Magistrate Recommends Sustaining Imposition of FBAR Willful Penalty (8/28/19)

In United States v. Rum (M.D. Fla. No. 8:17-cv-826-T-35AEP), Magistrate Report and Recommendation dated 8/2/19, here, the Court granted the Government's Motion for Summary Judgment sustaining the FBAR willful penalty at 50% for a single year.  The Court Listener docket entries with available links to some of the underlying docket entries is here.  (Readers wanting to follow the case might check in on the docket entries link for updates.)

The Report is 36 pages long.  I will not provide a detailed analysis here but just point out some of the key points that caught my attention.  Overall, it just did not look good for Rum, which is why the Magistrate recommended that the FBAR willful penalty in the 50% amount be sustained.

1.  Rum unquestionably had a foreign account and it was reportable.  So the issue was willfulness.

2.  Rum claimed that he created the account to hide assets from potential judgment creditors rather than the IRS, but the facts were not consistent with that claim.

3.  UBS sent Rum an annual notice that information was provided for him to meet his U.S. tax reporting obligations.

4.  Rum answered the Form 1040 Schedule B foreign account question no, and did not report any income from the account over the years.

5.  In 2004, Rum signed a document for the foreign account (UBS) that said:  "“In accordance with the regulations applicable under US law relating to withholding tax, I declare, as the holder of the above-mentioned account, that I am liable to tax in the USA as a US person.”

6.  In 2008, Rum moved the account from UBS to another Swiss bank, Arab Bank.  (On the timeline, of course, the U.S. was moving aggressively against UBS in 2008.)

7.  Rum claimed that a tax preparer prepared the tax returns, but the returns indicated that they were self prepared.

8.  If a preparer did prepare the returns, Rum admitted that he did not disclose to the prepare the foreign account; Rum claimed the preparer never asked about foreign accounts.

9.  Rather than join OVDI, Rum attempted a quiet disclosure.  (Easy to hindsight on that, given the ugly facts, and the fact that UBS turned on U.S. clients to protect their own skin, a characteristic of Swiss banks generally.)

FBAR Collection Suit Settled Before Jury Verdict Announced (8/27/19)

I previously reported on pretrial skirmishing in the Government's FBAR collection suit in United States v. Dadurian (S.D. Fla. 9:18-cv-81276).  See Court Denies Motion for Partial Summary Judgment on FBAR Willful Penalties (Federal Tax Crimes Blog 8/16/19), here, and Two New FBAR Opinions -- Nothing New Here (Federal Tax Crimes Blog 6/27/19), here.  I report here on the conclusion of the case.

The case went to trial and was submitted to the jury.  Before the verdict was announced, however, the parties settled the case, where the Government originally sought judgment for $2.7 million, for $1 million.  (However, see below as to how the settlement will be effected.) Apparently, there was some drama involved because the jury reached a verdict before the settlement was finally reached, so the parties had to choose to complete the settlement or accept the jury verdict (then unknown, although reached).  See FBAR Trial Settles With Recklessness Standard, TNT (8/29/19) (with the estimable Lee A. Sheppard contributing to the article).  I do not have a link to the article because it is behind a paywall, and getting Tax Analysts' permission to post is a nuisance, as well as (in my experience) requiring some wait period before posting.  Those with a TNT subscription should just go look at it there, although the important details are no different than I offer here drawn solely from the court documents I retrieved from Court Listener (which everyone can access free here).

The jury verdict held Dadurian liable for the accounts she had caused to be set up, but as noted the jury verdict does not control.  I have not attempted to determine the amount of the liability based on the jury verdict, but it was substantially less than the $2.7 million the Government claimed.

Here are the relevant documents from Court Listener:

• The Stipulation Regarding Settlement, here.
• The Jury Verdict (Mooted by the Settlement), here.

JAT Comments:

1.  Nothing particularly unusual here except, of course, the drama in having to choose between the settlement and the unknown jury verdict.

2.  The Stipulation Regarding Settlement is, I think, somewhat noteworthy as to how the settlement gets effected.  Here is the relevant part:  “The material terms of the settlement are as follows: Dadurian will stipulate to a judgment in the full amount of the penalties, plus interest accruing under 31 U.S.C. § 3717. The United States will agree to mark the judgment satisfied if Dadurian pays the United States $1,000,000.00 within 90 days of today.” So, there will be a judgment indicating Dadurian's liability for the full amount and then the judgment liability will be settled for $1 million.  (I guess this sentence is redundant, but that seems a strange way to effect a settlement; it seems to me the more straightforward way to settle would be to enter judgment in the amount of the settlement; if anyone knows why the settlement was structured in this way, please make a comment or email me at jack@tjtaxlaw.com.

Addendum 8/27/19 2:45pm:

3.  With regard to Comment #2, Bob Steinberg, an attorney-CPA, in Palmetto Bay Fl., asks whether this settlement format will give rise to cancellation of indebtedness income.  I think I can argue that both ways (if I had to).  Still, I would presume that somebody addressed that issue in reaching the settlement.  However, I would appreciate any analysis of that issue that readers may make either by comment or by email jack@tjtaxlaw.com.

Taxpayer Charged with False SFCP NonWillful Certification (8/26/19)

DOJ Tax issued a press release titled "Former CPA Indicted for Failing to Report Foreign Bank Accounts and Filing False Documents with the IRS," here.

This is the first time (at least that I can recall) that DOJ Tax has included a charge for false non-willful declaration in a SFCP submission.  Here are the pertinent parts of the press release:

According to the superseding indictment, Booker, a former Certified Public Accountant, owned a cocoa trading company that was organized under the laws of the Republic of Panama.  Booker allegedly operated that company from Venezuela, Panama, and his former residence in Fort Lauderdale, Florida.  The superseding indictment further alleges that, for calendar years 2011 through 2013, Booker failed to disclose his interest in financial accounts located in Switzerland, Singapore, and Panama on annual Reports of Foreign Bank and Financial Accounts (FBARs) as required by law.  Booker also allegedly filed false individual income tax returns for tax years 2010 through 2012 that failed to report to the IRS all of Booker’s foreign bank accounts. 

Booker is also charged with filing a false “Streamlined Submission” in conjunction with the Streamlined Domestic Offshore Procedures. The IRS Streamlined procedures allowed eligible taxpayers residing within the United States, who failed to report gross income from foreign financial accounts on prior tax returns, failed to pay taxes on that gross income, or who failed to submit an FBAR disclosing foreign financial accounts, to voluntarily disclose their conduct to the IRS.  The superseding indictment alleges that Booker’s Streamlined submission falsely claimed that his failure to report all income, pay all tax, and submit all required information returns, such as FBARs, was due to non-willful conduct.

The press release has a link to the superseding indictment here.  The key allegations on Streamlined are in paragraphs 39-41 on p. 11 of the Superseding Indictment.  These allegations are:

39. The Streamlined Domestic Offshore Procedures (the "Streamlined procedures") allowed eligible taxpayers residing within the United States who failed to report gross income from foreign financial accounts on prior tax returns, failed to pay taxes on that gross income, or who failed to submit an FBAR disclosing foreign financial aceounts, to voluntarily disclose their conduct to the IRS.  Taxpayers who were eligible under the Streamlined procedures were subject to substantially lower penalties than those provided by other 1RS programs. 

40.  In order to be eligible for treatment under the Streamlined procedures, taxpayers were required to file amended tax returns for the most recent three years for which the U.S. tax return due date had passed. Taxpayers who wished to take advantage of the Streamlined procedures were required to certify under the penalties of perjury that their failure to report all income, pay all tax or submit all required returns was due to non-willful conduct. Under the terms of the Streamlined procedures, the IRS defined non-willful conduct as conduct that was due to negligence, inadvertence, or mistake, or conduct that was the result of a good faith misunderstanding of the law. 

41. On or about October 14, 2015, BRIAN NELSON BOOKER submitted to the IRS a Certification by U .S. Person Residing in the United States for Streamlined Domestic Offshore Procedures (IRS Form 14654, "Streamlined submission"). In his Streamlined submission, the defendant certified under the penalties of perjury that he "learned about the FBAR filing requirements in 2008" and that he "mistakenly believed that only personal financial accounts had to be reported on the FBAR." The defendant also certified under the penalties of perjury that he was eligible for treatment under the Streamlined procedures and that his failure to report all income, pay all tax, and submit all required information returns, including FBARS, was due to non-willful conduct.

Court Listener has the docket entries, here,

JAT Comments:

Houston Attorney and Others Charged with Tax Crimes (8/21/19)

The USAO for SD Texas announced issued a press release titled "Houston Personal Injury Attorneys and Case Runners Indicted," here.  I don't know that there is anything exceptional about the case, but being from Houston this caught my attention.  I don't know any of the players mentioned in the press release.

Here are the key excerpts:

The charges against Stern and his alleged co-conspirators stem from a long-running criminal scheme to evade taxes. Stern also allegedly obtained his personal injury cases through barratry - the illegal practice of soliciting law firm clients by paying kickbacks to middlemen known as “case runners.”  

Stern and his co-conspirators sought to enrich themselves by illegally recruiting clients through the payment and receipt of illegal kickbacks in order to generate personal injury cases and legal fees, according to the charges. They allegedly worked to conceal and disguise the payments and hide their resulting income from the IRS by filing false documents with them. These allegedly included tax returns, 1099 forms and an offer in compromise that falsely reported material information including amounts of income, expenses and taxes due and owing. 

Once Stern became aware of the investigation, he allegedly worked to obstruct justice by ordering others to destroy subpoenaed documents and instructing co-conspirators not to cooperate. 

According to the indictment, Stern employed multiple devices to disguise his illegal kickback payments to case runners as legitimate referral fees paid to attorneys or as other types of legitimate payments that would be deductible under the tax laws. Stern allegedly funneled kickback payments to case runners Ratcliff and Marcus Esquivel (charged in a separate case) through the accounts of Bradley and Plezia. The charges allege Stern claimed the payments were legitimate referral fees to Bradley and Plezia rather than illegal kickbacks to Ratcliff and Esquivel. 

The indictment also alleges Stern wrote referral fee checks in the names of attorneys who never received the checks. Instead, Morris would allegedly cash the checks with forged endorsements at check-cashing locations and use the funds to pay illegal kickbacks owed to himself and other case runners for Stern’s referrals.    

Stern allegedly also filed 1099 forms that falsely reported to the IRS the nature of the payments and to whom they were made. On his tax returns, Stern falsely reported the illegal, non-deductible kickback payments as legitimate, deductible business expenses, which greatly reduced his tax burden, according to the charges. 

Bradley and Plezia allegedly filed false tax returns to facilitate the scheme.  Ratcliff failed to report many of the kickback payments he received as income on his company’s tax returns, according to the charges. Stern and Morris also allegedly caused another attorney to file false tax returns and a false offer in compromise with the IRS to help cover-up the scheme. 

All defendants are charged with conspiracy to defraud the United States. If convicted, they each face up to five years in prison. For willfully filing a false tax return, Stern, Ratcliff and Bradley face another three years of imprisonment. Aiding and assisting in the preparation and presentation of false tax returns carries another potential three-year-term, for which Stern and Morris are charged. If convicted of witness tampering or obstruction of justice, Stern could be sentenced up to 20 and 10 years, respectively.
The press release has the standard disclaimer: 

* * * * 

An indictment is a formal accusation of criminal conduct, not evidence.
A defendant is presumed innocent unless convicted through due process of law.

FBAR Collection Suit for over $105 Million (8/20/19)

A fellow practitioner alerted me to the FBAR collection suit in United States v. Burga (N.D. Cal. No. 19-cv-03246.)  The Court Listener docket entries are here.  As of this writing, the docket entries (through 8/2/19) show routine entries other than the complaint.  The complaint (from Court Listener) is here.

Note on access to court listener documents, see the last paragraph of this blog.

The complaint is against Francis Burga and her deceased husband (with Francis serving as administrator).  The willful FBAR penalties are $52,581,605 against each, husband and wife, and thus aggregate $105,163,210.  There are also late payment penalty, fees and interest on the base FBAR penalties.

The complaint is pretty damning.  Here are some items in the complaint:

1.  The defendants had "financial interest in at least 294 foreign bank accounts, in various countries, during at least years 2004 through 2009." (Compl. par. 12, which lists the accounts from p. 3 to p. 11.)

2.  The defendants created a Liechtenstein foundation that established complex structures of entities, numbering at least 25, based in Liechtenstein, Switzerland, Singapore and other European and Asian countries.  (Compl. par. 33-35.)

3.  The defendants signed documents with UBS indicating that they were U.S. citizens subject to U.S. tax and directing that statements not be sent to them and that the account not invest in U.S. securities (which would have triggered a U.S. information reporting by UBS).  (Compl. pars. 39-41,)

4.  During an audit in 2007 (apparently August 7, 2007), Mr. Burga told the IRS Revenue Agent conducting the interview that he and Ms. Burga did not have any foreign bank accounts, foreign corporations or foreign trusts.  (Compl. par. 44.)

5.  Immediately after the IRS interview, Mr. Burga moved all of the funds (over $6 million) from the UBS account and into a Liectenstein stiftung, for which Mr. Burga was founder and owner.  (Compl. pars. 45 & 46.)

6.  "Mrs. Burga has admitted that Mr.Burga is liable for the civil FBAR penalties assessed."  (Compl. par. 55.)

7.  The complaint does not have a spreadsheet with the amounts of the willful FBAR penalty for each account per year.

There is a related summons enforcement suit filed in 2018, styled United States v. Burga (N.D. Cal. 18-cv-01633), here on Court Listener.

Court Denies Motion for Partial Summary Judgment on FBAR Willful Penalties (8/16/19)

A colleague alerted me to a Tax Notes article, titled Practitioners Balk at Potential DOJ Willful FBAR Argument (Tax Notes 8/16/19).  The Tax Notes link is here, but requires a subscription.  Here is the opening from the article:

Practitioners are disturbed by a possible legal stance of the Justice Department in the latest dust-up over foreign bank account reporting, which would negate reliance on a professional as a defense to willful penalties. 

Tax Notes talked with two practitioners following filings of a joint pretrial statement and proposed jury instructions in Dadurian that seemingly advanced that stance on the part of  the government. Later filings on August 15 that came in after those conversations  appear to be taking a slightly softer stance. How exactly the case will be argued at trial remains to be seen, however.  

“The government is pushing the envelope,” Steven Toscher of Hochman Salkin Toscher Perez PC said. “While most of the courts have untethered willfulness in FBAR cases from its traditional meaning, a taxpayer’s good faith — including reliance on a professional — has always been considered a defense to willful penalties.” 

In June the U.S. District Court for the Southern District of Florida denied summary judgment for Daniela Dadurian, who is facing a $2.7 million liability for failing to file FBARs for accounts owned by herself, her mother, and several foreign entities after she failed to convince the court that there’s no evidence of willfulness regarding five of the accounts at issue.  

The Justice Department has alleged that Dadurian had financial interest in or signatory authority over several foreign accounts — some with maximum balances of over $2 million in some years — but indicated on her 2007 to 2010 tax returns that she did not have such interest or authority. According to the complaint, while Dadurian had filed FBARs for Swiss and German accounts before 2007, she failed to tell Anthony Caruso, her tax return preparer for the years at issue, about her foreign assets. 

The defense, however, asserts that she did not willfully fail to report her accounts because she relied on her tax attorneys’ advice that she did not need to disclose them.  

As explained by the district court in its summary judgement order, under 31 U.S.C. section 5321(a)(5), reasonable cause is not a defense to willful FBAR violations. The court further noted that reliance on a professional may constitute reasonable cause for underpayments of tax.

Those interested and with access to Tax Notes should track down the full article with more detail.

I pulled up some documents from the case from the pacer.gov web site docket entries.  The case is United States v. Dadurian (S.D. Fla. 9:18-cv-81276).  The documents are:

11th Circuit Pattern Jury Instruction Builder (8/16/19; 8/18/19)

While reviewing some docket entries in an FBAR case in Florida, I found a docket entry referring to the Eleventh Circuit Pattern Jury Instruction Builder, here.  I had not seen such a tool for pattern jury instructions that are so important for fashioning jury instructions for the more commonly encountered jury instructions needed in criminal cases.  (There is also a tool for pattern jury instructions in civil cases.)  In the past, practitioners would have to work from a pdf file with pattern jury instructions and then assemble and revise as appropriate.  Practitioners will still have modify the pattern jury instructions as appropriate to their particular cases.

I used the tool to generate some of the pattern jury instructions and link, here, the Word document the tool generated.  Remember that this is not a complete set that a practitioner would generate in a real case but only some of the instructions of interest to me to get an idea of how the tool worked.  Here is the table of contents generated by the tool.

TABLE OF CONTENTS
PRELIMINARY INSTRUCTIONS
P1 Criminal Cases
BASIC INSTRUCTIONS
B9.1A On or About; Knowingly; Willfully - Generally
B9.1B On or About; Knowingly; Willfully - Intentional Violation of a Known Legal Duty
SPECIAL INSTRUCTIONS
S8 Deliberate Ignorance as Proof of Knowledge
S9 Good-Faith Defense to Willfulness (as under the Internal Revenue Code)
OFFENSE INSTRUCTIONS
O13.6 Conspiracy to Defraud the United States 18 U.S.C. § 371 (Second Clause)
O108 Failure to File a Tax Return 26 U.S.C. § 7203
O109.1 Filing a False Tax-Related Document 26 U.S.C. § 7206(1)
O109.2 Aiding or Assisting in Preparation of False Documents Under Internal Revenue Laws 26 U.S.C. § 7206(2)
O110 False Tax Return, List, Account, or Statement 26 U.S.C. § 7207
O111 Impeding Internal Revenue Service 26 U.S.C. § 7212(a)
O112 Evading Currency-Transaction Reporting Requirement (While Violating Another Law) by Structuring Transaction 31 U.S.C. §§ 5322(b) & 5324(a)(3) 

I have not checked to see whether other Circuits have such a tool for their pattern jury instructions.  If anyone knows, please post a comment with a link or send me an email with the link at jack@tjtaxlaw.com.

Addendum 8/18/19 9:00pm:

Court Grants Government Partial Summary Judgment on FBAR NonWillful Penalty (8/14/19)

In United States v. Ott, 2019 U.S. Dist. LEXIS 132013 (E.D. Mich. 2019), here, the court granted the Government's motion for partial summary judgment on the $10,000 nonwillful penalties on 2 separate accounts for each of 3 years.  The penalties aggregated $60,000 plus interest and further nonpayment penalties.  Since the defendant failed to report the accounts, she was subject to penalties unless she could establish reasonable cause.

Reasonable cause is an affirmative defense, meaning that the person claiming reasonable cause must plead and the prove the defense.  On a motion for summary judgment by the party not bearing the burden on the defense (the United States in Ott), the party bearing the burden (Ott in Ott) must submit sufficient evidence to show that there is a fact reasonably in dispute. The Court framed it this way:

The Government moves for summary judgment against Ms. Ott, asserting there is no dispute that she violated 31 U.S.C. § 5314 when she failed to report her financial interest in, or authority over, her foreign financial accounts. Ms. Ott opposes the Motion, arguing there is a genuine dispute of material fact as to whether the affirmative defense of reasonable cause excuses her failure. The Court will disagree.

The steps in the Court's disagreement and thus entry of summary judgment for the U.S. are:

1.  "Ott does not dispute that she violated § 5314's reporting requirements, but maintains that assessing penalties under § 5321 would be inappropriate because she had reasonable cause for her omission."

2.  31 U.S.C. § 5321(a)(5)(B)(ii), here and quoted below in this blog, allowing the reasonable cause defense, does not define reasonable cause.  The Court, as have other courts, looked to the reasonable cause defense to tax penalties, citing Moore v. United States, 2015 U.S. Dist. LEXIS 43979, 2015 WL 1510007, at *4 (W.D. Wash. Apr. 1, 2015); and Jarnagin v. United States, 134 Fed. Cl. 368, 376 (2017).  The Court also cites the regulation under § 6664, 26 CFR § 1.6664-4(b)(1).

3.  The Court then held (Slip Op. at 6-7):

Here, Ms. Ott has not met her burden of establishing a material question of fact as to whether she had reasonable cause for the failure to disclose her foreign financial accounts. See ATL & Sons Holdings, Inc. v. Comm'r of Internal Revenue, 2019 U.S. Tax Ct. LEXIS 8, 2019 WL 1220942, at *10 (U.S. Tax Court Mar. 13, 2019) ("In litigation a taxpayer's contention of 'reasonable cause' is in the nature of an affirmative defense, which the taxpayer is obliged to raise."). Critically, she has not shown that she took any steps to learn whether she was required to report her foreign financial accounts. To the contrary, she notes that she hired an advisor to complete her tax returns, but fails to even suggest that she informed the advisor of these accounts. See Jarnagin, 134 Fed. Cl. at 378-79 ("[T]he Jarnagins neither requested nor received any advice one way or the other from their accountants regarding whether they were required to file FBARs . . . [t]he Jarnagins . . . cannot use as a shield reliance upon advice that they neither solicited nor received."). This certainly does not constitute ordinary business care and prudence. Ms. Ott's limited education and experience does not excuse this misstep. 

Ms. Ott's primary argument is that she "has yet to present evidence on this critical issue for trial." See Dkt. No. 20, p. 16 (Pg. ID 123). But the time for her to present facts and evidence demonstrating a genuine issue for trial was now, and unfortunately, that opportunity has passed. See Highland Capital, Inc. v. Franklin Nat. Bank, 350 F.3d 558, 564 (6th Cir. 2003) ("[T]he non-moving party cannot rest on its pleadings, but must identify specific facts that can be established by admissible evidence that demonstrate a genuine issue for trial."). Because there is no dispute that Ms. Ott violated § 5314's reporting requirements, and because she has not met her burden of establishing reasonable cause for that violation, the Court will Grant the Government's Motion for Partial Summary Judgment.

2019 Federal Tax Procedure Book Editions Available (8/12/19)

The 2019 editions of the Tax Procedure Book (Student Edition and Practitioner Edition) are available for download on SSRN as of 8/12/18.  The SSRN postings are linked on the page on the right of my Federal Tax Procedure Blog titled "2010 Federal Tax Procedure Book & Supplements (8/12/19)," here.

As always in posting the annual editions (and, indeed in posting entries on the FTP Blog), I encourage readers to make comments.  Comments can range from the substantive to any other that can make the next editions of the FTP Book better.  Corrections of grammar and syntax would be appreciated because I do not have a proof reader for the book, and I am a poor proof reader of my own work.

Comments on the blog entries can be made below the entries.  Comments on the FTP Book Editions may be made on the Page titled "2010 Federal Tax Procedure Book & Supplements (8/12/19)," here.

Thank you.

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.