John Doe Summons Issued to Wells Fargo for Records of CIBC FirstCaribbean International Bank Correspondent Account (4/30/13)

DOJ has announced, here, that a district court approved John Doe Summons for records of CIBC FirstCaribbean International Bank's correspondent account at Wells Fargo, N.A. The goal of the summons is to "allow the IRS to identify U.S. taxpayers who hold or held interests in financial accounts at FCIB and other financial institutions that used FCIB’s Wells Fargo correspondent account."

The correspondent account and its use in tax enforcement in the context of offshore banks is described as:

A correspondent account is a bank deposit account maintained by one bank for another bank. Financial transactions involving U.S. dollars flow through U.S. banks. Therefore, foreign banks that do business in U.S. dollars, but have no office in the U.S., obtain a correspondent account at a U.S. bank in order to engage in such transactions. These transactions leave a trail in the U.S. that the IRS can access through the records of the correspondent bank accounts. These correspondent bank accounts have records of money deposited, money paid out through checks and money moved through the correspondent account by wire transfers. All of this information the IRS can obtain through a John Doe summons issued to the U.S. bank holding the correspondent account.

As best I understand it, through the correspondent bank, the offshore bank without any other U.S. presence can service U.S. customers for some of their needs.  But, the U.S. bank establishing the correspondent  relationship -- in this case, Wells Fargo -- has a U.S. presence which means that it is subject to U.S. process, including a John Doe Summons which can be used to ferret out information of the offshore bank's customers using the relationship.  The use of such correspondent bank relationships to service U.S. customers needs is the weakness in offshore banks' claims of impregnability to U.S. tax and law enforcement because they have no U.S. presence.  A similar JDS was issued to UBS's U.S. branch for records of its correspodent relationship with Wegelin  & Co.  See prior coverage on the Wegelin related JDS.  IRS Issues John Doe Summons to UBS (All Over Again) (1/28/13; updated 2/2/13), here.

Tips to Avoid an IRS Criminal Investigation or, Worse, a Tax Grand Jury Investigation (4/27/13)

Kelly Phillips Erb, here, has authored this article:  Ten Ways Not To Say Goodbye: Avoiding Jailtime For Tax Charges (Forbes 4/26/13), here.  She opens her top ten list as follows:

When asked by a (repeat) client how to stay out of jail, criminal defense attorney Charlie Thomas offered this sage advice: Stop stealing shit. 

The same logic applies to taxes. If you want to avoid jail time, for the most part, the best advice is to file and pay on time. But I know that doesn’t always happen so let’s assume that you didn’t do that. What next? 

It’s important to understand that the Internal Revenue Service doesn’t want to throw you in jail. Criminal investigations consume a lot of resources: they take time and they’re expensive. So for most taxpayers, a criminal investigation isn’t a first step, but rather the end process of lengthy attempts to get you to resolve your tax obligations. In other words, it’s rare that an agent will show up on your doorstep one day with cuffs in hand.

Here are her top ten tips - I provide the bullet point only; she has discussion in her article.

1. File and pay your taxes on time. 
2. Open your mail and respond appropriately. 
3. Cooperate during an examination/audit. 
4. Be consistent. 
5. Don’t destroy records. 
6. Don’t lie. 
7. Don’t be overconfident. 
8. Hire a defense attorney. 
9. Read the fine print. 
10. Understand that there is no Perry Mason. 

Using Kovel Experts to Protect the Attorney-Client Privilege and Work Product Privilege (4/27/13)

I draw readers attention to a recent excellent article on the use of "Kovel" experts in delivering legal services and protecting the attorney-client privilege and work product "privilege" for their work.  Sara E. Kropf and Julie Marie Blake, Protecting the Confidentiality of the Work of an 'Outsider' on the Defense Team Maximizing the Protections of the Attorney-Client Privilege and Work Product Doctrine, 37 Champion 26 (2013).  The article is available on the NACDL site here for members of NACDL.  The article is also available publicly on Sara Kropf's web site here.

I strongly recommend that readers interested in the subject read the article.

I offer below a cut and paste (footnotes omitted) of my less complete discussion from my Federal Tax Procedure book of the subject with reference to the attorney-client privilege, but the concepts should also apply to work product:

2. Protecting Information Developed in the Audit (Kovel). 

In delivering legal services, an attorney will often need the assistance of non-lawyers who will become privy to confidential information.  At its most basic level, non-attorney personnel in the lawyer’s firm – paralegals and other assistants, secretaries, etc. – will become privy to the information.  Disclosures of such information to these personnel will not constitute a waiver of any privileges that may otherwise apply.  Often, however, the attorney will find it helpful to engage personnel outside the firm.  For example, often in a tax engagement, an attorney will hire an outside accountant to assist the lawyer in delivering legal services to the client.  The lawyer may want the accountant to meet with the client and obtain information directly from the client, and cloak that information in the attorney-client privilege just as if the lawyer obtained it directly rather than through the accountant.  The traditional method by which that is done, at least in a tax practice, is through an arrangement whereby the lawyer engages the outside personnel – accountant in the present example – to become part of the team delivering legal services to the client.  

This procedure was approved early on in a case called United States v. Kovel, 296 F.2d 918 (2d Cir. 1961).  The case is now shorthand for the concept.  The engagement for such legal related services is now commonly called a Kovel engagement, and the service provider is called a Kovel accountant or whatever is appropriate for the nature of the services.  Here, as in many areas of the law, it is imperative to do it and do it right.

More on the GAO Report on IRS Offshore Disclosure Initiatives (4/27/13)

Yesterday I posted the general summary of the GAO report titled Offshore Tax Evasion:  IRS Has Collected Billions of Dollars, but May be Missing Continued Evasion (GAO-13-318, Mar 27, 2013), here, and made comments regarding the general summary.  Yesterday's blog entry is GAO Report Targets Strategies Other than OVDP (4/26/13), here.  The focus of yesterday's blog was taxpayer use of alternative strategies to OVDP -- particularly quiet disclosure and go forward strategies.  Today, I will focus on the rest of the report that has some very interesting history of the IRS's identification of offshore account noncompliance and statistics of results, particularly from the 2009 OVDP.

Given the scope of the report, I will only present certain select issues.  I strongly encourage those with a particular interest in this general area to read the entire report to mine their own nuggets from it.  Where I quote, I omit footnotes.  However, footnotes are important for those wanting to dig into the report.

1.  The scope of the report is as follows (from opening letter to Senator Baucus):

You asked us to review IRS's 2009 Offshore Voluntary Disclosure Program (OVDP) -- IRS's second offshore program and the most recent program with enough closed cases for analysis. In this report we (1) describe the nature of the noncompliance of taxpayers participating in the 2009 OVDP, (2) determine the extent to which IRS used data from the 2009 OVDP in order to better prevent and detect future noncompliance, and (3) assess IRS's efforts to identify taxpayers who may have attempted quiet disclosures or other ways of circumventing some of the taxes, interest, and penalties that would otherwise be owed.

2.  "As of December 2012, these offshore programs have resulted in more than 39,000 disclosures and over $5.5 billion in revenues."

JCT Staff Report on Selected Tax Procedure and Administration Issues" (4/26/13)

The Staff of the Joint Committee on Taxation has published "Present Law And Background Information Related To Selected Tax Procedure And Administration Issues" dated April 14, 2013, available here.

The three principal topics are (as presented):

I.  Background and Federal Tax Provisions and Practices Implicated in Identity Theft Fraud
II.  Authority to Regulate the Conduct of Paid Tax Return Preparers.
III. Civil Tax Penalties as a Factor in Voluntary Compliance.

I focus here on the last item -- Civil Tax Penalties as a Factor in Voluntary Compliance.  The subtopics are:

A. Civil Assessment Process
B. Civil Tax Penalties
Overview of penalties
Legislative and other history
Selected Issues Raised by Practitioner Groups and Others

The first first of these subtopics -- A. Civil Assessment Process -- is short and probably already known to readers of this blog.  Hence, I do not dwell upon that portion of the Report.  The first two divisions of the second subtopic - B. Civil Tax Penalties -- is probably also known to readers, hence I focus only on the last (Selected Issues) and quote it in its entirety (footnotes omitted), although it too is cryptic.

Whether penalties encourage voluntary compliance 

One criticism of the current regime is that many of the penalties which have been enacted, particularly over the past decade, seem to be designed for the purpose of raising revenue or punishing taxpayers rather than encouraging voluntary compliance. To support this assertion, practitioner groups and others have pointed to the strict liability penalty created under section 6662(b)(6) which imposes a penalty on transactions which lack economic substance and the strict liability penalty provided under section 6707A for failure to disclose reportable transactions. They argue that the lack of a reasonable cause defense under these provisions eliminates the opportunity, and the incentives, to remediate and to become compliant. Under section 6707A, for example, the penalty may be imposed even if the failure to disclose the transaction is not willful but instead inadvertent (perhaps because the taxpayer could not identify whether a transaction was a reportable transaction).

GAO Report Targets Strategies Other than OVDP (4/26/13)

The U.S. Government Accountability Office (GAO) has released a report titled Offshore Tax Evasion:  IRS Has Collected Billions of Dollars, but May be Missing Continued Evasion (GAO-13-318, Mar 27, 2013), here.  The summary is here.

The summary page is here.

What GAO Found 

As of December 2012, the Internal Revenue Service's (IRS) four offshore programs have resulted in more than 39,000 disclosures by taxpayers and over $5.5 billion in revenues. The offshore programs attract taxpayers by offering a reduced risk of criminal prosecution and lower penalties than if the unreported income was discovered by one of IRS's other enforcement programs. For the 2009 Offshore Voluntary Disclosure Program (OVDP), nearly all program participants received the standard offshore penalty--20 percent of the highest aggregate value of the accounts--meaning the account value was greater than $75,000 and taxpayers used the accounts (e.g., made deposits or withdrawals) during the period under review. The median account balance of the more than 10,000 cases closed so far from the 2009 OVDP was $570,000. Participant cases with offshore penalties greater than $1 million represented about 6 percent of all 2009 OVDP cases, but accounted for almost half of all offshore penalties. Taxpayers from these cases disclosed a variety of reasons for having offshore accounts, and more than half of them had accounts at Swiss bank UBS. 

Using 2009 OVDP data, IRS identified bank names and account locations that helped it pursue additional noncompliance. Based on a review of cases, GAO found examples of immigrants who stated in their 2009 OVDP applications that they were unaware of their offshore reporting requirements. IRS officials from the Offshore Compliance Initiative office said they have not targeted outreach efforts to new immigrants. Using information from the 2009 OVDP, such as the characteristics of taxpayers who were not aware of their reporting requirements, to increase education and outreach to those populations could promote voluntary compliance.

Hale Sheppard Article on Willful FBAR Penalty Cases (4/26/13)

Hale Sheppard, here, a player in the offshore account area, has published a new article, titled Government Wins Second Willful FBAR Penalty Case: What McBride Really Means for Taxpayers, J. Taxation (Spring 2013).  The article can be view, by link, on his Firm's Tax Blawg, here.  Here is a short summary of the scope of the article:

Taxpayers with undisclosed foreign accounts wish it were not true, but the reality is that the U.S. government, after a long period of inactivity and ineffectiveness, has taken significant steps over the past few years to identify and punish failures to file Forms TD F 90-22.1 (Report of Foreign Bank and Financial Accounts), or foreign bank account reports (“FBARs”) as they are commonly known.  These steps include enacting legislation obligating foreign institutions to automatically provide the IRS with information about U.S. accountholders, paying handsome rewards to whistleblowers, introducing a new information return forcing taxpayers to report their foreign financial assets (including foreign accounts) to the IRS each year, imposing multi-million dollar fines and disclosure duties on foreign banks that collaborate with taxpayers to evade U.S. taxes, extracting valuable data about international tax transgressions from taxpayers participating in the Offshore Voluntary Disclosure Program (“OVDP”), and criminally prosecuting FBAR offenders.  Another step has become apparent in the past few months; that is, litigation to collect civil penalties for “willful” FBAR violations.  To date, two cases have been decided, both in favor of the U.S. government.  The attached article, “Government Wins Second Willful FBAR Penalty Case:  Analyzing What McBride Really Means to Taxpayers,” examines the most recent case.  The article was published in the Journal of Taxation (April 2013).

The article has detailed discussions of the two decided willful FBAR penalty cases (Williams and McBride), both finally won by the Government.  As I have noted  before, both cases have bad -- indeed egregious -- facts for the taxpayer, so I am not sure how to extrapolate any real world conclusions for U.S. taxpayers with better facts.

I recommend that readers having an interest in or concern about the willful FBAR penalty read the article in its entirety because it covers a lot of ground.  Here are some excerpts that I thought might be particularly helpful to readers:

Sentencing Judge on Offshore Prosecution Chastises the Government for Lack of Judgment (4/25/13)

According to a newspaper report, the sentencing judge in the prosecution of Mary Estelle Curran of Palm Beach chastised the Government for prosecuting the case rather than resolving it civilly.  Ms. Curran was among the first group of 250 U.S. taxpayers ratted out by UBS and thus was not rejected from the OVDP program when she tried to join it.  Michele Dargan, Judge frees woman seconds after giving her probation (Palm Beach Daily News 4/25/13), here.  The Government prosecuted her.  In pleading to two counts of tax perjury (Section 7206(1)), she agreed to pay the standard 50% high amount FBAR penalty of  $26.6 million on a high account amount of $43 million.  Key excerpts:

U.S. District Judge Kenneth Ryskamp sentenced Mary Estelle Curran of Palm Beach to one year probation Thursday on tax charges, before revoking the sentence five seconds later and sending her out of the courtroom a free woman. 

Ryskamp chastised the government for prosecuting the 79-year-old woman when 38,000 other people in the same situation were given amnesty. 

* * * *\ 

“Based on these facts, did it ever occur to the government to dismiss these charges,” Ryskamp said. “Instead, the government decided it had to make a felon out of this woman?”\ 

Mark Daly, from the Department of Justice Tax Division, told Ryskamp that Curran’s husband, Mortimer, was a “very wealthy man” and shouldn’t have turned to a foreign national for an interpretation of U.S. Law.”

Another article:  Susannah Nesmith & David Voreacos, Widow Gets Less Than Minute of Probation in U.S. Tax Case (Bloomberg 4/25/13), here.  Excerpts:\

TIGTA Report

TIGTA has released a recent report titled Taxpayer Referrals of Suspected Tax Fraud Result in Tax Assessments, but Processing of the Referrals Could Be Improved (2/20/13), Reference Number: 2013-40-022, here in pdf and here in html.

Highlights 

IMPACT ON TAXPAYERS 

When individuals want to report possible instances of Federal tax fraud by a taxpayer, the IRS instructs them to complete and mail Form 3949-A, Information Referral, or to provide this information via a letter.  During Fiscal Years 2010 through 2012, the Small Business/Self-Employed (SB/SE) and Wage Investment (W&I) Divisions received and screened 274,976 Forms 3949-A.  During that same time period, examinations initiated from Form 3949-A referrals resulted in more than $66.5 million in tax assessments.  However, TIGTA previously reported that the IRS misrouted referrals it sent to other functions.  While corrective actions will reduce the number of referrals received by the SB/SE and W&I Divisions, both divisions can more efficiently and effectively process Forms 3949-A. 

WHY TIGTA DID THE AUDIT 

This audit was initiated in coordination with a previous TIGTA audit based on a TIGTA Office of Investigations referral that reported thousands of identity theft cases reported on Form 3949-A were not being processed. 

WHAT TIGTA FOUND 

TIGTA determined that both the SB/SE and W&I Division screeners improperly screened Forms 3949-A.  While improvements to the processes and better communication with the Accounts Management function will reduce the number of referrals the divisions receive, other issues affect the screeners’ ability to research and identify referrals worthy of examination.  Neither division has a routine review process to evaluate screened referrals not selected for examination.  Routine checks of screened work would identify potential areas for improvement.  In addition, the SB/SE Division does not have specific guidelines for screeners.  More detailed guidelines would allow SB/SE Division screeners to be more consistent when evaluating referrals. 

The SB/SE and W&I Divisions spent approximately $211,041 to screen the 102,465 Forms 3949-A received for Fiscal Year 2012 and assessed more than $29 million.  The divisions should reevaluate the Form 3949-A program’s effectiveness once corrective actions are complete and determine how much of their limited resources they should devote to the program.  Increased efficiency may make it more cost efficient for the divisions to place a higher priority on these referrals.

Bank Frey Executive and Swiss Lawyer Indicted (4/18/13)

The USA for SDNY has announced, here, the indictment of Stefan Buck, head of "Bank 1" (Bank Frey), and Edgar Paltzer, a partner at a Swiss law firm, a dual U.S.-Swiss citizen, and a registered attorney in NY.  (A copy of the indictment is here.)  According to the press release, they "are each charged with one count of conspiring with U.S. taxpayer-clients and others to hide millions of dollars in offshore accounts from the IRS and to evade U.S. taxes on the income earned in those accounts."  The following are other key excepts from the press release.

PALTZER is a U.S.- and Swiss-trained lawyer who began to practice at the Swiss Law Firm in 1998, in the fields of international private client work, wealth transfer planning, successions, trusts and foundations, and eventually became a partner. PALTZER is licensed to practice in New York State. 

In 2007, BUCK worked as a client adviser, and later, as the head of private banking at Swiss Bank No. 1, which provides private banking, asset management, and other services to clients around the world. In December 2012, BUCK became a member of Swiss Bank No. 1’s three-person executive committee. 

In March 2009, UBS AG (“UBS”), a Swiss bank that provided private banking services to U.S. taxpayers, entered into a deferred prosecution agreement with the Department of Justice and admitted engaging in a conspiracy to defraud the IRS. In February 2012, Wegelin & Co. (“Wegelin”), another Swiss bank that provided similar services, was indicted by a grand jury in the Southern District of New York for its conduct in conspiring with U.S. taxpayers to evade taxes, and ultimately pled guilty. Between March 2009 and February 2012, Swiss Bank No. 1 experienced an increase of approximately 300% in clients who were U.S. taxpayers. Further, as of September 30, 2012, Swiss Bank No. 1 had approximately 2 billion Swiss francs in assets under management (“AUM”), equating to approximately $2.12 billion. Approximately 882.5 million Swiss francs of this AUM, equating to approximately $938 million, or approximately 44 percent of Swiss Bank No. 1’s total AUM, was held on behalf of U.S. taxpayers living in the United States.

Update on U.S. Swiss Negotiations for a Global Settlement (4/18/13)

Reuters reports developments on this front.  Katharina Bart and Kim Dixon, Deal on the table in U.S.-Swiss tax dodger dispute (Reuters 4/17/13), here.  Excerpts:

The Swiss and U.S. governments were considering on Wednesday a possible solution to end their dispute over Swiss banks accused of helping wealthy Americans evade billions of dollars in taxes. 

[A] source familiar with the long-running and complex talks has told Reuters that the two countries have agreed on an outline for a deal. 

To determine how they should be dealt with, the source said, more than 300 Swiss banks would be divided into groups based on the extent to which they had helped U.S. clients hide money.

The article also discusses the indictment of a Bank Frey executive, Stefan Buck, and a Swiss lawyer, Edgar Paltzer, yesterday.  I will devote a separate blog to that indictment, but I do not here that the diplomatic negotiations and the indictment are probably related.

TIGTA Report on Actions to Identify Potential Fraud During Civil Audits (4/17/13)

TIGTA issued a new report, Actions Can Be Taken to Reinforce the Importance of Recognizing and Investigating Fraud Indicators During Office Audits, here.  Here are the published highlights:

IMPACT ON TAXPAYERS 

Penalties, such as for civil fraud, are designed to promote voluntary compliance by imposing an economic cost on taxpayers who choose not to comply with the tax law. Because indicators of fraud are not always recognized and properly investigated, the IRS may be missing opportunities to further promote voluntary compliance and enhance revenue for the Department of the Treasury. 

WHY TIGTA DID THE AUDIT 

This audit was initiated to determine whether fraud is recognized and pursued during office audits of individual tax returns in accordance with IRS procedures and guidelines.  The review is part of our Fiscal Year 2013 Annual Audit Plan and addresses the major management challenge of Tax Compliance Initiatives.  

WHAT TIGTA FOUND 

TIGTA reviewed a statistical sample of 100 office audits, closed between October 2009 and September 2010, that involved high-income and sole proprietor taxpayers agreeing they owed additional taxes of at least $10,000.  The review identified 26 audits with fraud indicators that were not recognized and investigated in accordance with some key IRS procedures and guidelines.  When the sample results are projected to the population of 3,674 closed office audits meeting the above characteristics, TIGTA estimates that fraud indicators were not recognized and investigated in approximately 939 office audits during Fiscal Year 2010.  TIGTA estimates that additional assessments totaling approximately $5.8 million in civil fraud penalties may have been avoided by taxpayers. 

TIGTA’s evaluation indicates that a combination of factors caused the quality problems and that actions can be taken at the examiner and first-line manager levels to better ensure that fraud indicators are recognized and properly investigated.

Lesson for Students on the Civil Tax Collateral Consequences of a Criminal Case (4/16/13)

Last night in our Tax Fraud class at UH Law School, we covered a chapter on Civil Tax Considerations.  A Tax Court decision yesterday offers a good opportunity to reprise key points from the class.  The materials in this blog are directed to students rather than experienced practitioners.

In Laciny v. Commissioner, T.C. Memo. 2013-107, here, after pleading guilty to tax perjury (Section 7206(1), here), the IRS pursued the taxes for years of her counts of conviction and related years.  The Tax Court sustained the IRS's determination of additional taxes and the civil fraud penalty.  The following are key points from the opinion (and except for the student's curiosity, the reading the opinion is not necessary).

1.  The underlying tax misconduct was the diversion of corporate funds, thereby underreporting both corporate tax and individual tax.

2.  The wife had previously been indicted for multiple counts, including tax perjury for corporate and individual returns, conspiracy, and aiding and abetting.  She then pled guilty to two counts each of corporate and personal false returns (tax perjury).  The plea agreement had a schedule of total unreported diverted funds.  During her colloquy on plea, she admitted her misconduct including the intentional omission of income.

3.  The wife was sentenced to one year and one-day.  (Students will recall that the addition of one day over one year qualifies the defendant for the good time credit that will knock time off the sentence actually served,  provided, of course, the defendant behaves while incarcerated.)  She was also ordered to pay restitution in an amount not specified, although the respondent agreed that any payments of the restitution would be applied to reduce the tax liability (see fn. 9 on p. 13 of the slip opinion).

4.  The IRS issued a notice of deficiency to husband and wife relating to the tax liability involved and the civil fraud penalty.  (Students will recall that Congress recently enacted a provision that permits the IRS to assess amounts related to tax restitution immediately without having to issue a notice of deficiency; of course to the extent that the IRS seeks more than is included in an order of restitution (which typically would not include mere civil tax adjustments or penalties), the IRS will have to issue a notice of deficiency.)

Boulware Redux - Attorneys Fees from Shareholder's Criminal Case Not Deductible by Corporation (4/14/13)

This is more or less a whimper from the past.  Readers may recall the Supreme Court decision in Boulware v. United States, 552 U.S. 421 (2008), here.  See also Boulware Wins the Battle Only to Lose the War (FTCB 3/9/09) , here (discussing the Ninth Circuit's opinion on remand from the Supreme Court.).

In HIE Holdings v. Commissioner, 2013 U.S. App. LEXIS 6952 (9th Cir. 2013), here, Boulware and his related corporations suffered the civil tax fall out from the criminal case.  The opinion is a nonprecedential opinion.  Many such opinions are cryptic; HIE Holdings is cryptic, but the key point for this blog is clear.  I quote the relevant portion in full:\

This appeal concerns tax positions filed by Hawaiian Isles Enterprises, Inc.  (HIE) and HIE Holdings, Inc. (Holdings). First, the founder and controlling shareholder of HIE and Holdings, Michael Boulware, faced criminal and civil litigation for fraud and tax evasion. HIE and Holdings paid Boulware's substantial legal defense fees and claimed these fees as deductible business expenses. * * * * In a thorough opinion, the Tax Court, for the most part, agreed, characterizing most of the legal fees as Boulware's personal expenses * * * *.  We affirm the judgment of the Tax Court. 

A. Legal Fees 

Boulware's contested legal defense fees are not an "ordinary and necessary" business expense under I.R.C. § 162(a) as they do not "arise[] in connection with the . . . profit-seeking activities" of HIE or Holdings, but instead spring from the personal fraud of Boulware. United States v. Gilmore, 372 U.S. 39, 40, 48, 83 S. Ct. 623, 9 L. Ed. 2d 570, 1963-1 C.B. 356 (1963). Nor are these fees theft losses under I.R.C. § 165(e), as HIE and Holdings knowingly paid for Boulware's fees. Taxpayers' attempt to raise the issue of the Lee expenses for appeal in a footnote fails under United States v. Strong, 489 F.3d 1055, 1060 n.4 (9th Cir. 2007) (holding that "[t]he summary mention of an issue in a footnote, without reasoning in support of the appellant's argument, is insufficient to raise the issue on appeal" (internal quotation marks omitted)). Taxpayers' attempt to object to the Tax Court's treatment of their bad debt is similarly unavailing, as the Tax Court's judgment was not adverse to the taxpayers on this issue. Finally, the Tax Court did not clearly err in determining that Boulware cannot deduct these fees himself as ordinary and necessary expenses of his systemic wrongdoings, as his various schemes did not amount to a trade or business, even an illicit one.

This is so cryptic that, from the opinion, not everything said under "Legal Fees" is clear.  Still, it is clear that the Tax Court's denial of those legal fees was affirmed.  The next related questions, not answered, is whether the corporations' payment of those legal fees would be either compensation or dividend distributions to Boulware and, if so, Boulware could himself deduct those fees (subject to any limitations on deductions).

Negative Inference from NonParty Alleged Co-Conspirator's Invocation of Fifth Amendment in a Civil Case (4/13/13)

Last week, in the class that Larry Campagna, here, and I teach on Tax Fraud at UH Law School Larry, a student asked about the assertion of the Fifth Amendment by a third party witness -- alleged to be a co-conspirator -- permits a negative inference against a party alleged to be a co-conspirator.  It is a good question, so I took a look and thought I would post my very brief research -- I have not chased this to the ground.

Of course, it is common-place in criminal cases that a nonparty co-conspirator's testimony can be used against a co-conspirator defendant.  The applicable Federal Rule of Evidence, Rule 801(d)(2)(E), here, so provides:

(d) Statements That Are Not Hearsay. A statement that meets the following conditions is not hearsay: 

* * * * 

(2) An Opposing Party’s Statement. The statement is offered against an opposing party and: 

* * * * 

(C) was made by a person whom the party authorized to make a statement on the subject; 

(D) was made by the party’s agent or employee on a matter within the scope of that relationship and while it existed; or 

(E) was made by the party’s coconspirator during and in furtherance of the conspiracy.   

The statement must be considered but does not by itself establish the declarant’s authority under (C); the existence or scope of the relationship under (D); or the existence of the conspiracy or participation in it under (E).

The Notes of the drafting Committee say:

A Self-Proclaimed "Simple Man," "Utterly Uneducated" in Tax and Finance, but Still a Self-Made Multi-Millionaire Loses his Bullshit Tax Shelter Case (4/13/13)

In Kerman v. Commissioner, ___ F.3d ___, 2013 U.S. App. LEXIS 7032 (6th Cir. 2013), here, the Sixth Circuit rejected the Kerman's claim for tax benefits or, at least, relief from penalties from a bullshit tax shelter, this one of the Cards variety that has met with uniform rejection from the courts.  I just gave you the final result.  But the opinion starts this way (usually you can tell the result from the opening):

A tax shelter can be legitimate — if the reported transaction has economic substance. But the shelter Mark Kerman participated in lacked such substance. The transaction had no purpose other than the creation of an income tax benefit. After Kerman claimed the benefit on his tax return, the IRS disallowed the deduction and imposed a valuation misstatement penalty pursuant to 26 U.S.C. § 6662(e), which was increased to 40 percent of the unpaid tax pursuant to § 6662(h). The tax court affirmed the IRS's decision. Kerman appeals, contending that the shelter was legitimate and that, even if it was not, the penalty should not be imposed. Because the transaction lacked economic substance and Kerman lacked reasonable cause or good faith to believe that it did, we AFFIRM.
I
A
Mark Kerman is a college-educated multi-millionaire.

Toward the end of the opinion another key signal dot is connected as follows:

Finally, Kerman argues, the tax court gave him too much credit. He's just a simple man, "utterly uneducated in the complex tax arena — let alone the more byzantine tax-shelter realm." Appellant's Br. 48. Consequently, he was forced to rely on personal advisors. And, he argues, his reliance was reasonable even if his advisors had conflicts of interest.

So, what should I say about the opinion?  Prudence and respect for my readers time counsels that I should not say anything except the bullet points from the case.  So, I won't.

Fraud Civil and Criminal and Collateral Consequences (4/13/13)

Professor Joshua Blank, Professor of Tax Practice and Faculty Director of the Graduate Tax Program, New York University School of Law, here, has posted this article to SSRN:

Blank, Joshua D. , Collateral Compliance (February 25, 2013). University of Pennsylvania Law Review, Forthcoming; NYU Law and Economics Research Paper No. 12-06. Available at SSRN: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2032788

This posting is a draft of 2/25/13 of an article that will, presumably subject to final revisions, appear in the 162 U. PA. L. REV. __ (forthcoming, 2013).

This draft says:

PRELIMINARY DRAFT: 2/25/13
Please do not cite without permission

For this reason, I will not cite it quote it, etc., except for the table of contents below.  I do expect, however, to make a blog entry on it when the law review article is published.  In the meantime, readers having an interest in the area can read this draft

SSRN Abstract:

As most of us are aware, the failure to comply with the tax law can lead to civil and criminal tax penalties. But tax noncompliance has other consequences as well. Collateral sanctions for tax noncompliance, which are imposed on top of tax penalties and are often administered by agencies other than the taxing authority, increasingly apply to individuals who have failed to obey the tax law. They range from denial of hunting permits to suspension of driver’s licenses to revocation of passports. Further, as the recent Supreme Court case Kawashima v. Holder demonstrates, some individuals who are subject to tax penalties for committing tax offenses involving “fraud or deceit” may even face deportation from the United States. Criminal law scholars have written dozens of articles on the collateral consequences of convictions. Yet tax scholars have virtually ignored collateral tax sanctions, even though their use by the federal and state governments is growing. 

This Article offers a comprehensive analysis of collateral consequences in the taxation context. While many criminal law scholars have proposed ways to alleviate collateral consequences, this Article argues that, when applied in connection with violations of the tax law, collateral consequences may offer previously unappreciated social benefits. In many cases, collateral tax sanctions can promote voluntary tax compliance more effectively than additional monetary tax penalties, especially if governments increase public awareness of collateral tax sanctions. Governments should therefore embrace these sanctions as a means of tax enforcement and taxing authorities should publicize them affirmatively.

Sentencing Guideline Amendment on Unclaimed Credits, Deductions and Exemptions (4/13/13)

The United States Sentencing Commission voted on its 2013 amendments.  The amendments are here,  with the tax amendments on p. 61.   The amendments change the Commentary in §2T1.1 to read as follows:

Unclaimed Credits, Deduction s, and Exemptions.—In determining the tax loss, the court should account for the standard deduction and personal and dependent exemptions to which the defendant was entitled. In addition, the court should account for any unclaimed credit, deduction, or exemption that is needed to ensure a reasonable estimate of the tax loss, but only to the extent that (A) the credit, deduction, or exemption was related to the tax offense and could have been claimed at the time the tax offense was committed; (B) the credit, deduction, or exemption is reasonably and practicably ascertainable; and (C) the defendant presents information to support the credit, deduction, or exemption sufficiently in advance of sentencing to provide an adequate opportunity to evaluate whether it has sufficient indicia of reliability to support its probable accuracy (see §6A1.3 (Resolution of Disputed Factors) (Policy Statement)).  

However, the court shall not account for payments to third parties made in a manner that encouraged or facilitated a separate violation of law (e.g., "under the table" payments to employees or expenses incurred to obstruct justice).  

The burden is on the defendant to establish any such credit, deduction, or exemption by a preponderance of the evidence. See §6A1.3, comment.

Hat tip to Peter Hardy, here, for calling this development to my attention.

For past postings on this issue, see

1. Principal Comments on Unclaimed Deductions and Losses in Sentencing Tax Loss Determinations (FTCB 3/16/13), here.
2. Tax Conviction and Sentence Affirmed Under Unusual Circumstances (FTCB 12/3/12), here.
3. Tax Due and Owing, Tax Loss, Restitution, Civil Tax (FTCB 5/23/12), here.
4. Tenth Circuit Decision on Unclaimed Deductions for Sentencing Tax Loss Calculations (FTCB 8/16/11), here.