defendant, the United States, moves for an order imposing a negligence penalty on plaintiff TIFD III-E Inc. ("TIFD") for tax years 1997 and 1998. During the 1990s, TIFD's parent company, General Electric Capital Corporation ("GECC"), joined with a pair of Dutch banks ("the Dutch Banks" or "the Banks") to form an aircraft leasing company. TIFD considered the Dutch Banks to be its partners in the venture, and did not report any income allocated to the Banks on its own tax returns. During the course of this litigation, I twice found that decision to be more than reasonable; indeed, I found that the company correctly deemed the Banks to be equity stakeholders rather than lenders. TIFD III-E v. United States, 342 F. Supp. 2d 94 (D. Conn. 2004)  [*4] ("Castle Harbour I"); TIFD III-E v. United States, 660 F. Supp. 2d 367 (D. Conn. 2009) ("Castle Harbour III"). The Second Circuit twice disagreed. TIFD III-E v. United States, 459 F.3d 220 (2d Cir. 2006) ("Castle Harbour II"); TIFD III-E v. United States, 666 F.3d 836 (2d Cir. 2012) ("Castle Harbour IV"). So, after more than a decade of litigation, TIFD ultimately lost this case. In addition, the Second Circuit held that the IRS could impose a 20% accuracy penalty against TIFD for substantial understatement of its income taxes in 1997 and 1998.

Despite having "twice found that [GE's] decision to be more than reasonable," the judge candidly acknowledges that the Second Circuit disagreed.  The court then proceeds to find GE reasonable again.

I won't review the facts, for the court itself that "I assume the parties' familiarity with the facts underlying this case."  I will note that, as is common in these bullshit corporate tax shelters, a foreign bank was the linchpin to make it have the superficial appearance of working.  (Foreign banks also played an essential role in the bullshit individual Son-of-Boss tax shelters; in this regard, see my postings Credit Suisse DOJ Investigation Status and New NY Investigation (Federal Tax Crimes Blog 4/7/14), here; and NY State Agency Makes New Moves in Investigation of Credit Suisse (Federal Tax Crimes Blog 4/17/14), here.)

Excellent Article on Federal Judges' Views of Allocutions (4/17/14)

I refer students and practitioners to an excellent empirical study of federal judges' views on allocution under FRCrP Rule 32(i)(4)(A), here.  Mark W. Bennett and Ira P. Robbins, Last Words: A Survey and Analysis of Federal Judge's Views on Allocution in Sentencing, 65 Ala. L. Rev. 735 (2013), here.  I first cut and paste the introduction (footnotes omitted) and then offer some of the findings and conclusions.  I omit footnotes and references to footnotes.

I am not a victim. It was stupid. I was wrong.
--Kwame Brown, Former D.C. Councilman 1 

Others can take my life. They can take and make me out as a monster. They can treat me as a monster. But they can't take away my heart, and in my heart I know I did not do those alleged disgusting, hideous acts. 

--Jerry Sandusky, Former Pennsylvania State University Assistant Football Coach 2 

Your Honor, I cannot offer you an excuse for my behavior. How do you excuse betraying thousands of investors who entrusted me with their life savings? How do you excuse deceiving 200 employees who have spent most of their working life working for me? How do you excuse lying to your brother and two sons who spent their whole adult life helping to build a successful and respectful business? How do you excuse lying and deceiving a wife who stood by you for 50 years, and still stands by you? And how do you excuse deceiving an industry that you spent a better part of your life trying to improve?
 . . .
Apologizing and saying I am sorry, that's not enough. Nothing I can say will correct the things that I have done. . . . There is nothing I can do that will make anyone feel better for the pain and suffering I caused them, but I will live with this pain, with this torment for the rest of my life.
I apologize to my victims. I will turn and face you. I am sorry. I know that doesn't help you.
Your Honor, thank you for listening to me. 

--Bernard Madoff, Former NASDAQ Chairman 3 

INTRODUCTION 

Sentencing: "[T]hat gut-wrenching courtroom moment when a real life intersects with esoteric legal arguments and sentencing guidelines that never truly capture a case's nuances." Some individualization does, however, enter the sentencing process through allocution--the defendant's opportunity to stand up and address the court. Despite this opportunity--or perhaps because of it--many judges consider tailoring the sentence to the specifics of a case the "most difficult and draining aspect of their work." The three excerpts above illustrate how drastically different allocutions can be. While Brown and Madoff readily admitted guilt, Sandusky vehemently denied all wrongdoing and instead portrayed himself as the victim. Sandusky was sentenced to thirty-to-sixty-years imprisonment for sexual abuse, and Brown was sentenced to one day in custody plus community service for bank fraud. Soon after hearing Madoff's allocution, then-Federal District Judge Denny Chin condemned Madoff's actions as "extraordinarily evil" and imposed a 150-year sentence--three times longer than the federal probation office had recommended and more than ten times longer than Madoff's lawyers had requested. 9 Given these radically different approaches and the various sentences imposed, did the allocutions serve any valuable purpose? Did Madoff's apologetic allocution make any difference? 

In theory, allocution provides an opportunity for defendants to accept responsibility, to humanize themselves and their transgressions, and to mitigate their sentences, thus ensuring that the sentences are "tailored to fit both the crime and the person who committed it." From the earliest days of allocution to the present time, defendants' procedural rights have expanded in criminal trials, including the right to testify on one's behalf, the right to counsel, the mandatory preparation of presentence reports, and the right to object to their contents. Has this evolution of rights greatly altered the rationale behind the need for allocution? Whatever the answer to this question may be, ultimately judicial discretion is the greatest factor affecting how much weight will be accorded to a defendant's allocution. But this truism raises many critical questions, including the following: When might allocution help the defendant? When might it hurt? Do defense attorneys take allocution seriously? Do they prepare their clients adequately for allocution? How much do federal judges weigh allocution in deciding the final sentence? What features of allocution carry the most weight? 

While commentators have addressed some of these questions in a scholarly or anecdotal manner, this Article answers these questions more directly through a first-ever survey of all federal district judges regarding allocution. This Article discusses the importance of allocution and the relevance, attention, and weight federal judges place on this often-overlooked stage of the criminal-justice process. Part I explores the history of the right to allocute from its foundations in seventeenth-century common law to its modern-day application. Part II outlines our expectations prior to conducting the survey, some aspects of the participating judges' backgrounds and statuses, and the format of the survey. Part III summarizes the results of the survey. Part IV expounds on the survey's findings and includes recommendations for effective allocution and for future surveys on this subject. Finally, this Article concludes with a brief summary of the federal district judges' allocution advice.

New Report on Shifting Taxable Income Out of the U.S. (4/16/14)

U.S. PIRG reports that it is "is a consumer group that stands up to powerful interests whenever they threaten our health and safety, our financial security, or our right to fully participate in our democratic society."  See web site about page here.  It has issued the following report: U.S. PIRG, Picking Up the Tab 2014: Average Citizens and Small Businesses Pay the Price for Offshore Tax Shelters (4/15/14), pdf download here and the download page with link is here.  The press release is here.

The principle focus of the report is for the shifting of otherwise taxable U.S. income overseas, particularly by large corporations.  While that is a phenomenon in the secret offshore bank area, the report is principally concerned with transfer pricing and other opportunities to shift, of the type recently investigated by the Senate Permanent Subcommittee on Investigations, which I previously report on.  See U.S. Senate Committee Investigation of Crackdown on Offshore Tax Evasion (Federal Tax Crimes Blog 2/20/14), here.

From the press release:

• General Electric paid a federal effective tax rate of negative 11.1 percent between 2008 and 2012 despite being profitable all of those years. The company received net tax payments from the government. GE maintains18 subsidiaries in tax haven in 2013 and parked $110 billion offshore. One of the company’s most lucrative loopholes just got renewed by the Senate Finance Committee. GE alone hired 48 lobbyists to push to renew the “active financing exception.”
• Microsoft avoided $4.5 billion in federal income taxes over a three year period by using sophisticated accounting tricks to artificially shift its income to tax-friendly Puerto Rico. Microsoft maintains five tax haven subsidiaries and keeps $76.4 billion, on which it would otherwise owe $24.4 billion in additional U.S. taxes.
• Pfizer paid no U.S. income taxes between 2010 and 2012 because the company reported losses in the U.S. during those years, despite making 40 percent of its sales in the U.S. and earning $43 billion worldwide. The company operates 128 subsidiaries in tax havens and has $69 billion parked offshore which remains untaxed by the U.S., according to its own SEC filing.

NY State Agency Makes New Moves in Investigation of Credit Suisse (4/17/14)

The drumbeat against Credit Suisse continues with the New York State Department of Financial Services investigation into tax shelters in which Credit Suisse or its affiliates participated.  See Karen Rebelo and Katharina Bart, NY regulator subpoenas Credit Suisse in U.S. tax probe - source (Reuters 4/15/14), here, and Greg Farrell and David Voreacos, Lawsky Said to Subpoena Credit Suisse in Tax-Evasion Case (Bloomberg 4/15/04), here.

It is said that the subpoenas specifically seek "employment records of Roger Schaerer who was previously indicted as an enabler in the DOJ's offshore bank account drama.  See Criminal Charges for More Swiss Bank Enablers (Federal Tax Crimes7/21/11), here.

Update on Zwerner Case - Subsequent Filings (4/16/14)

I previously posted a blog on the US Motion for Summary Judgment in Zwerner.  See U.S. Motion for Summary Judgment in Zwerner (Federal Tax Crimes Blog 3/5/14), here.  I post now the subsequent documents, including Zwerner's response on the motion and the US reply to Zwerner's response.  I also post (i) Pretrial Stipulation with related proposed jury instructions and jury verdict forms and (ii) Motions in Limine that are pending.  I have bookmarked these documents in Adobe format.  I think readers will have to download the file to take advantage of the bookmarks.

• 20140307 Zwerner - D Response on US MSJ (TJ001).pdf, here.
• 20140317 Zwerner - US Reply on US MSJ (TJ001).pdf, here.
• 20140407 Zwerner - Pretrial Stipulation (TJ001).pdf, here.
• 20140407 Zwerner - Proposed Jury Instructions (TJ001).pdf, here.
• 20140407 Zwerner - US Proposed Jury Verdict Form (TJ001).pdf, here.
• 20140407 Zwerner - D Proposed Jury Verdict Form (TJ001).pdf, here.
• 20140407 Zwerner - US Motion in Limine (TJ001).pdf, here.
• 20140407 Zwerner - D Motion in Limine (TJ001).pdf, here.

I may post more on these documents when and if I have time.

U.S. Seeks to Forfeit Proceeds of Secret Swiss Account; the Enabler Turns on the Client (4/15/14)

David Voreacos, U.S. Seeks to Seize $12 Million in Swiss-Linked Tax Case (Bloomberg 4/8/14), here.  Excerpts:

U.S. prosecutors moved to seize $12.2 million they say was transferred to New York from a secret Swiss account set up by a lawyer who helped Americans hide assets from the Internal Revenue Service. 

In a forfeiture action filed today in Manhattan federal court, the government demanded the money of “Client 1” and the client’s father, who prosecutors said used a “mail and wire scheme to defraud the IRS of taxes due.” The accounts were held at “Bank A” in Zurich and “Bank B” in Switzerland, according to the civil complaint, which doesn’t name the institutions or client.
The government said the accounts were set up by Swiss attorney Edgar Paltzer, who pleaded guilty in New York on Aug. 16, admitting he committed tax fraud for more than a decade. Paltzer is cooperating with prosecutors amid a U.S. crackdown on offshore tax evasion that has targeted Swiss banks, bankers, lawyers and financial advisers. 

* * * * 

Paltzer created sham entities in the British Virgin Islands, Liechtenstein and Panama to hide the true owners of the accounts and visited the client and father in Staten Island, New York, in 2006, according to the complaint. The client and Paltzer also had dinner in Manhattan.

For a posting on Paltzer's plea, see Swiss Lawyer Pleads Guilty to U.S. Tax Crimes (Federal Tax Crimes 8/16/13), here.

Of course, one of the messages here is that those who think their enablers -- whether banks or individuals -- are honorable enough to protect them may be disappointed.

As Shakespeare said in King Henry the Fourth, part 1, Act 2, Scene 2, here, putting the following words into the mouth of Falstaff:  "a plague upon it when thieves cannot be true one to another!"

Addendum 4/15/14 5:00pm:

Article: Who is a U.S. Person for U.S. Tax and Immigration (4/15/14)

Henry P. Bubel, Jenny Longman, Lisa M. Koenig, Nikki Dryden,and Michelle Munoz-Machen, Who is a U.S.Person? Disparities between U.S. tax and immigration law, Tax Planning International Review (March 2014), here.  Highly recommended.

The introduction is (footnotes omitted):

I. The increased importance of defining a U.S. Person, for tax law purposes 

The question of who is a U.S. person has always been relevant for tax purposes because it  determines who is subject to (a) U.S. income, gift and estate tax, (b) filing Foreign Bank Account Reports (FBARs), and (c) the ‘‘exit tax’’ under what is now Section 877A of the Internal Revenue Code (the ‘‘Code’’ or ‘‘I.R.C.’’). The inquiry has become increasingly relevant, however, in the context of the Foreign Account Tax Compliance Act (‘‘FATCA’’), as foreign banks and other financial institutions must make determinations as to the identity of the beneficial owners of accounts. 

Under FATCA, foreign banks, brokerage firms, investment firms, and other ‘‘foreign financial institutions’’ must agree to report certain information on their U.S. account holders or else face withholding on certain payments made from U.S. sources beginning in July 2014. In many cases, the institutions’ own governments (through intergovernmental agreements signed with the United States that implement FATCA) may require the determination in order to report on U.S. accounts. 

In addition, the Department of Justice (‘‘DOJ’’) recently announced a new program under which Swiss banks that are not currently the subject of a DOJ investigation may request a ‘‘Non-Prosecution Agreement’’ or ‘‘Non-Target Letter.’’ In connection with this new program, the Swiss Financial Market Supervisory Authority intends to encourage all Swiss banks to send a letter to all U.S. individual and entity holders of accounts, further begging the question of who is a U.S. person for these purposes.  

As an individual’s immigration status may – but may not always – drive the determination of whether he or she is a U.S. person for tax purposes, this article summarises the various classifications comprising a ‘‘U.S. person’’ under U.S. immigration and tax law. It also provides several examples to illustrate some of the challenges posed by the disparate treatment of citizenship and residency under these different codes of law.

IRS News Release Reminding / Warning U.S. Taxpayers with Foreign Assets (4/11/14)

The IRS has used its bully news pulpit to remind U.S. persons subject to return reporting of their obligations arising from foreign assets.  IR-2014-52, April 11, 2014, here.

In part most relevant to the discussions on this blog, the release says:

Federal law requires U.S. citizens and resident aliens to report any worldwide income, including income from foreign trusts and foreign bank and securities accounts. In most cases, affected taxpayers need to fill out and attach Schedule B to their tax return. Certain taxpayers may also have to fill out and attach to their return Form 8938, Statement of Foreign Financial Assets. 

Part III of Schedule B asks about the existence of foreign accounts, such as bank and securities accounts, and usually requires U.S. citizens to report the country in which each account is located. 

Generally, U.S. citizens, resident aliens and certain nonresident aliens must report specified foreign financial assets on Form 8938 if the aggregate value of those assets exceeds certain thresholds. See the instructions for this form for details. 

Separately, taxpayers with foreign accounts whose aggregate value exceeded $10,000 at any time during 2013 must file electronically with the Treasury Department a Financial Crimes Enforcement Network (FinCEN) Form 114, Report of Foreign Bank and Financial Accounts (FBAR). This form replaces TD F 90-22.1, the FBAR form used in the past. It is due to the Treasury Department by June 30, 2014, must be filed electronically and is only available online through the BSA E-Filing System website. For details regarding the FBAR requirements, see Report of Foreign Bank and Financial Accounts (FBAR).

Grinberg Article on Battle Over Taxing Offshore Accounts (4/11/14)

I am attending a tax conference in Charlottesville Virginia today.  The weather is lovely, but we are inside talking tax.  (A pitch for readers' sympathy.) 

One of the handouts is the following article by Professor Itai Grinberg, Associate Professor at Georgetown Law School, for which I cut and paste the abstract.  The complete article is here.

The Battle Over Taxing Offshore Accounts
Itai Grinberg [Profile here]

Abstract

The international tax system is in the midst of a contest between automatic information
reporting and anonymous withholding models for ensuring that nations have the ability to tax offshore accounts. At stake is the extent of many countries’ capacity to tax investment income of individuals and profits of closely held businesses through an income tax in an increasingly financially integrated world.  

Incongruent initiatives of the European Union, the Organisation for Economic Cooperation and Development (OECD), Switzerland, and the United States together represent an emerging international regime in which financial institutions act to facilitate countries’ ability to tax their residents’ offshore accounts. The growing consensus that financial institutions should act as cross-border tax intermediaries represents a remarkable shift in international norms that has yet to be recognized in the academic literature. 

The debate, however, is about how financial institutions should serve as cross-border tax intermediaries, and for which countries. Different outcomes in this contest portend starkly different futures for the extent of cross-border tax administrative assistance available to most countries. The triumph of an automatic information reporting model over an anonymous withholding model is key to (1) allowing for the taxation of principal, (2) ensuring that most countries are included in the benefit of financial institutions serving as cross-border tax intermediaries, (3) encouraging taxpayer engagement with the polity, and (4) supporting sovereign policy flexibility, especially in emerging and developing economies. This Article closes with proposals to help reconcile the emerging automatic information exchange approaches to produce an effective multilateral system.