Swiss Category 1 Bank Enters NPA (8/6/19)

On August 5, 2019, DOJ Tax announced here another nonprosecution agreement (NPA) with a Category 1 Swiss Bank, LLB Verwaltung (Switzerland) AG, formerly known as “Liechtensteinische Landesbank (Schweiz) AG” (LLB-Switzerland).  The announcement has links to the NPA, here, and the Statement of Facts, here.

Key features of this NPA are:

1.  LLB Verwaltung must pay the Tax Division a penalty of $10,680,554.64.  According to the NPA, the penalty is in lieu of restitution, forfeiture or criminal fine.

2.  LLB Verwaltung must "cooperate in any related criminal or civil proceedings in return for the Department’s agreement not to prosecute the company for tax-related criminal offenses committed by LLB-Switzerland."

3.  A related Liechtenstein bank, Liechtensteinische Landesbank AG (LLB-Vaduz), earlier in 2013 reached a separate NPA.  See DOJ Tax Press Release, here.  LLB-Vaduz paid restitution of $7,525,542.  See also Liechtensteinische Landesbank Enters NPA (Federal Tax Crimes Blog 7/30/13), here.

4.  The bad behavior, variations on a theme for many Swiss banks, is described in the press release:

According to the statement of facts agreed to by the parties, LLB-Switzerland and some of its employees, including members of the bank’s management, conspired with a Swiss asset manager and U.S. clients to conceal those U.S. clients’ assets and income from the Internal Revenue Service (IRS) through various means, including using Swiss bank secrecy protections and nominee companies set up in tax haven jurisdictions. At its peak, LLB-Switzerland had approximately one hundred U.S. clients holding nearly $200 million in assets. The majority of those accounts were in the names of nominee entities. 

In 1997, Liechtensteinische Landesbank AG (LLB-Vaduz), a bank headquartered in Liechtenstein, acquired LLB-Switzerland (LLB-Vaduz reached a separate agreement with the Justice Department in 2013 that excluded LLB-Switzerland from the resolution). At that time, LLB-Switzerland provided banking and asset management services to individuals and entities, including citizens and residents of the United States, principally through private bankers based in Zurich, Geneva and Lugano, Switzerland. LLB-Switzerland also acted as a custodian of assets managed by third-party external investment advisers. 

In 2003, LLB-Switzerland began a relationship with a Swiss asset manager. The asset manager offered to create nominee structures, including corporations, foundations, and trusts, to conceal accounts owned by his U.S. clients at Swiss financial institutions. LLB-Switzerland delegated to the Swiss asset manager the authority to prepare account opening and “know your customer” (KYC) documents.  

The Swiss asset manager provided prospective customers with a sales letter, pitching his ability to conceal a client’s assets and income from taxing authorities through the use of multiple layers of sham offshore entities and nominee directors in countries or regions that the Swiss asset manager thought would resist requests for information and assistance from foreign law enforcement, including law enforcement in the United States. LLB-Switzerland and its management knew that the Swiss asset manager was marketing structures to clients as a means of tax evasion as the bank kept a copy of the manager’s sales letter in the bank’s files. 

In 2008, after it became publicly known that UBS AG, Switzerland’s largest bank, was the target of a U.S. criminal investigation focusing on tax and other violations, the amounts that LLB-Switzerland held for U.S. clients swelled. At the end of 2007, the Bank had 72 U.S. clients with almost $80 million in assets. By the end of the next year, the number of U.S. clients increased to 107, but the assets more than doubled to over $176 million. LLB-Switzerland’s management knew that many of the U.S. clients coming to LLB‑Switzerland were bringing undeclared funds with them.  

Although LLB-Switzerland’s management monitored the United States’ investigation of UBS, LLB-Switzerland failed to take actions to cease assisting U.S. taxpayers to evade their taxes. While in August 2008, LLB-Vaduz prohibited U.S. persons from becoming clients of the Liechtenstein bank, LLB-Switzerland did not implement a similar policy. Despite press reports, indicating the Swiss asset manager was under investigation for helping clients evade U.S. taxes, LLB-Switzerland waited two years – until a grand jury had indicted the Swiss asset manager - to close the accounts he managed.

Restitution Based Assessment--Some Issues of Interest (8/3/19; 8/7/19)

Readers of this blog will likely be interested in a recent post on Procedurally Taxing Blog:  Keith Fogg, Interest and Penalties on Restitution-Based Assessments (Procedurally Taxing Blog 7/31/19).  Highly recommended.  The context is the relationship between restitution as ordered by the court in a criminal case and the restitution based assessment that the IRS is mandated to make, particularly as related to interest on the restitution.

After some emailing with Keith, I thought I would add some related material and comments that readers of this blog might find interesting or useful.

1.  The amount of the restitution can include an interest factor from the date of the loss through the date of the restitution order by judgment in the criminal case.  The DOJ Criminal Tax Manual thus says:  "Prosecutors should seek prejudgment Title 26 interest in restitution in order to fully compensate the IRS."  DOJ CTM 44.00 RESTITUTION IN CRIMINAL TAX CASES (last edited January 2019), here.

The U.S. Attorneys Manual (now called Justice Manual after renaming in 2018) had a template in the Tax Resource Manual that would include interest under 6601 and/or 6621 in the restitution order as of the date of sentencing.

• https://www.justice.gov/archives/usam/tax-resource-manual-20-optional-restitution-paragraphs
• https://www.justice.gov/archives/usam/tax-resource-manual-21-proposed-restitution-order

The Tax Resource Manual seems to have dropped off the current Manual (called the Justice Manual), although the prior Tax Resource Manual is still available per the links above.  (Perhaps it will be added back later.)  So, diligent US Attorneys should be aware of it.  And, of course, DOJ Tax CES attorneys should be aware of the CTM provision.  And, since the IRS makes the calculations, the IRS agents should be aware of as well.  (By contrast, interest is not included on tax loss for Sentencing Guidelines purposes except in the case of evasion of payment, when interest was included in the amount the defendant sought to evade.)

My understanding, though, is that courts sometimes (perhaps even often) do not include interest in restitution.  (See discussion of recent case in paragraph 3 below.)

2.  I have just updated the text and a footnote in the working draft of my Federal Tax Procedure Book (will be published on SSRN by mid-August 2019) dealing with some of the nuance.  Here is a cut and paste of the text and the key text amd footnote:

CDP Proceeding Moot Because Restitution Based Assessment and NFTL Withdrawn (7/30/19)

In Catlett v. Commissioner, T.C. Memo. 2019-86, here, Catlett, a return preparer, was convicted of a defraud/Klein conspiracy (27 USC § 371), multiple counts of aiding and assisting (§ 7206(2)) and one count of tax obstruction (§ 7212(a)).  He was sentenced to 210 months and order to pay restitution of $3,810,244, with restitution to "be paid [in] monthly installments of $500.00 over a period of 3 year(s) to commence when the defendant is placed on supervised release."  Catlett remains in prison and likely won't be release for some number of years.  The IRS made a restitution based assessment ("RBA") based on the sentencing court's order of restitution (and separately assessed underpayment penalty and interest).  Catlett filed a CDP proceeding when the IRS attempted to collect.

The IRS conceded that the RBA was premature because the district court order payment to commence after Catlett was placed on supervised release which had not yet occurred.  See United States v. Hassebrock, 663 F.3d 906, 924 (7th Cir. 2011) (Where "a district court can only impose restitution as a condition of supervised release, a defendant cannot be required to pay restitution until his period of supervised release begins."); United States v. Howard, 220 F.3d 645, 647 (5th Cir. 2000) ("Were restitution simply a term of supervised release or probation, it could not be due prior to the commencement of such a term." (quoting United States v. Webb, 30 F.3d 687, 690 (6th Cir. 1994))).

The IRS moved to dismiss the CDP case as moot. The Tax Court agreed and rejected Catlett's claim that, because the IRS indicated that, once he is released, the IRS will refile the RBA.

JAT comments:

1.  Because the restitution apparently related to other taxpayer's taxes, the IRS could not proceed with a regular assessment (requiring deficiency procedures) against Catlett.  If the IRS had been able to pursue a normal assessment (with deficiency procedures), it could assess the tax, penalties and interest and could even collect prior to the period specified in the court's restitution order.

2.  This aspect of the RBA seems to me to be a glitch.  Even where a defendant is permitted to defer payment of the restitution, there should be some lien to protect the creditor (here the IRS) in the interim just in case assets from which restitution can ultimately be collected appear.  Presumably, the general criminal lien will offer some protection, but even if the IRS could perfect an RBA assessment and resulting lien before supervisory release, it certainly should not be able to attempt collection on the RBA where the sentencing court deferred collection.

New IRS LB&I Compliance Campaigns of Interest (7/30/19)

IRS LB&I has announced six new compliance campaigns, here.

1.  The new campaign particularly relevant for readers of this blog is:

• Post OVDP Compliance
Practice Area: Withholding & International Individual Compliance
Lead Executive: John Cardone, director of Withholding & International Individual Compliance

U.S. persons are subject to tax on worldwide income. This campaign addresses tax noncompliance related to former Offshore Voluntary Disclosure Program (OVDP) taxpayers’ failure to remain compliant with their foreign income and asset reporting requirements. The IRS will address tax noncompliance through soft letters and examinations.

JAT Comment:  Readers will recall that the OVDP had several iterations and, with the expansion of the Streamlined alternatives for nonwillful actors, OVDP itself was targeted to willful actors or persons at risk of the IRS treating them as willful actors.  So, those persons who took advantage of OVDP and took care of past issues presumably were back in the system with respect to their foreign income and asset reporting.  But, presumably, the IRS has some reason to believe that those OVDP participants may not  have stayed in compliance after closing out their OVDP participations.

2.  Another campaign of possible interest to readers is:

• ExpatriationPractice Area: Withholding & International Individual Compliance
Lead Executive: John Cardone, director of Withholding & International Individual Compliance 

U.S. citizens and long-term residents (lawful permanent residents in eight out of the last 15 taxable years) who expatriated on or after June 17, 2008, may not have met their filing requirements or tax obligations. The Internal Revenue Service will address noncompliance through a variety of treatment streams, including outreach, soft letters, and examination.

IRS Sending Letters to Taxpayers with Potential Taxable Virtual Currency Transactions (7/26/19)

In IR-2019-132, here, the IRS announced that it is "sending letters to taxpayers with virtual currency transactions that potentially failed to report income and pay the resulting tax from virtual currency transactions or did not report their transactions properly."  By the end of August, the notice says, more than 10,000 taxpayers will receive the letters.

The Notice further says:

"Taxpayers should take these letters very seriously by reviewing their tax filings and when appropriate, amend past returns and pay back taxes, interest and penalties," said IRS Commissioner Chuck Rettig. "The IRS is expanding our efforts involving virtual currency, including increased use of data analytics. We are focused on enforcing the law and helping taxpayers fully understand and meet their obligations."

The Notice concludes with this:

Taxpayers who do not properly report the income tax consequences of virtual currency transactions are, when appropriate, liable for tax, penalties and interest. In some cases, taxpayers could be subject to criminal prosecution.

Court Affirms Conviction, Rejecting Lesser Included Offense Instruction Request (7/17/19; 7/18/19)

In United States v. Rankin, 929 F.3d 399 (6th Cir. 2019), CA6 here, and GS here, Rankin was charged with (i) seven counts of failure to collect, account for and pay over payroll withholding tax in violation of  7202, (ii) six counts of tax perjury , § 7206(1), for individual tax returns, (iii) three counts of tax perjury, § 7206(1), for corporate returns, and (iv) one count of tax obstruction, § 7212(a). After trial, he was convicted on all counts and sentenced to 60 months (5 years).

On appeal, Rankin raised a number of issues and prevailed on only one relating to the timing of restitution.  I think only one issue is particularly interesting -- the lesser included offense issue.

Defendants facing felony count charges will often want a lesser included offense instruction to give the jury an alternative to conviction on the more serious offense charged.  Rankin was charged with seven counts of § 7202, a felony 5-year charged.  Rankin asked to a lesser included offense instruction for § 7203, failure to pay, which is a 1-year misdemeanor.  The district court denied the instruction.  The Court of Appeals affirmed the denial of the instruction.

The Court starts off with the guiding law (slip op., at 8, cleaned up; 929 F.3d at 406):

If a defendant asks for a lesser included offense instruction to which he is entitled, it is generally reversible error not to give it. A defendant is entitled to an instruction on a lesser-included offense if: (1) a proper request is made; (2) the elements of the lesser offense are identical to part of the elements of the greater offense; (3) the evidence would support a conviction on the lesser offense; and (4) the proof on the element or elements differentiating the two crimes is sufficiently disputed so that a jury could consistently acquit on the greater offense and convict on the lesser.

Section 7202 (cleaned up) makes it a felony for "any person required . . . to collect, account for, and pay over any tax imposed" to "willfully fail to collect or truthfully account for and pay over such tax."

Section 7203 (cleaned up) makes it a misdemeanor for "any person required . . . to pay any estimated tax or tax, or required . . . to make a return, keep any records, or supply any information," to "willfully fail to [do so] at the time or times required by law or regulations."

Here, the Court rejected Rankin's claim that he was entitled to a § 7203 lesser included offense instruction (slip op., at pp 8-9; 929 F.3d at 406-407). The gist of the reasoning is:  While it is true that a failure to pay over withheld payroll taxes would be a crime described in both § 7202 and § 7203, § 7202, the felony did not have an extra element that would permit a jury to convict for § 7203, the misdemeanor, but acquit for § 7202, the felony.

The Court does paint in (too) broad strokes in getting there.  The Court said (929 F.3d at 407):  "all violations of § 7203 for failing to pay a tax necessarily constitute violations of § 7202."  (929 F.3d at 407) That statement is only true in the context of taxes that a person is required to collect, account for and pay over (like payroll withholding tax). My experience is that § 7203 failure to pay cases can be applied in contexts well outside withholding taxes.

JAT Comments:

Seggerman Siblings (4 of them) Sentenced for Offshore Evasion (7/16/19)

I have previously written on the offshore account saga of the Seggerman family, principally as it relates to the prosecution of their lawyer-enabler, Michael Little.  (My blogs are listed at the bottom of this blog entry.)  The Seggermans were a prominent family.  The Seggerman siblings (4 of them), whose deceased father started the evasion, were sentenced last week.  Three were sentenced to 4-months, and one was sentenced to 6-months.  I post some links to news reports on the internet and in some cases bold-face items that I found particularly interesting:

Aaron Elstein, In surprise, New York's first family of tax evasion sentenced to prison (Crains New York  (6/26/19), here):

A federal judge Wednesday imposed prison sentences of four to six months on the four adult children of deceased Wall Street money manager Harry Seggerman, who bequeathed them a $12 million inheritance hidden in a secret Swiss bank account. 

The siblings funneled the money into the U.S. tax-free through shell companies or a fraudulent foundation. One would return from annual trips to the World Economic Forum in Davos, Switzerland, with just under $10,000 in her pocket, and had her husband and daughter do the same, so they wouldn't have to declare the cash to U.S. customs officials. 

"There is a strong need to deter others from the conduct that went on here," U.S. District Judge P. Kevin Castel declared as he sentenced the family members. Estate taxes could have eroded roughly half of the father's fortune. 

Henry Seggerman, 66, got six months in prison. Henry inherited his father's money management business and is a former movie producer who helped bring Crocodile Dundee to American audiences. 

Judge Castel imposed four-month sentences on Yvonne Seggerman, 63, who used to run a nonprofit playhouse in Rhode Island; Suzanne Seggerman, 56, former president of the nonprofit Games for Change; and John Seggerman, 55, a former aide to Sens. John and Lincoln Chaffee of Rhode Island. 

The eldest sibling got a longer sentence because he was involved in tax evasion for a longer time, the judge said. The Seggermans had all pleaded guilty and cooperated with the government after they were caught. 

The expressions and body language of prosecutors suggested they were surprised the Seggerman offspring got prison time at all, given that the government had not recommended any. Prosecutors had praised the Seggermans for testifying last year at the trial of their adviser, British lawyer Michael Little, who is serving a 20-month sentence. 

Judge Castel took note of the cooperation and commended the heirs for their philanthropic and volunteer activities with immigrant and school groups. He agreed they are unlikely to be repeat offenders. But he also observed that a poor person who committed tax fraud would probably go to prison, as would a poor person who committed immigration fraud. 

"There are not two federal systems of justice," he said.

Andrew Denney and Bruce Golding, Siblings sentenced for elaborate Swiss bank inheritance scam (NY Post 6/26/19), here.

More on Litigation and IRS Raising Civil Fraud New Matter (7/12/19)

I posted this blog entry on my Federal Tax Procedure Blog, here.  I posted the predicate blog entry on both Blogs, so I thought this follow-through should be on both blogs because it deals with the consequences of tax fraud, albeit civil tax fraud which gives rise to a potential civil fraud penalty and an actual unlimited statute of limitations (albeit the IRS may never know about it).  So, here it is:

My last post involved the IRS raising the civil fraud penalty as new matter by amended answer and prevailing. IRS Raises Fraud In Tax Court Amended Answer and Prevails (Federal Tax Crimes Blog 7/9/19), here.  The key point of the blog entry was the danger of unspotted issues after an audit and the risks of petitioning the Tax Court for redetermination.

First, on that issue, I offer the relevant portion of the working draft of my Federal Tax Procedure Book will be published on SSRN in early August 2019 (footnotes omitted):

New Matters [In the Tax Court]. 

The IRS can raise new issues in its answer that seek to increase the amount of the deficiency on a basis not asserted in the notice of deficiency or to justify the deficiency asserted (or part thereof) on some basis not asserted in the notice of deficiency.  Jurisdictionally, the Tax Court case is a case to redetermine the correct amount of tax liability for the year(s) involved, thus permitting it to determine a higher deficiency amount or an overpayment.  § 6214(a) & 6512(b). So the IRS can seek additional taxes and penalties not previously asserted.  The statute of limitations will be open because, to reprise what we learned earlier, the statute is suspended during the period the Tax Court case is pending.  §§ 6213(a) and 6503(a).   This is one of the dangers in proceeding in the Tax Court where the IRS has not previously spotted an issue.  Since the statute of limitations is suspended upon issuance of the notice of deficiency (§ 6503(a)), all new matters may be raised, assuming that the statute of limitations did not bar the notice of deficiency in the first place. 

The IRS's ability to raise new issues after its original answer is, however, limited by rules of fairness.  If the IRS does assert new matters after filing its original answer, it will formally do so by moving to amend the original answer.  The Tax Court rules, like the Federal Rules of Civil Procedure applicable in district courts and the Court of Federal Claims' Rules, permit amended pleadings, usually requiring the approval of the Court which is liberally granted to promote justice on the underlying merits. New issues cannot be inserted too late in the process so as to deny the taxpayer the effective opportunity to respond.  And, as to “new matters,” the IRS bears the burden of persuasion.  (Of course, if the new matter is the civil fraud penalty not asserted in the notice of deficienty, the IRS would have the burden of persuasion anyway to prove civil fraud by clear and convincing evidence, so asserting civil fraud as a new matter has no affect on the burden of persuasion.) 

The IRS is allowed to raise a new theory or ground in support of an issue raised in the notice of deficiency without the theory or ground being a new matter.  Depending upon how much variance the new theory or ground has with the notice of deficiency, the variance might be considered a new matter subject to the foregoing new issues discussion.  Certainly, if it is raised so late that the taxpayer cannot fairly respond with evidence addressing the new issue, the Court should deny the IRS’s attempt to assert the new issue. 

If the IRS asserts an affirmative defense (such as estoppel), it will be deemed denied and the taxpayer need not file a responsive pleading, which is usually called a “reply.”  If, however, the IRS raises “new matter” either in an answer or an amended answer, the taxpayer should file a reply providing the IRS notice as to the taxpayer's position on the new matter.  This is frequently done via a simple denial of the various matters pled with respect to the new matter. 

I think it would be helpful to illustrate the new matter issue.  Recall that § 6662 provides a 20% substantial understatement penalty that is then increased to 40% if the understatement is attributable to a gross valuation misstatement.  If the notice of deficiency asserted the 20% penalty but, in its answer, the IRS asserts the 40% penalty, the IRS will have the burden of proof on the increase in the penalty.  That seems to be the straight-forward reading of the rule shifting the burden of proof to the IRS.  But, let’s focus on one issue raised in this setting.  The taxpayer can avoid the accuracy related penalties if there was reasonable cause for the position on the return.  This is like an affirmative defense to the penalty.  Thus, as to the 20% penalty asserted in the notice and contested in the petition, the taxpayer bears the burden of proving reasonable cause even after the IRS meets its production burden under §7491(c); as to the increased 40% penalty, however, the IRS bears the burden of proof, including establishing absence of reasonable cause. 

Finally, an even worse case for the taxpayer who improvidently petitions for redetermination is that the IRS can raise as new matter a civil fraud penalty.  Say in the above example, the notice of deficiency asserted either the 20% or 40% accuracy related penalty in § 6662 and then in the answer (or amended answer), the IRS asserts the 75% civil fraud penalty in § 6663.  Note in this regard that, if the IRS raises the civil fraud penalty as a new matter, its burden of proof is not affected because, as to civil fraud, the IRS bears the burden of persuasion by clear and convincing evidence anyway, just as it the civil fraud penalty had been asserted in the notice of deficiency.  So,  if the IRS prevails, the taxpayer will be even worse off for having filed a petition for redetermination.  Thus, taxpayers and practitioners should think carefully about unspotted potential issues before filing a petition for redetermination in the Tax Court.

Now let's work this a little more.  This IRS favorable result works because the statute of limitations is still open in Tax Court proceedings.

IRS Raises Fraud In Tax Court Amended Answer and Prevails (7/9/19)

In Wegbreit v. Commissioner, T.C. Memo. 2019-82, here, the taxpayer husband went through some deceptive shenanigans to hide the income from the sale of his interest in a business.  There were some other issues.  The numbers are large.  I won't get into the detailed facts, but what caught my eye was this (slip op., at 2-3, 44-45):

After the petitions were filed, respondent filed an amended answer asserting that Samuel Wegbreit (S. Wegbreit) and Elizabeth J. Wegbreit (E. Wegbreit) were each liable for penalties for fraud pursuant to section 6663 for 2005 through 2009. 

See also slip op. 44-45 for some more detailed on the amended answer allegations of fraud.

The Opinion section starts with general discussion and swings to the fraud issue as follows (slip op. 47-49):

The Commissioner has the burden of proving by clear and convincing evidence that (1) an underpayment exists for the year in issue and (2) some portion of the underpayment is due to fraud. See sec. 7454(a); Rule 142(b). The Commissioner also has the burden of producing evidence in relation to other penalties. Sec. 7491(c). Thus in analyzing the evidence in this case we have considered whether it is clear and convincing as to the elements of underpayment of tax for each year and of fraudulent intent. We conclude that the evidence is sufficient under that standard. 

Many of the critical documents in the record reflect “effective as of” dating and do not reveal when they were executed. Most of the documents were also prepared or notarized by Palardy. Palardy admitted that at Agresti’s request she would backdate documents and notarize documents stating incorrect dates. That any backdating occurred suggests a willingness to manipulate the relevant chronology in a way that undermines the credibility of petitioners Wegbreit’s evidence. 

The “effective as of” dating and the backdating of relevant documents also impede our review of the substance of the transactions involving SWTF, Threshold, and Acadia and lead us to conclude that the chronology reflected in those documents is not credible. The number of documents in the record that are on their face unreliable has made this case considerably more difficult. Our chore is compounded because the parties included numerous duplicate copies of key documents without explanation or analysis. Notwithstanding the Court’s comments and directions at the conclusion of the trial, the briefs of the parties failed to focus on the material facts. Respondent’s proposed findings of fact merely summarize testimony and documents and generally fail to analyze the transactions and entities involved. See Rule 151(e). Respondent continues to use the shotgun approach to theories of the case rather than selecting the strongest arguments and focusing on them. Petitioners Wegbreit’s briefs misstate the record and are unreliable. After dealing directly with the record with little aid from the parties’ briefs, we conclude that the reliable evidence is clear and convincing as to unreported income and fraudulent intent.

Well, the IRS prevailed despite the shortcomings of the cohort of IRS lawyers.

General Lesson

The obvious general lesson from a case like this is to remember that filing a case in the Tax Court can open upon issues not previously set up by the IRS in the notice of deficiency.  This can be substantive issues involving additional tax or can be penalties, both of which, if asserted as new matter, can draw interest from the due date of the return.

Beyond the General Lesson

There is more in the details as lessons to trial counsel.  As noted above, the Court found that the "Petitioners Wegbreit’s briefs misstate the record and are unreliable."  Presumably those briefs were submitted by their trial counsel.

Moreover, beyond misstating the record, the case should remind trial counsel to vet the evidence the taxpayer introduces through the lawyer (or if by testimony, upon cross-examination).  Let's go back to the opinion.

Two New FBAR Opinions -- Nothing New Here (6/27/19)

I report two unremarkable FBAR willful civil penalty cases.  I don't provide links, but provide the court and docket numbers for those wanting to go to Pacer to get the cases.

In United States v. Schoenfeld, 2019 U.S. Dist. LEXIS 105906 (M.D. Fla. No. 3:16-cv-1248-J-34PDB 6/25/2019), an FBAR collection case, the Court denied the defendant's motion for summary judgment holding (Slip Op. pp. 20-21):

In short, none of Defendant's arguments persuade the Court that in failing to update the BSA implementing regulations after Congress's amendment to the statute in 2004, the Secretary intended to prohibit the IRS from being able to use its discretion and impose the maximum penalty allowed by the statute, "particularly given the IRS's clear statements to the contrary." Garrity, 2019 WL 1004584, at *4. Indeed, in its 2008 version of the Internal Revenue Manual (IRM), the IRS specifically recognized the conflict between the statute and the regulation, and stated that although "the regulations at 31 C.F.R. § [1010.820] have not been revised to reflect the change in the willfulness penalty ceiling . . . the statute is self-executing and the new penalty ceilings apply." See IRM § 4.26.16.4.5.1 (July 1, 2008), available at 2008 WL 5900930. Similarly, the current version of the IRM provides that "[f]or violations occurring after October 22, 2004, the statutory ceiling is the greater of $100,000 or 50% of the balance in the account at the time of the violation." See IRM § 4.26.16.4.5.1 (Nov. 6, 2015), available at 2007 WL 9418679. Although the IRM does not "have the force of law," it does provide "persuasive authority" suggesting that the Secretary did not intend to limit the willful FBAR violation penalty to $100,000. See Griswold v. United States, 59 F. 3d 1571, 1576 (11th Cir. 1995) ("While the IRS Manual does not have the force of law, . . . the manual provisions do constitute persuasive authority as to the IRS's interpretation of the statute and the regulations."); see also Romano-Murphy v. C.I.R., 816 F.3d 707, 719 (11th Cir. 2016) (same). Thus, for all of the reasons explained above, the Court declines to reduce the penalty assessed against Steven Schoenfeld for an alleged willful FBAR violation to $100,000.

I previously reported on an earlier opinion in Schoenfeld.  Court Holds That Liability for FBAR Civil Willful Penalty Survives Death (9/26/18), here.

In United States v. Dadurian, 2019 U.S. Dist. LEXIS 104683 (S.D. Fla. 9:18-cv-81276 6/24/2019), also an FBAR collection suit, the Court denied the defendant's motion for summary judgment, noting the differing definitions of willful for the FBAR civil penalty (i.e., intent to violate a known legal duty, knowing and reckless) but found that under any of these definitions the facts were sufficiently contested to reject summary judgment.  The facts that are recounted by the court do not look good for the defendant, but the court was only dealing with defendant's motion for summary judgment.

Virtual Currency Held in Foreign Accounts Not FBAR Reportable (6/27/18; 7/2/18)

I am not an expert on virtual currency or reporting requirements for virtual currency.  One issue is whether virtual currency or holding virtual currency on a foreign third-party exchange was reportable on the FBAR, FinCEN Form 114.

I link here a report from the AICPA Virtual Currency Task Force which obtained some input from the IRS on the issue.  Kirk Phillips, Virtual currency not FBAR reportable (at least for now) (Journal of Accountancy 6/19/19), here.

FinCEN responded that regulations (31 C.F.R. §1010.350(c)) do not define virtual currency held in an offshore account as a type of reportable account. Therefore, virtual currency is not reportable on the FBAR, at least for now. 

The report caveats that only FBAR reporting is addressed.  Reporting on Form 8938, Statement of Specified Foreign Financial Assets, is not addressed.

Updates:

• James Creech (Guest Blogger), Virtual Currency, FBAR, and the Ripple Effect (ProcedurallyTaxing Blog 7/2/19), here.

Advising Clients on "How To Do Time" (6/26/19)

I picked up this offering that Tax Crimes fans might be interested in.  Alan Ellis and J. Michael Henderson, How to Do Time, Parts 1-4.  Many of criminal defense lawyers really do not get into the details of the prison experience.  These authors offer useful insights that will be helpful in preparing clients for the experience.  This was published in Law 360 but is available on Allan Ellis' sight, here.

The introduction from an email from Allan Ellis:

How To Do Time, Parts 1-4

Most lawyers understandably are unable to advise a first-time federal inmate as to what it will be like in prison. Rarely do they ever get beyond an attorney visiting room. In this four-part series of articles, Alan Ellis and J. Michael Henderson, the co-authors of the Federal Prison Guidebook, with the help of Phillip S. Wise, retired Bureau of Prisons Assistant Director of Health Services, offer answers to many questions that attorneys, their clients, and their clients' family and friends may have. 

Ninth Circuit Rejects Inclusion of Reckless Conduct in Willful Requirement for § 6694(b)(2) Preparer Civil Penalty (6/25/19)

I and other commentators have lamented courts expansion of the concept for willful for the FBAR civil penalty that can be draconian (although the IRS limits its application as a matter of discretion).  Specifically, I and others have urged that the definition of willful for FBAR civil penalty purposes should be the same as the definition of willful in the parallel criminal proceedings (see Ratzlaf v. United States, 510 U.S. 135 (1994), adopting the Cheek standard (Cheek v. United States, 498 U.S. 192, 200-201 (1991)) applicable for tax crimes). 

The courts have decided otherwise.  See e.g., today's other posting in Court Finds Taxpayer Willfully Failed to File FBARs (Federal Tax Crimes Blog 6/25/19), here.

In Rodgers v. United States (9th Cir. 6/21/2019) (unpublished), here.  The Court addressed another civil penalty with a statutory willful requirement.  The penalty was the § 6694(b) preparer penalty which provides:

(b) Understatement due to willful or reckless conduct
   (1) In general.  Any tax return preparer who prepares any return or claim for refund with respect to which any part of an understatement of liability is due to a conduct described in paragraph (2) shall pay a penalty with respect to each such return or claim in an amount equal to the greater of—
      (A) $5,000, or
      (B) 75 percent of the income derived (or to be derived) by the tax return preparer with respect to the return or claim.
   (2) Willful or reckless conduct.  Conduct described in this paragraph is conduct by the tax return preparer which is—
      (A) a willful attempt in any manner to understate the liability for tax on the return or claim, or
      (B) a reckless or intentional disregard of rules or regulations.

The district court in Rodgers defined “willful” in § 6694(b)(2)(A) to include “recklessness.”  Of course, reckless conduct under this statute must mean something different than willful, otherwise (b(2)(B) would be redundant, and certainly there is nothing in the statute to indicate a congressional understanding the reckless was included in the definition of willful.

The Court of Appeals reversed for the district court to determine whether the correct definition of willful would affect the outcome in some cases.  Addressing the correct definition of will, the Court said:

1. We agree with Rodgers that the district court applied the wrong definition of “willful” in § 6694(b)(2)(A). As we explained in Richey v. IRS, 9 F.3d 1407, 1411 (9th Cir. 1993), willfulness under § 6694(b)(2)(A) requires “a conscious act or omission made in the knowledge that a duty is therefore not being met.” Id. (quoting Pickering v. United States, 691 F.2d 853, 855 (8th Cir. 1982)).  We further noted that the definition of “willful” in § 6694(b) is the “same” as the definition used in 26 U.S.C. § 7206. Id. As the Supreme Court has explained, that definition does not include recklessness. See United States v. Bishop, 412 U.S. 346, 354 (1973).

The reason I call this case to readers' attention is that, like the 6694/7206 analogy, the FBAR willful civil penalty drawn in the same language as the criminal penalty for failure to file FBARs and other BSA violations.  The criminal violations clearly require intent to violate a known legal duty, conduct that is more than reckless conduct.  Yet the courts apply a different standard for BSA civil penalties (FBAR penalties here). The Courts may take some comfort for a more relaxed definition and burden of proof (e.g., preponderance rather than clear and convincing) because the penalty is civil and thus not as punitive as a criminal penalty which, so the notion goes, should require more egregious conduct (specific intent rather than reckless conduct).  Yet, the courts applying willful in the tax preparer civil penalty context reach what appear to be opposite conclusions. 

Of course, the FBAR willful penalty does not have a statutory alternative reckless standard like § 6694(b)(2).  But, I just wonder whether, if that alternative were not in § 6694(b)(2), the courts would have reached a different result (i.e., include reckless conduct in definition of willful) simply because a civil rather than a criminal penalty were involved.

Court Finds Taxpayer Willfully Failed to File FBARs (6/25/19)

In United States v. Flume (S.D. TX No. 5:16-cv-00073 Order dated 6/11/19 Dkt. No. 86), here, the Court held Flume liable for the willful FBAR penalty.  The case continues the holdings that, even if Flume did not have the intent to violate a known legal duty, his recklessness with regard to knowledge of the duty establishes liability for the penalty.

The key points that I gathered in my quick read are:

1.  The Court found that Flume was not a credible witness.  That alone creates a huge hurdle in a case where his intent and knowledge and testimony about his intent and knowledge are at issue.

2.  Flume was a successful business man and thus, if indeed he had not reviewed the return and understood the Schedule B question, he acted with extreme recklessness.  Indeed (Slip Op. 16):

His testimony that he was simply “careless with the reading of everything on the tax return” is not credible. (RT2 5:10–11.) Moreover, Schedule B’s question about foreign bank accounts is simple and straightforward and requires no financial or legal training to understand. See McBride, 908 F. Supp. 2d at 1211 (“[B]ecause the federal tax returns contain a plain instruction regarding the disclosure of interests in foreign financial or bank accounts, the risk of failing to disclose an interest in such a foreign account is obvious.”). Even the most cursory review of his tax return would have alerted Flume to the foreign-account reporting requirement.

3.  The Court confirmed (Slip Op. 11 n. 11) its earlier rejection of a "constructive knowledge" theory that "every taxpayer, merely by signing a tax return, is presumed to know of the need to file an FBAR.”   See Robert S. Horwitz, Kimble–A New FBAR Willful Penalty Case, Some Further Thoughts on Bedrosian, Willfulness and the Overlooked Opinion in Flume (Tax Litigator Blog 1/4/19), here.

4.  The attempt to claim reliance on his tax preparers was unavailing because (i) Flume did not advise his tax preparers of the UBS account, and (ii) Flume, a successful businessman, "was reckless in failing to investigate the credentials of the people he claims to have entrusted with his tax liability."

JAT Comments:

Former DOJ Tax Attorney Pleads to Tax Perjury (6/21/19; 6/22/19)

DOJ Tax announced here that James F. Miller, a former Tax Division attorney, pled guilty to willfully filing a false tax return that "underreported his gross income on his 2010 through 2014 tax returns by approximately $2,215,587."  The plea count was § 7206(1) which is a three year felony.  The announcement indicates that he agreed to pay $735,933 restitution.

I calculated the Guidelines range on the following assumptions:  (i) the restitution amount is the tax loss; there is no sophisticated means adjustment, and the maximum 3 point reduction for acceptance of responsibility.  On that basis, my rough calculation indicates an aggregate sentencing level of 17 and a guidelines range of 24-30 months.  (JAT Note:  I corrected the calculation on 6/22/19 to take out the sophisticated means addition which I had not caught in the spreadsheet.)

The plea documents are:

1. The plea agreement, here.
2. The Criminal Information for the plea, here.
3.  The Statement of Facts, here.

Update 6/22/19 10:15am:  Peter Reilly, a frequent and interesting commentator on the tax scene, has posted an entry on Miller's plea and some of the background information.  Peter J. Reilly, Tax Lawyer Turned Lobbyist Pleads Guilty To Leaving Over $2M Off Tax Returns (Forbes 6/22/19), here.   I highly recommend Peter's discussion.  Peter offers links for further information on Miller.

Court Suppresses Witness Interview Given Pursuant to IRS Summons (6/14/19)

In United States v. Patterson (E.D. La. No. 19-27, Order and Reasons dated 6/11/19 (Dkt. 64)), here, the court ordered suppression of statements made in one of three communicative encounters with IRS CI agents.  I call them communicative encounters because one of the encounters was by text and the other two were traditional CI agent interviews.  During the process of these encounters and before the third one, Patterson said that she was consulting with an attorney, but no attorney was otherwise involved in the process.

After the first encounter (an interview) in which IRS CI's standard noncustodial warnings were given, an IRS CI Special Agent issued a summons.  The second encounter was by texting between Patterson and the Agent about her appearance at the time and place designated in the summons.  Patterson said she could not.  The agent then texted

I can authorize one extension on the summons but I need to remind you that the summons is a legal document. Please read the section entitled Enforcement of Summons. Failure to appear will result in an attachment and arrest. Since you’ve been fully cooperative, I don’t want that to happen.

They then agreed upon a rescheduling of the summons appearance.

The third encounter was Patterson's appearance as rescheduled pursuant to the summons.  The third encounter is described as follows (Slip Op. 8-9, footnotes omitted):

The IRS Summons ordered Patterson to appear at the F. Edward Hebert Federal Building, room 1037. Once she arrived at the Hebert Building, she walked through metal detectors and past security officers to get to room 1037. She did not bring the nameless lawyer she had referred to in her communications with Agent Nuss; instead, she came alone. At the IRS’s office she met with Agent Nuss and she was introduced to Special Agent Cary Davis. The Special Agents were not in uniform, but Davis provided her badge and credentials for Patterson’s inspection. Unlike when Special Agents Boyles and Nuss had interviewed her at her mother’s home, this time the agents did not read Patterson the statement of non-custodial rights, despite the Internal Revenue Manual’s admonition that they do so. It appears that the agents did not advise Patterson of any of her rights; they did not tell her she could terminate the interview or that she could leave at her discretion. The interview took place in a conference room and began at 3:19 p.m.

According to the IRS memorandum, the agents began the interview by giving Patterson a spreadsheet entitled “2012 Returns Deposited to Crown Bank Account,” which Patterson had previously reviewed. The agents asked her to identify the customers she had referred to Butler; she did so. Then, the agents gave Patterson client folders for tax year 2012 which had been summoned from Butler; Patterson proceeded to identify the false items in returns prepared by Butler and her former co-worker, Dana Alvarez. The agents then gave Patterson print-outs of transmitted returns that Patterson had prepared for her No Limit Tax Refund business in 2014 for tax year 2013 and asked her to identify false items. Patterson reviewed the print outs and identified approximately fifty-three false items in thirty-one returns she had prepared. She was asked to do the same with tax returns she had prepared for tax year 2014, both for her own company and for Pelican Income Tax, and she identified many more false items in tax returns she had prepared. The interview lasted until 7:07 p.m.33 Patterson was not arrested at the conclusion of the interview and was allowed to leave.

The issue with respect to all of the communicative encounters was whether they were in a custodial setting.  A custodial setting requiring full-blown Miranda warnings is usually obvious, but can also exist in other settings.  As explained by the court (Slip Op. p. 14)

Taxpayer Waived Argument that § 6501(c)(1) Requires Taxpayer's Fraud for Unlimited Statute of Limitations (6/14/19)

In Finnegan v. Commissioner, 926 F.3d 1261 (11th Cir. 2019), here, the 11th Circuit held that the taxpayers had waived the right to assert that § 6501(c)(1) required the taxpayer's own fraud for the unlimited statute of limitations.  Readers will recall that § 6501(c)(1) provides as an exception to the normal 3 year civil statute of limitations:

"In the case of a false or fraudulent return with the intent to evade tax, the tax may be assessed, or a proceeding in court for collection of such tax may be begun without assessment, at any time."

The Tax Court held in Allen v. Commissioner, 128 T.C. 37 (2007) that the taxpayer's own fraud was not required.  The Court of Federal Claims held in BASR Partnership v. United States, 795 F.3d 1338 (Fed. Cir. 2015), that the taxpayer's fraud was required.

The substantive issue is, of course, important because tax preparers can commit fraud on a return without the taxpayer engaging in the fraud on the return.  In addition, any number of enablers (such as preparers and tax shelter promoters) can commit fraud that finds it way on a return.  In either event, if all that is required is fraud on the return without the taxpayer's own participation in the fraud, then there is an unlimited statute of limitations.

The 11th Circuit did not address the merits of the split between the Tax Court in Allen and the Court of Federal Claims in BASR.  So, the merits of the issue is still open.  The important thing is that the Government is still asserting that Allen was correct -- that the taxpayer's fraud is not required for the unlimited statute of limitations in § 6501(c)(1).  The Government's brief is here.  I offer some brief excerpts from that brief stating the argument (but without the detail support for the argument):

[*2]  

"2. Whether the fraud exception under I.R.C. § 6501(c)(1), requiring 'a false or fraudulent return with the intent to evade tax,' applies where, as here, the taxpayer’s return preparer, and not the taxpayer, possessed the requisite intent." 

* *  * *

Ninth Circuit Holds for Government in Altera (6/8/19)

Although this is not a tax crimes issue, it is a hot topic in the tax law relating to one of the most revenue potential sources--transfer pricing.  The tax world has anxiously awaited yesterday's decision by Ninth Circuit's reconstituted panel in Altera Corp. v. Commissioner, ___ F.3d ___ (9th Cir. 2019), here.  In a sister blog (Federal Tax Procedure) I have posted a blog entry on the decision:  Ninth Circuit Reverses Unanimous Tax Court in Altera (Federal Tax Procedure Blog 6/7/19; 6/8/19), here.  For those interested in the intersection of administrative law (particularly the APA) and tax law, the case is a good read with a lot more nuance than one might otherwise imagine, and I hope my blog entry helps understand the decision.

As always, I appreciate comments.  Please leave a comment to this blog or email me at jack@tjtaxlaw.com.