Court Denies Motion to Dismiss FBAR Collection Suit (4/30/20)

In United States v. Green (S.D. Fla. Dkt. 1:19-cv-24026-KMM, Order dated 4/27/20), CourtListener here, the Court denied a motion to dismiss, holding (i) that the FBAR willful penalty survived the death of the person penalized and (ii) that the Government’s complaint adequately alleged willfulness.  These are, by now, standard holdings, so I do not discuss them.

I do note the following interesting fact (Slip Op. p. 6-7.):

On October 31, 2013, Marie applied to enroll in the IRS’s 2012 Offshore Voluntary Disclosure Program (“OVDP”), which offered a coordinated, standardized settlement to U.S. taxpayers who had failed to report foreign bank accounts by filing FBARs and failed to pay income tax on income received in those foreign bank accounts. Id. ¶ 49. After Marie enrolling into the 2012 OVDP, she attempted to “directly enter” another offshore disclosure program offered by the IRS. Id. ¶ 51. After Marie was informed that she was not allowed to directly enter the other program, she informed the IRS that she intended to withdraw from the 2012 OVDP and the IRS removed her from the program. Id. ¶¶ 51, 52. On June 1, 2017, a duly authorized delegate of the Secretary assessed civil penalties against Marie for willfully failing to file FBARs for 2010 as to the BoJ and Templaide Accounts, and 2011 [*7] as to the BOJ account. Id. ¶ 60. 

Are Discussions with Lawyer Colleagues Waivers of the Work Product Privilege? (4/30/20)

Today, I discuss a facet of the work-product doctrine, often called the work product privilege.  I address waiver for opinion work product in the setting for discussions among lawyers (or others for whom the privilege might apply) who have not been retained in the engagement to develop and refine legal issues and theories.

The specific context that this came up was for a legal email discussion group maintain by an attorney organization to discuss particular tax contexts and issues.  The discussion group contains a large number of lawyers (I think it is limited to lawyers), and so far as I am aware, the list of lawyers (as it may change from time to time) is not made available to the members of the group.  So participants invariably do not know some or even many in the group.  There is a prohibition on Government attorneys being members.  Of course, members may from time to time become Government attorneys and have the prior discussions available to them, but that’s a rabbit trail I won’t go down right now.  Suffice it to say that there is the expectation that the discussions in the group are not available to the IRS or DOJ.

The clients' identities are not disclosed in the discussions. I have no way of knowing, but assume that the attorneys anonymize any facts that are disclosed in order to set up and move the discussion forward.  For purposes of this discussion, let’s assume that the facts are so anonymized.

The issue I present is whether the discussions that, from each participating attorney’s perspective disclose anonymized facts and seek only legal discussion, thereby constitute a waiver of the work product privilege.  Yesterday, there was a discussion on an attorney mail group regarding whether the discussions in emails to the group constituted a waiver of the work-product privilege.

The issue is whether the IRS or DOJ could in a tax investigation (including grand jury investigation) or tax litigation discover the group email discussions on the basis of waiver of the work product privilege and thereby prejudice the client (taxpayer).  For example, the first interrogatory and/or request for production in tax litigation from the Government would be to identify all discussions by the attorney relating to the client’s facts and produce all documents relating to those discussions.  Similarly, the Government could use its investigative compulsory process to demand access to the discussions and documents related to the discussions.

I had never thought about the issue before (that I can recall).  In a more general sense, I had never thought that discussing anonymized facts with fellow practitioners was a waiver of the work product privilege as to the anonymized facts and the legal and practice discussions that the anonymized facts generate.  The settings presenting the issues can be myriad, including a lunch with a fellow practitioner, a small discussion group of practitioners (many larger cities have such groups), or larger groups (such as at CLE events or, in the present case, an email discussion group).  (I should note that perhaps, if the “waiver” were viable in this context, it might also apply to Government attorney discussions with fellow Government attorneys who are not involved in the particular litigation.)

Having now thought about the issue and done some poking around on the issue, I am just going to offer some non-definitive thoughts on the issue.

I first offer the generic discussion from the current working draft of my Federal Tax Procedure Book (for publication in August 2020) (footnotes omitted, but those wanting footnotes can get the pdf with footnotes here):

f. Work Product Doctrine.

Bank Hapoalim Enters Guilty Plea to Conspiracy for Assisting U.S. Taxpayer Hide Accounts and Taxable Income (4/30/20)

DOJ Tax has this announcement: Israel’s Largest Bank, Bank Hapoalim, Admits to Conspiring with U.S. Taxpayers to Hide Assets and Income in Offshore Accounts: Bank Hapoalim (Switzerland) Pleads Guilty and Bank Hapoalim B.M. Enters into Deferred Prosecution Agreement for Criminal Misconduct; Agree to Pay Nearly $875 Million, here.  The charges thus pled are: “conspiring with U.S. taxpayers and others to hide more than $7.6 billion in more than 5,500 secret.Swiss and Israeli bank accounts and the income generated in these accounts from the Internal Revenue Service (the IRS).”

Key excerpts are:

As part of today’s resolutions, along with resolutions entered into with state and federal partners, Bank Hapoalim B.M. (BHBM), Israel’s largest bank, and Bank Hapoalim (Switzerland) Ltd. (BHS), its Swiss subsidiary, agreed to pay approximately $874.27 million to the U.S. Treasury, the Federal Reserve, and the New York State Department of Financial Services. Today’s resolution is the second-largest recovery by the Department of Justice in connection with its investigations since 2008 into facilitation of offshore U.S. tax evasion by foreign banks. 

* * * * 

Today’s resolutions include agreements with BHBM and BHS (collectively, the “Bank”) under which the Bank agreed to accept responsibility for its conduct by stipulating to the accuracy of extensive Statements of Facts. BHBM further agreed to refrain from all future criminal conduct, implement remedial measures, and cooperate fully with further investigations into hidden bank accounts. Assuming BHBM’s continued compliance with its agreement, the Government has agreed to defer prosecution of BHBM for a period of three years, after which time the Government will seek to dismiss the charge against BHBM.  

According to documents filed today in Manhattan federal court:

Fifth Circuit Rejects Attorney-Client Identity Privilege for Law Firm Documents (4/26/20)

In Taylor Lohmeyer Law Firm P.L.L.C. v. United States, 957 F.3d 505 (5th Cir. 4/24/20), here, the Court of Appeals affirmed the district court’s enforcement of a John Doe Summons (JDS) to a law firm to obtain documents, and thus identities, of the Firm’s clients who “at any time during the years ended December 31, 1995[,] through December 31, 2017, used the services of [the Firm] . . . to acquire, establish, maintain, operate, or control (1) any foreign financial account or other asset; (2) any foreign corporation, company, trust, foundation or other legal entity; or (3) any foreign or domestic financial account or other asset in the name of such foreign entity.”  The Court affirmed the district court's enforcement of the summons, rejecting the firm's argument that the client's identities were confidential client communications. 

I have revised the relevant portion of the working draft of my Federal Tax Procedure Book (for publication in August 2020) and offer below a cut and paste of the revised portion (footnotes omitted).  I also point readers to a good law review article on the general subject:  Richard Lavoie, Making a List and Checking it Twice: Must Tax Attorneys Divulge Who's Naughty and Nice, 38 U.C. Davis L. Rev. 141 (2004), here.  The following discussion from my Federal Tax Procedure Book is under the attorney-client privilege discussion.

(4) Client Identity Privilege. 

Is the identity of the client privileged under the attorney-client privilege?   A frequent context in which this question is presented is the reporting requirements for cash payments via the Form 8300, Report of Cash Payments Over $10,000 Received in a Trade or Business.  (Recall that the Form 8300 is a double agency form–for the IRS and for FinCEN.)  This reporting requirement applies to cash received by attorneys.  Often clients engaged in criminal activity pay their attorneys in cash.  Can the attorney receiving cash omit the client’s name from the report?  The mere receipt of the cash might disclose, at least implicitly, something confidential that is important to the purposes behind the attorney-client privilege; thus a requirement that the attorney disclose the receipt of the cash from the identified client might be inconsistent with the attorney-client privilege.  Another context in which the issue comes up is when the IRS issues a John Doe Summons (“JDS”) to a law firm related to abusive tax shelter transactions to discover the names of clients engaging the firm with respect to the shelter. That those clients engaged the firm with respect to the shelter does imply something about the clients’ communications with the firm, at a minimum the clients’ desire and tax need for some form of tax mitigation.  The conventional holding in this context is that the identity of the client and fee arrangements are not attorney-client communications invoking the the attorney-client confidential communications privilege.  

Some courts of appeals recognize that there may be a “narrow exception * * * when revealing the identity of the client and fee arrangements would itself reveal a confidential communication.” For purposes of convenience I refer to this narrow exception as the “identity privilege” which is a common term for it, but you should remember that it is not a separate privilege but rather a particular subset of one or more other privileges or policies that might be involved (here the attorney-client privilege).  The district court in Gertner relied upon the identity privilege but the Court of Appeals did not address the issue because it denied enforcement of the summons in any event because the Government had not used the proper John Doe summons procedure. 

I attempt here just a summary of the law in the area in tax cases: 

Compassionate Release from Incarceration Based on COVID-19 Pandemic (4/20/20; 5/7/20)

This blog entry was updated on 5/4/20 to add a short notice discussion of Paul Daugerdas' denial of compassionate release in paragraph 5 below; and on 5/7/20 to add a reference and link to Peter Reilly's blog on the Daugerdas matter.

The Procedurally Taxing Blog has an excellent posting today on the compassionate release of a notorious tax criminal, Morris Zukerman.  Leslie Book, Court Grants Compassionate Release to High Profile Tax Felon Morris Zukerman (Procedurally Taxing Blog 4/20/20), here.  The blog entry discusses the Court’s granting Zukerman release because of his physical characteristics (75 years old, diabetes, hypertension and obesity) and close physical incarceration with other inmates that might make him particularly susceptible to COVID-19 infection and serious consequences.

Since I have never before considered the compassionate release provision, 18 USC § 3582, and have not done any independent research, I refer readers to the PT Blog entry linked above, which also has a link to the decision granting Zukerman the release.

JAT Comments:

1.  I wonder whether this and related decisions granting compassionate release in the age of COVID-19 will open the floodgates of such requests for those who, sometimes with the aid of their attorneys, conjure up some special characteristics.  (See paragraph 4 below discussing the Valentino habeas corpus proceeding.)

2.  I wonder whether the Court’s reacted too hastily to the exhaustion requirement.  As often with seeking relief from Government agencies, the statute requires that the incarcerated person first seek relief from the agency.  Zukerman did seek that relief but, rather than waiting for an answer to his request or the passage of 30 days, he filed the court proceeding three days after the request.  Had that process been allowed, perhaps the Bureau of Prisons could have found some accommodation to meet at least some of the concerns claimed by Zukerman.  But, the court just blew past the exhaustion requirement based on his physical characteristics, the conditions of his incarceration and the COVID-19 pandemic.  In my posting earlier today, I said:  "(Presumably, the Bureau of Prisons had time in the court proceedings to offer the court its views as to why it believed Zukerman were not at disproportionate risk.)"  I have just reviewed Zukerman's letter response to the Government's opposition, CourtListener here, and quote from it on this issue (pp. 2-3):

Second Circuit Affirms Conviction; Includes Tax Interest and Penalties as Relevant Conduct (4/14/20; 4/21/20)

In United States v. Adams, ___ F.3d ___ (2d Cir. 2020), here, the Second affirmed the conviction and sentencing of Adams after he pled guilty to a six-count superseding indictment charging:

Counts One, Three, and Five charged Adams with making and subscribing to false tax returns for the years 2009, 2011, and 2012, in violation of 18 U.S.C. § 2 and 26 U.S.C. § 7206(1). Counts Two and Four charged Adams with tax evasion in 2011 and 2012, in violation of 18 U.S.C. § 2 and 26 U.S.C. § 7201. Count Six charged Adams with attempting to interfere with the administration of the internal revenue laws, in violation of 18 U.S.C. § 2 and 26 U.S.C. § 7212(a).

The key holdings are (as described in the Court captions are):

1.  Adams Is Not Entitled to Withdraw His Guilty Plea.
2.  The district court properly calculated the Tax Loss
3. The District Court Properly Concluded That Adams Obstructed Justice
4. Although the District Court Erred in Ordering the Payment of Immediate Restitution, the Court Had the Authority to Order Restitution as a Condition of Supervised Release
5. Adams's Double Jeopardy Claim Has Been Waived
6.  Adams Was Not Deprived of His Right to a Fair and Impartial Tribunal

The opinion is routine and, for purposes of this blog does not warrant discussion except I do address the Tax Loss Calculation because of its reminder of relevant conduct:

The tax loss calculation included penalties and interest.  Normally, the tax loss calculation would only include penalties and interest if the taxpayer were convicted of evasion of payment of the assessed amounts.  (The tax loss for evasion of assessment does not include interest and penalties.)  That taxpayer was not convicted of evasion of payment; hence he urged that the tax loss should not include those amounts.  The Court held, however, that evasion of payment was relevant conduct (cleaned up):

Since the statutory reference in § 2T1.1 n.1 does not require a charge or conviction to be applicable to a defendant's case, we hold that, under U.S.S.G. § 2T1.1 application note 1, the exception permitting interest and penalties to be included in the tax loss calculation for "willful evasion of payment cases" under 26 U.S.C. § 7201 and "willful failure to pay cases" under 26 U.S.C. § 7203 can be applied based on uncharged relevant conduct constituting violations of those statutes. Thus, even where a defendant has not been convicted of willful evasion of payment under § 7201 or willful failure to pay under § 7203, penalties and interest may still be included in the tax loss calculation if the object of the offense is to avoid the tax, penalties, and interest.

JAT Comment (added 4/16/20 11:00am):

1.  From what I recall over the years, the tax loss calculation for counts of conviction for tax crimes related to assessment (rather than collection), such as evasion of assessment and tax perjury, have not included penalties and interest in the tax loss calculation.   Perhaps my memory fails me, but I just don't recall that  the tax loss calculation included interest and penalties.  SG § 2T1.1 n. 1, here, says:  " The tax loss does not include interest or penalties, except in willful evasion of payment cases under 26 U.S.C. § 7201 and willful failure to pay cases under 26 U.S.C. § 7203."  Conceptually, if a person intended to evade assessment, it is not much of a leap, if a leap at all, to say that the person intended to avoid the interest and penalties on the tax that he or she avoided assessment.  So, I wonder if this is an opening that the Government might exploit in some cases to sweep into the loss calculation penalties and interest.  Of course, given the ranges in the Tax Table in § 2T4.1, here, including the interest and penalties may not change the offense level so it may not be that big a deal.  But one should remember that the civil fraud penalty is 75% which draws interest from the due date of the return, so the tax loss would be substantially increased so as to, depending up the loss, move up one offense level.  (The same would be true of a fraudulent failure to file penalty that goes up to 75%.)

2.  Added 5/21/20 4:00 pm: Jeremy Temkin, a frequent writer on tax crimes subjects for the New York Law Journal, has this post on Adams:  Jeremy Temkin, Financial Considerations for Sentencing in Federal Tax Prosecutions, New York Law Journal 5/21/20), here.  Highly recommended.

Offshore Account Related Plea After Quiet Disclosure (4/4/2020)

On April 3, 2020, DOJ Tax issued this press release:  Lake Worth Businessman Pleads Guilty to Evading Taxes on Millions in Income, Stashing Funds in Secret Accounts Around the World, here.

The key excerpts are (with bold face supplied by JAT to highlight the taxpayer’s attempt to hide the ball through a false quiet disclosure):

A Lake Worth, Florida, businessman pleaded guilty today to tax evasion and willful failure to file a Report of Foreign Bank or Financial Account * * * *. 

According to court documents and statements made in court, Dusko Bruer owned and operated a company that bought U.S.-made agricultural machinery and parts and sold them throughout the world. Beginning in 2003, the company did not pay Bruer a salary. Instead, Bruer used millions of dollars from the company’s bank accounts to pay his personal expenses, make investments abroad, and make transfers to an employee and his family. From 2007 through 2011, Bruer transferred over $5.8 million of the company’s profits to foreign financial accounts. Bruer used the company’s profits to buy a yacht, purchase a waterfront home for his girlfriend and himself, purchase a home for an employee, and buy real property in Serbia. Between 2007 and 2014, Bruer failed to report more than $7.7 million in income and did not pay taxes of more than $2.7 million that were due to the United States. 

Although Bruer’s company had a number of employees and reaped millions of dollars in profits, Bruer never filed a corporate tax return for the company nor did the company ever pay taxes on its income. Bruer also never filed employment tax returns during those years reporting wages that the company paid to its employees nor did the company withhold and pay over payroll taxes. 

From 2007 through 2015, Bruer maintained financial accounts in Croatia, Germany, Serbia, and Switzerland. He did not report his ownership of the accounts to the Financial Crime Enforcement Network (FinCEN) by filing a Report of Foreign Bank or Financial Account (FBAR), despite knowing he had an obligation to do so. In 2010, an account he held at a subsidiary of Credit Suisse AG in Zurich, Switzerland reached a year-end high value of $6,177,586. Bruer used the assets in his foreign accounts for personal use, including the purchase of a yacht for $1,350,000 and a 3,200 square foot home in Lake Worth, Florida, with 100 feet of waterfront frontage for approximately $1,650,000. 

From 1999 to 2014, Bruer never filed a personal tax return nor did he pay tax on his income. In 2015, Credit Suisse closed his account in Switzerland and advised him to enter the IRS’s Offshore Voluntary Disclosure Program (OVDP), by which taxpayers could avoid criminal prosecution by making a voluntary disclosure directly to IRS-Criminal Investigation, filing six years of delinquent or amended income tax returns, as well as delinquent or amended FBARs, paying back taxes, interest, and certain penalties on the six tax years in the disclosure period, and paying a penalty on the highest aggregate account balance of their noncompliant offshore assets. Bruer did not enter into the OVDP because he determined that the cost would be too high. Instead, Bruer made a “quiet” disclosure that involved filing several delinquent tax returns with the IRS, not flagging the returns in anyway or paying the taxes, penalties and interest that would be paid in OVDP. 

The returns Bruer filed as part of his “quiet” disclosure were false because they disclosed only the funds he held in the Credit Suisse account and not the funds he held in the accounts in Croatia, Germany, Serbia, nor did they report the income he earned from his company.

I offer the following:

• The information, here.
• The Plea Agreement, here.
• The Factual Agreement, here.
• The CourtListener Docket Entries, here.

JAT Comments:

Recent Article on Prosecution for False Certification of Nonwillfulness (4/1/20)

I previously reported on the indictment of Brian Nelson Booker for false certification of nonwillfulness on the form for the IRS' Streamlined Offshore Domestic Program (SDOP).  Taxpayer Charged with False SFCP NonWillful Certification (Federal Tax Crimes Blog 8/26/19), here.

An outstanding tax crimes practitioner has just published an article that fleshes the discussion out.  Sharon L. McCarthy, Streamlined Disclosure in U.S. v. Brian Nelson Booker (CPA Journal 3/31/20), here.  Sharon is with Kostelanetz & Fink, here, and her bio is here.

Sharon's article is a short read, so I won't try to summarize it other than the concluding caveat:

Violators Will Be Prosecuted The criminal charges against former CPA Brian Nelson Booker, the first ever arising from the IRS’s Streamlined Domestic Disclosure Program, serve as an important reminder to all return preparers of their duties not only to report their own income honestly and correctly, but to provide sound advice to clients whose interest in a lower penalty may blind them to facts that indicate willful nonreporting. Tax advisors now have concrete proof, through the Booker indictment, that submission of fraudulent certifications in the SDOP could result in criminal prosecution.

Bullshit Shelter Taxpayers Continuing FOIA Litigation to Identify Informants Turning Them In to IRS (3/30/20)

FOIA requests and litigation have not been featured prominently on this blog.  For this entry, FOIA litigation is front and center, but interesting for a tax crimes blog because of what the FOIA requesters (in the role of taxpayers in this case) seek from the IRS – the identity of the whistleblower, if one exists, who turned them in for attempting a raid on Treasury via a bullshit tax shelter.  In United States v. Montgomery (D. D.C. No. 17-918 (JEB) Memo Op. Dtd 3/25/20), here, the Court starts:

This Freedom of Information Act dispute represents the latest round in Plaintiffs Thomas and Beth Montgomery’s never-ending heavyweight bout with the Internal Revenue Service over their multi-billion-dollar tax-shelter scheme. After settling various financial disputes with the agency, Plaintiffs submitted FOIA requests to Defendant in order to discern whether a whistleblower had incited the agency’s investigation. The Service’s responses, however, did not bring Plaintiffs any closer to discovering the source of their woes. Frustrated in their pursuit of this information, they filed suit in this Court. 

In response to the previous round of summary-judgment motions, the Court held that Defendant had appropriately invoked Glomar with respect to one category of Plaintiffs’ requests but had failed to conduct an adequate search as to the other. History repeats itself here in regard to the current dispositive Motions. Once again, Defendant has justified its invocation of  Glomar as to certain potential documents, but it has otherwise not conducted an adequate search. The Court will therefore grant in part and deny in part the parties’ Motions for Summary Judgment and direct the IRS to renew its search.

A Glomar response a FOIA response that “neither confirms nor denies the existence of documents responsive to the request” because it would cause cognizable harm under a FOIA exception.  E.g., Ctr. for Constitutional Rights v. C.I.A., 765 F.3d 161, 164 (2d Cir. 2014).  Obviously, the IRS does not either want to disclose that there was an informant or the name of the informant if there was an informant.

Then the Court recounts the facts:

The Court has recounted the facts surrounding this prolonged tax saga in several of its prior Opinions, but it will provide a brief recap here. See, e.g., Montgomery v. IRS, 292 F. Supp. 3d 391, 393–94 (D.D.C. 2018). In the early 2000s, Plaintiff Thomas Montgomery helped form several partnerships that were structured so as to facilitate the reporting of tax losses without those entities’ experiencing any real economic loss. Id. at 393. These “tax-friendly investment vehicles” allowed Thomas and his wife Beth, filing jointly, to report the entities’ alleged losses as part of their individual tax returns. Id. (alteration omitted). In other words, Plaintiffs were able to enjoy the tax benefits of experiencing an investment loss without shouldering the consequent burdens of such a loss. Somehow — and the Montgomerys are determined to learn exactly how — the IRS caught wind of their use of these vehicles, setting into motion over a decade of litigation on the issue. 

After examining the structure of the partnerships, the IRS issued “final partnership administrative adjustments” (FPAAs) as to two of them, which resulted in the agency’s imposing certain penalties and disallowing some of the losses the Montgomerys had claimed on their individual returns. Id. at 393–94. Next, the partnerships sued the Service in several separate actions, seeking a readjustment of the FPAAs (for those keeping score at home, this would amount to a readjustment of the adjustments). See Bemont Invs., LLC v. United States, 679 F.3d 339 (5th Cir. 2012); Southgate Master Fund, LLC v. United States, 659 F.3d 466, 475 (5th Cir. 2011). Ultimately, the Fifth Circuit affirmed the IRS’s determination that the partnerships had substantially understated their taxable incomes, Bemont, 679 F.3d at 346, but held that one transaction by the Southgate partnership had a legitimate investment purpose. Southgate, 659 F.3d at 483. With these mixed verdicts in hand, the Montgomerys and the partnerships pursued thirteen separate suits against the IRS, seeking, inter alia, a refund of assessed taxes and penalties. Montgomery, 292 F. Supp. 3d at 394. The cases were ultimately consolidated, and the parties reached a global settlement agreement in November 2014 that entitled the Montgomerys to more than $485,000. Id.

Thus, while the Montgomerys did get a substantial refund, it appears that they lost their claims to even more substantial refunds.  The Montgomerys walked away from the settlement of their tax liabilities with an ax to grind--with an informant causing their woe, if there was an informant.

The Court then addresses the particular skirmish in this long running saga, calling it "Another turn of the hamster wheel."

I don’t know that there is anything more to say about this continuing saga other than that the bullshit tax shelter abusers must have more money than they apparently need.

Cross posted on Federal Tax Procedure Blog, here.

District Court Muddles an FBAR Willful Penalty Case (3/21/20; 3/24/20)

I made a key revision on 3/24/20 at 4:00pm as indicated in red below to state with cites to the statute that the willful FBAR willful penalty limits (greater of $100,000 or 50% of unreported accounts) is a maximum penalty, thus giving the IRS authority to assert lesser FBAR penalty amounts than those maximums.  That reading of the willful penalty was implicit in the  rest of the discussion; I just thought it should be made explicit.  The changed language is marked in red below.

In United States v. Schwarzbaum (S.D. Fla. Dkt. 18-cv-81147, Order dated 3/20/20), here, in an FBAR collection suit, the court:

1. Held that Schwarzbaum was not liable for the FBAR willful penalty for 2006 but held open the possibility that the nonwillful penalty might apply. 

2. Held that Schwarzbaum was liable for the FBAR willful penalty for 2007, 2008 and 2009, but held that the IRS’s method of determining the penalty was arbitrary and capricious because it was not based on the June 30 values in the unreported offshore account, but the Court held that the parties were to confer to “in an effort to resolve the outstanding amount owed.”

The CourtListener docket for the case is here.

JAT Comments:

1.  I will not review the facts leading to the holding but will instead only deal with the legal issues in the opinion that I think are worthy of comment.

Fifth Circuit Erroneously Describes Defraud Conspiracy as Conspiracy to Commit Tax Fraud (3/19/20)

In United States v. Scully, ___ F.3d ___ (5th Cir. 3/4/20), here, the Fifth Circuit affirmed Scully’s convictin for “(1) conspiracy to defraud the United States, (2) conspiracy to commit wire fraud, and (3) three individual counts of wire fraud.” (Scully was acquitted of “preparing false tax returns,” § 7206(2).)  The district court had sentence Scully to “concurrent, below-guidelines sentences of 180 months on the wire-fraud counts and 50 months on the tax-conspiracy count.”  The CourtListener docket entries are here.

In very broad strokes, Scully was in a business with two others that imported shrimp for use in frozen meals the business sold.  He cheated his partners and, in the process, apparently he or related parties reported and paid less tax than they should have.  One of his partners turned him into the IRS.  IRS CI investigated.  Scully was indicted, and was tried on the second superseding indictment, here.  The jury verdict is here.

The arguments Scully raised on appeal do not directly implicate the tax related charge on which he was convicted (Count One, conspiracy to defraud).  Scully does raise a Fourth Amendment argument to suppress the results of the search warrant obtained and conducted incident to the IRS CI investigation.  Nothing particularly unique there.  The Court rejects this and Scully’s other arguments.

The case is not particularly noteworthy, but I posted it principally to complain about the Court's loose language in describing the defraud conspiracy.  Count 1 of the superseding indictment (incorporated from the original indictment) was a conspiracy to defraud under 18 USC § 371.  Section 371actually describes two type of conspiracy: (i) an offense conspiracy, “to commit any offense against the United States;” and (ii) a defraud conspiracy, “to defraud the United States, or any agency thereof.”  The Court of Appeals describes the charged defraud conspiracy in two different ways: “conspiracy to commit tax fraud” (Slip Op. 6); and “conspiracy to defraud the United States.” (Slip Op. 9.)  The correct description is the latter rather than the former.

Swiss Bank Account Records as Business Records for Hearsay Exception (3/18/20)

In a designated order, Tax Court Judge Lauber rejected taxpayer objections to the introduction of records obtained by the IRS pursuant to the DOJ and Swiss government agreement to provide information from Swiss banks concerning "accounts of interest.”  Harrington v. Commissioner (Designated Order 2/7/20), here.  This seems to be a resolution of a hearsay objection by applying the exception for business records.

The order is very short, so I will excerpt only part of it, mostly as a teaser to read the whole order.

In 2009 the U.S. Department of Justice reached an agreement with the Swiss Government concerning "accounts of interest" held by U.S. citizens and residents. Pursuant to this agreement the Internal Revenue Service (IRS) submitted to the Swiss Government, under the bilateral income tax treaty between the two nations, a request for information concerning specific accounts believed to be beneficially owned by U.S. taxpayers. The Swiss Government directed UBS to initiate procedures that would lead to turning over to the IRS information in UBS files concerning bank-only accounts, custody accounts in which securities or other investment assets were held, and offshore nominee accounts beneficially owned indirectly by U.S. persons. See U.S. Department of Justice, Press Release, U.S. Discloses Terms of Agreement with Swiss Government Regarding UBS (Aug. 19, 2009), at http://www.usdoj.gov/opa/pr/2009/August/09-tax-818.html. The parties acknowledged that the Swiss Federal Office of Justice would oversee UBS' compliance with its commitments.
- 2 -
Pursuant to this agreement the U.S. Competent Authority received from the Swiss Government information concerning numerous U.S. taxpayers. In September 2011 the IRS received 844 pages of information concerning UBS accounts held by or associated with petitioner. This material includes bank records, investment account statements, letters, emails between petitioner and UBS bankers, summaries of telephone calls, and documentation concerning entities through which assets were held.
Respondent has submitted with the UBS documents a "Certification of Business Records" executed by Britta Delmas, legal counsel for UBS. Ms. Delmas attached to her certification an index listing 844 Bates-numbered pages as UBS records associated with petitioner. Ms. Delmas avers that these records are original records or true copies of records that: (1) were made at or near the time of the occurrence of the matters set forth therein by persons with knowledge of those matters; (2) were kept in the course of UBS' regularly conducted business activity; and (3) were "made by the said business activity as a regular practice." At the bottom of her certification Ms. Delmas "declares under penalty of perjury under the laws of Switzerland that the foregoing is true and correct."
Having considered the origin and nature of the UBS records along with the certification of Ms. Delmas, we are satisfied that the records are authentic business records of UBS and that they were used and kept in the course of UBS' regularly conducted business activities. Respondent provided fair notice to petitioner of his intent to introduce them as such. See Fed. R. Evid. 901(11). And Ms. Delmas signed the records "in a manner that, if falsely made, would subject [her] to a criminal penalty in the country where the certification is signed." Fed. R. Evid. 902(12). Accordingly, we will admit the documents into evidence as self-authenticating foreign business records. See Fed. R. Evid. 801(d)(2), 803(6), 902(11), (12). n1
   n1 It is significant that the UBS records were provided pursuant to an agreement between the United States and a foreign government. See United States v. Johnson, 971 F.2d 562, 571 (10th Cir. 1992) ("A foundation for admissibility may at times be predicated on judicial notice of the nature ofthe business and the nature of the records as observed by the court, particularly in the case of bank and similar statements.") (quoting Federal Deposit Ins. Corp. v. Staudinger, 797 F.2d 908, 910 (10th Cir. 1986)).

DOJ Tax Announces Convictions in Massive Biodiesel Tax Fraud (3/16/20)

This DOJ Tax announcement is noteworthy even though it does not involve one of the Title 26 crimes or a conspiracy to commit a Title 26 offense or an offense conspiracy to defraud the IRS:  Jury Finds Los Angeles Businessman Guilty in $1 Billion Biodiesel Tax Fraud Scheme: Four Members of Kingston Family, including the CEO and CFO of Washakie Renewable Energy, Previously Pleaded Guilty (3/16/20), here.

Key excerpts (with bold-face added by JAT):

According to evidence presented at a seven-week trial, Dermen was the owner and operator of Noil Energy Group, a California-based fuel company; SBK Holdings USA, a Beverly Hills real estate investment company; and Viscon International, a Nevada fuel additive corporation.  From 2010 to 2016, Dermen conspired with the owners and operators of Washakie Renewable Energy (Washakie), a Utah-based biodiesel company, including its Chief Executive Officer Jacob Kingston, his brother, Chief Financial Officer Isaiah Kingston, and others, including their mother, Rachel Kingston, and Jacob Kingston’s wife, Sally, to fraudulently claim more than $1 billion in renewable fuel tax credits from the IRS. 

The IRS administers refundable federal tax credits designed to increase the amount of renewable fuel used and produced in the United States. As part of their scheme, Dermen and Jacob Kingston shipped millions of gallons of biodiesel within the U.S. and from the U.S. to foreign countries and back again to create the appearance that qualifying renewable fuel was being produced and sold.  They also doctored production and transportation records to substantiate Washakie’s fraudulent claims for more than $1 billion in IRS renewable fuel tax credits and credits related to the EPA renewable fuel standard. To further create the appearance they were buying and selling qualifying fuel, the coconspirators cycled more than $3 billion through multiple bank accounts.
As a result of the fraudulent claims, the IRS paid more than $511 million to Washakie and the Kingstons that was distributed between them and Dermen. Jacob and Isaiah Kingston sent more than $21 million in fraudulent proceeds to SBK Holdings USA, Inc., Dermen’s California-based company, and sent $11 million to an associate of Dermen’s at his request. Jacob Kingston used $1.8 million of the fraud proceeds to buy Dermen a 2010 Bugatti Veyron, and they exchanged gifts including a chrome Lamborghini and a gold Ferrari.  

Dermen and Jacob Kingston also laundered $3 million through Dermen’s company, Noil Energy Group, to purchase a mansion in Sandy, Utah for Jacob Kingston and his wife Sally.  Dermen also laundered $3.5 million through his California company, SBK Holdings USA, Inc., to purchase a mansion in Huntington Beach, California.   

Throughout the scheme, Dermen assured Jacob Kingston that he and the Kingstons would be immune from criminal prosecution because they would be protected by Dermen’s “umbrella” of corrupt law enforcement personnel. Jacob and Isaiah Kingston transferred over $134 million in fraudulent proceeds to companies in Turkey and Luxembourg at Dermen’s direction, in purported payment for protection. 

The jury found Dermen guilty of conspiracy to commit mail fraud, conspiracy to commit money laundering, and money laundering concealment money laundering, and expenditure money laundering. 

Another Plea Related to Offshore Accounts (3/9/20)

DOJ Tax issued this press release:  Alabama Salesman Pleads Guilty to Tax Evasion: Defendant Used Offshore Insurance Wrapper Accounts to Conceal Assets, here.  The criminal information and plea agreement are here and here.

Key excerpts are:

According to court documents and statements made in court, Ivan Scott “Scott” Butler was an automobile industry consultant and sold automobile warranties as an independent salesman. In 1993, Butler stopped filing tax returns and attended tax defier meetings and purchased tax defier materials. Starting in 1998, Butler used several Nevada nominee corporations to receive his income. In around 1999, Butler moved hundreds of thousands of dollars, some in precious metals, to bank accounts in Switzerland and concealed his assets in offshore insurance policies held in the name of non-U.S. insurance providers, disguising his ownership of the funds. Such accounts, which generally are used as investment vehicles, are commonly known as “insurance wrappers.”
In 2014, Butler converted some of his insurance annuities into precious metals, which were shipped to Butler and another individual in the United States. Some of those precious metals were given to friends and family for safekeeping. In total, Butler caused a tax loss to the Internal Revenue Service (IRS) of $1,093,400.
* * * *
At sentencing, Butler faces a maximum sentence of five years. Butler also faces a period of supervised release, restitution, and monetary penalties.

JAT Comments:

1.  The statement of facts is just a variation on a theme of the pattern of offshore account evasion.  The big twist here is that Butler coupled the offshore evasion failure to file tax returns.

2.  Obviously, this pattern of conduct involved a lot more potential crimes than Butler pled to.  Pleading permits a conviction on fewer counts.  But, the Sentencing Guidelines permits consideration of relevant conduct but assuming that the object of the crimes (pled and relevant conduct) is tax evasion, then the tax loss for all of them will be the critical component in the Guidelines calculation.  It is unlikely that the failure to get a plea to more counts will affect the sentence Butler receives.

U.S. Accountant Enabler Connected with Panama Papers Pleads Guilty (3/1/20)

DOJ has this press release: U.S. Accountant Pleads Guilty in Panama Papers Investigation (2/28/20), here.  Key excerpts are:

A Massachusetts-based accountant who was charged along with three others in connection with a decades-long criminal scheme perpetrated by Mossack Fonseca & Co. (Mossack Fonseca), a Panamanian-based global law firm, and its related entities, pleaded guilty today to wire and tax fraud, money laundering, aggravated identity theft and other charges.  

Richard Gaffey, aka “Dick Gaffey,” 75, of Medfield, Massachusetts, pleaded guilty to one count of conspiracy to commit tax evasion and to defraud the United States, one count of wire fraud, one count of money laundering conspiracy, four counts of willful failure to file Reports of Foreign Bank and Financial Accounts (Financial Crimes Enforcement Network Reports 114), and one count of aggravated identity theft. 

* * * * 

According to the allegations contained in the indictments, other filings in this case, and statements during court proceedings, including Gaffey’s guilty plea hearing, since at least 2000 through 2018, Gaffey conspired with others to defraud the United States by concealing his clients’ assets and investments, and the income generated by those assets and investments, from the IRS through fraudulent, deceitful, and dishonest means. 

During all relevant times, while acting as an accountant, Gaffey assisted U.S. taxpayers who were required to report and pay income tax on worldwide income, including income and capital gains generated in domestic and foreign bank accounts.  Gaffey helped those U.S. taxpayers evade their tax reporting obligations in a variety of ways, including by hiding the beneficial ownership of his clients’ offshore shell companies and by setting up bank accounts for those shell companies.  These shell companies and bank accounts made and held investments totaling tens of millions of dollars.  For one U.S. taxpayer, Gaffey advised the taxpayer how to covertly repatriate approximately $3 million to the United States by reporting to the IRS a fictitious company sale  to thereby evade paying the full U.S. tax amount.  Gaffey was assisted in this scheme through the use of Mossack Fonseca law firm, including Ramses Owens, a Panamanian lawyer who previously worked at the Mossack Fonseca.

Gaffey was the U.S. accountant for co-defendant Harald Joachim von der Goltz.  From 2000 until 2017, von der Goltz was a U.S. resident and was subject to U.S. tax laws, which required him to report and pay income tax on worldwide income.  In furtherance of von der Goltz’s efforts to conceal his assets and income from the IRS, Gaffey falsely claimed that von der Goltz’s elderly mother was the sole beneficial owner of the shell companies and bank accounts at issue because, at all relevant times, she was a Guatemalan citizen and resident, and – unlike von der Goltz – was not a U.S. taxpayer.  In support of this fraudulent scheme, Gaffey submitted the name, date of birth, government passport number, address, and other means of identification of von der Goltz’s elderly mother to a U.S. bank in Manhattan. 

The press release does not state the maximum sentence based on the counts of conviction as is often stated in press releases.  Stating the maximum sentence is often misleading because sentences, particularly in tax crimes cases, are often well below the maximums based on the counts of conviction.  The sheer range of crimes to which he pled and is thus convicted would make a statement of the "stacked" maximum so great that, probably, merely stating the maximum would be misleading to the uninitiated.  Although the stacked maximum sentence is surely well in excess of 15 years, the likely sentence given his age is probably in 3-4 year range.

District Court Sustains FBAR Civil Willful Penalty (2/28/20)

In United States v. Ott (E.D. Mich. Dkt. 2:18-cv-12174 2/26/20), here, the district court sustained the IRS assertion of willful FBAR penalties.  The CourtListener docket entries are here:

In material part, the court held:

1. The preponderance of the evidence standard applied to the FBAR willful civil penalty.

2. The definition of willfulness includes recklessness and willful blindness.  (Note the caption for that holding is: “Willfulness Definition for Civil Tax Liability.”)

3. FBAR willfulness can be shown by inference from the facts.

None of this is particularly new, and follows a line of cases over the past few years.

One point of interest is that the IRS asserted tax and civil fraud penalties under § 6663 for 2006, 2007 and 2008.  (See the Tax Court Docket Entries here.)  The taxpayer petitioned the Tax Court and the case was settled for penalties and the accuracy related penalty in § 6662.  See the decision document here (Dkt 45).  Of course, the IRS' burden to prove civil fraud for the civil fraud penalty is the clear and convincing standard, whereas, the trend in cases is that proving willfulness for the FBAR civil willful penalty is preponderance and the definition of willfulness may be looser than civil fraud.  So, the two outcomes are not inconsistent on their face.

Disqus Comment Problems - Hopefully Resolved (2/21/20)

I just realized late last week that there were some disqus comment problems that have apparently been going on for at least a couple of months.  I have not received an email alert of new comments.  And then when I tried to go to the moderation  page in disqus, I could not do so.  I finally got through to the moderation page and there were a number of old comments.  I have approved those comments and hopefully they now show up, albeit belatedly.  I will work through them and see if I should make any replies to the comments.

I am sorry about the problem and will be more diligent in the future.

Two Articles on Swiss Banks (2/19/20)

This is just a miscellaneous post on Swiss Banks to report two recent articles on two different topics.

• Samuel Gerber, U.S. Tax Dispute: Swiss Banks in for More Fines? (Finews.com 2/19/20), here. The article reports on recent addenda by two Category 2 banks who reached NonProsecution Agreements (“NPAs”) under the DOJ Swiss Bank Program.  I recently reported on two incidents:  Union Bancaire Privée, UBP SA ("UBP") Enters an Addendum to its Swiss Bank Program Category 2 NPA (Federal Tax Crimes Blog 2/5/20), here; and Coutts & Co. Ltd. Enters an Addendum to its Swiss Bank Program Category 2 NPA (Federal Tax Crimes Blog 12/20/19), here.  The article speculates that there may be more to come, concluding that: “The Swiss banking industry doesn’t know how far the U.S. authorities intend to go but one observer noted that the proverbial lemon has been squeezed dry already.”  That’s their story and they are sticking to it.
• Switzerland still a hot spot to hide money, but getting better (SWI Swissinfo.ch 2/19/20), here. This article reports (excerpted from the start of the article):

The biennial Financial Secrecy Index ranks each country based on how intensely the country’s legal and financial system allows wealthy individuals and criminals to hide and launder money from around the world. The index bases each country’s secrecy score on 20 indicators, each of which is scored out of 100.  

For the first time Switzerland isn't the worst offender in the Financial Secrecy Index, which was first published in 2011. The current Financial Secrecy Indexexternal link, released by the Tax Justice Network on Tuesday, found that overall financial secrecy around the world is decreasing due to a push for more transparency. On average, countries on the index reduced their contribution to global financial secrecy by 7% since the last index in 2018. 

The Cayman Islands took the top spot followed by the US, which posted a worse score than the previous year partly because it has yet to sign up to the Common Reporting Standardsexternal link for automatic exchange. 

Switzerland’s expansion of the automatic exchange of information on clients to include over 100 countries helped the country move from first to third when it comes to opacity. According to the ranking, Switzerland reduced the risk of acting as an offshore haven by 12% from 2018. 

However, wealthy people from countries not on the list, many of which are in the developing world, can still hide their money virtually risk-free from the tax authorities in their home country by using the offshore services of banks and other financial service providers in Switzerland.