Ninth Circuit Panel Requires Cheek-Type Specific Intent for Civil Willfully Preparer Penalty (8/31/21)

In Rodgers v. United States,   (9th Cir. 7/6/21), CA9 here (unpublished and nonprecedential), the Court held (based on a prior appeal) that the return preparer penalty under § 6694(b)(2)(A) for a “willful attempt in any manner to understate the liability for tax on the return or claim” requires “specific intent to understate tax liability on tax returns or claims.”  Basically, the panel held, the civil penalty requires the same level of intent as § 7206, which is the Cheek-type of intent – specific intent to violate a known legal duty.  (The panel opinion does not cite Cheek, but that is the way I read the opinion.)

The opinion is nonprecedential because, as interpreted by the panel, the Ninth Circuit’s precedent compelled the conclusion.  Accordingly, the panel reversed because the district court held that willful blindness satisfied the test of willfulness.

JAT Comments:

1. A civil penalty statutory willfully “element” often is not interpreted and applied the same as the tax crime willfully "element." The obvious example for those who follow this blog is the FBAR civil willful penalty under 31 U.S.C. § 5321(a)(5)(C).  The FBAR criminal penalty requires Cheek-type specific intent willfulness.  Ratzlaf v. United States, 510 U.S. 135 (1994).  But the FBAR civil penalty with the same word (willfully), as interpreted and applied by the courts, requires a less specific intent, including willful blindness and reckless conduct.

Willful Blindness As Permitting Only an Inference of Knowledge (8/30/21)

I have written on the question of whether the willful blindness concept permits conviction of a knowledge element crime upon the finding of willful blindness or, instead, permits only an inference of the knowledge element upon showing willful blindness.  See blog entries here.  In other words, if the criminal statute requires a knowledge element, will a showing of willful blindness require conviction or only permit conviction. 

The key in jury cases is the instruction.  In United States v. Henson, 9 F.4th 1258, 1278 (10th Cir. Aug. 19, 2021), CA10 here and GS here, the Court affirmed a challenge to the following instruction for an offense requiring knowingly as an element (a less rigid intent element than willfully for tax crimes):

The term "knowingly" means that defendant [*38]  realized what he was doing and was aware of the nature of his conduct and did not act through ignorance, mistake, or accident.

When the word "knowingly" is used in these instructions, it means that the act was done voluntarily and intentionally, and not because of mistake or accident. Although knowledge on the part of the defendant cannot be established merely by demonstrating that the defendant was negligent, careless, or foolish, knowledge can be inferred if the defendant deliberately blinded himself or herself to the existence of a fact. Knowledge can be inferred if the defendant was aware of a high probability of the existence of the fact in question, unless the defendant did not actually believe the fact in question.

I have bold-faced the key language.  To which I say, exactly!

Newsletter Focusing on DOJ Tax Criminal Enforcement Section (8/25/21)

I received the email below from Jeff Beinholt, an alumnus of DOJ Tax CES (the Criminal Section initialism).  The content speaks for itself.  Some readers of this blog may be within the target audience for his newsletter focusing on CES.

"Greetings. Jeff Breinholt here, an alumnus of the Tax (Crim) Division (1990-1997). About six months ago, I launched a newsletter devoted to Tax Division history, culture, and lore, called The Malone Report. It's a private online newsletter/blog that is only available to registered members (though it's free). Would any of you Tax Division alums like to be added? If so, you can send an email to GMAD2021@yahoo.com." 

Daugerdas Re-Appears on the Tax Scene - This Time in a CDP Proceeding for Restitution Based Assessment (8/12/21)

In Daugerdas v. Commissioner (T.C. Dkt.7350-20L Order Dated 8/11/21), here, the Tax Court (Judge Goeke) in addressed some issues arising in a CDP proceeding arising from a lien filing related to a restitution-based assessment (“RBA”) under § 6201(a)(4) for tax loss arising from Title 18 crimes of conviction.  Long-term readers of this blog may recognize the petition, Paul M. Daugerdas.  A link to posts mentioning Daugerdas is here (sorted by relevance but can be sorted in reverse chronological order).

I find the order confusing so I will try to work through the order adding some of my own nuance (at the risk of further confusion).  I caution readers that I am confused about some of the Order and may be missing the point in some of my comments.  Nevertheless here is my best shot at working through the order.  I find it very difficult to summarize in fewer words in a meaningful way.

Judge Goeke summarizes Daugerdas’ relevant trajectory as follows (Order 1-2):

            For more than a decade beginning in the early 1990s, petitioner, a former tax attorney, designed, sold, and implemented fraudulent tax shelters to his clients to enabled them  to evade tax. In October 2013 he was convicted in the U.S. District Court for the Southern District of New York on mail fraud, obstruction of the administration of the internal revenue laws, four counts of client tax evasion, and conspiracy to defraud the United States. United States v. Daugerdas, 837 F.2d 212, 218 (2nd Cir. 2016). He was acquitted of tax evasion for his personal income tax. At a sentencing hearing on June 25, 2014, the District Court sentenced petitioner to 180 months incarceration, 3 years of supervised release, restitution of $371,006,397, and preliminary forfeiture of $164,737,500 of petitioner’s assets.

Petitioner agreed to the restitution calculations submitted by the Government, and the District Court adopted those calculations. At the sentencing hearing, the District Court stated that the restitution pursuant to the Mandatory Victims Restitution Act (MVRA) and named the IRS as petitioner’s victim. It did not address a payment schedule or expressly state whether payment was due immediately. Addressing how to portion the restitution among petitioner and his co-defendants, it stated that petitioner is “responsible for the full amount of restitution” and made him jointly and severally liable with his co-defendants for $258.6 million of the restitution. The Court noted that petitioner had criminal proceeds of $97 million, i.e., tax shelter fees.

The IRS then made a § 6201(a)(4) assessment.  That provision is:

(4) Certain orders of criminal restitution
(A)In general. The Secretary shall assess and collect the amount of restitution under an order pursuant to section 3556 of title 18, United States Code, for failure to pay any tax imposed under this title in the same manner as if such amount were such tax.
(B)Time of assessment. An assessment of an amount of restitution under an order described in subparagraph (A) shall not be made before all appeals of such order are concluded and the right to make all such appeals has expired.
(C)Restriction on challenge of assessment. The amount of such restitution may not be challenged by the person against whom assessed on the basis of the existence or amount of the underlying tax liability in any proceeding authorized under this title (including in any suit or proceeding in court permitted under section 7422).

To repeat, the crimes of conviction were:  “mail fraud, obstruction of the administration of the internal revenue laws, four counts of client tax evasion, and conspiracy to defraud the United States.”  Restitution law divides the tax loss universe into tax loss related to Title 26 crimes (which includes tax evasion and obstruction of the administration of the internal revenue laws) and tax loss related to crimes under other Code provisions, principally Title 18 (which includes mail fraud and conspiracy).  Restitution for tax loss for Title 26 crimes is not generally available; restitution for tax loss for Title 18 crimes is generally available.  I say generally not available for Title 26 crimes, but a court can impose restitution for Title 26 tax crimes: (i) as a condition of supervised release after the defendant serves his incarceration period (see Order p. 8); or (ii) by consent of the defendant (which is a common condition in cases resolved by plea agreement, but there is no indication that Daugerdas consented here).  Judge Goeke discusses the supervised release that the sentencing court ordered (Order p. 8) but fails to tie it to the restitution ordered by the sentencing court.  In other words, from the factual recounting in the Order, the restitution did not include restitution for the tax crimes of conviction but only for the Title 18 crimes of conviction, so even if the court had imposed (which it does not seem to have done) restitution as a condition of supervised release, the need to tie restitution to tax crimes of conviction would seem unnecessary and nonsensical.  (The Order is not clear on this point, so I am taking a bit of a leap to conclude that the restitution related only to Title 18 crimes of conviction.)

2021 Federal Tax Procedure Editions Now Available for Download on SSRN (8/8/21)

 I have posted to SSRN the 2021 editions of my Federal Tax Procedure Book.  I have not been formally notified by SSRN that they have been accepted (whatever that means; the author paper page shows them as “Submitted;” when accepted the status will change to “Distributed.”).  Nevertheless, it appears that they are available for the community to download.

 The links to download are here:

• Federal Tax Procedure (2021 Student Ed.), SSRN here.
• Federal Tax Procedure (2021 Practitioner Ed.), SSRN here.

Looking toward the next editions in August 2022, I am constantly revising the 2021 edition which became the working draft for the 2022 editions.  I make hundreds of changes during the year, some to add new "stuff," others to correct or better state the old "stuff," and still others for reasons that feel right at the time.  For the significant changes, I post the changes on the Federal Tax Procedure Blog page to the right titled "Federal Tax Procedure Book 2021 Editions Updates (8/9/21)", here.  Each time I make post a significant change, I reset the date in parentheses.

I ask that those desiring a copy of either or both editions download from the SSRN web site.  SSRN maintains statistics on downloads that are useful for scholars.  So, please, rather than sharing a copy of the pdf in each case, direct anyone you think may be interested to the SSRN site page for the publication so that the download metric can be useful.

Also, I urge those using the book to advise me when they think the book can be improved.  Most importantly I would like to know where I have misstated or omitted something of importance.  Also, even for more mundane matters such as wording or syntax that can be improved.  Your input will permit me to make updates on the Federal Tax Procedure Blog and then make the 2022 version better.

Thank you.

This blog entry is cross-posted on the Federal Tax Procedure Blog, here.

USAO SDNY and Bank of Butterfield Enter NPA (8/3/21)

The USAO SDNY has issued this press release:  Manhattan U.S. Attorney Announces Agreement With Bermudian Bank To Resolve Criminal Tax Investigation: The Bank of N.T. Butterfield & Son Limited Pays $5.6 Million in Forfeiture and Restitution; Receives Non-Prosecution Agreement as a Result of its Cooperation, here.  The combined NPA and Statement of Facts are linked in the press release; direct link is here.

Key excerpts from the press release:

Audrey Strauss, the United States Attorney for the Southern District of New York, Stuart M. Goldberg, Acting Deputy Assistant Attorney General of the Justice Department’s Tax Division, and James C. Lee, Chief of the Internal Revenue Service, Criminal Investigation (“IRS-CI”), announced today that Bank of N.T. Butterfield & Son Limited (“BUTTERFIELD”) entered into a non-prosecution agreement (“NPA”) with the U.S. Attorney’s Office and agreed to pay $5.6 million to the United States for assisting U.S. taxpayer-clients in opening and maintaining undeclared foreign bank accounts from 2001 through 2013.  The NPA was based on BUTTERFIELD’s extraordinary cooperation, including its efforts in providing 386 client files for non-compliant U.S. taxpayer-clients, and provides that BUTTERFIELD will not be criminally prosecuted.  The NPA requires BUTTERFIELD to forfeit $4.896 million to the United States, representing certain fees that it earned by assisting its U.S. taxpayer-clients in opening and maintaining these undeclared accounts, and to pay $704,000 in restitution to the IRS, representing the approximate unpaid taxes arising from the tax evasion by BUTTERFIELD’s U.S. taxpayer-clients.

2d Circuit Holds that A U.S. Person Who Is Both Owner and Beneficiary of Foreign Trust Is Liable for Separate Penalties for Failure to Report in Both Categories (8/2/21)

There is a U.S. tax compliance problem with offshore activity often beyond the ability of the IRS to obtain or easily obtain relevant information and ensure that tax is properly reported and collected.  A prominent topic on this blog has been the FBAR reporting obligation that, as relevant to tax, assists in U.S. tax compliance with respect to foreign financial accounts.  A similar problem exists for foreign trusts with U.S. owners and beneficiaries and, not surprisingly, there are obligations for the U.S. owners and beneficiaries to report information to the IRS useful for tax compliance.

In Wilson v. United States, 6 F.4th 432 (2d Cir. July 28, 2021), 2d Cir. here and GS here, the Court held that the following are two separate filing or reporting obligations that can attract separate penalties when both apply:  

• § 6048(b)(1) requires “any United States person [who] receives . . . during any taxable year . . . any distribution from a foreign trust” to “make a return with respect to such trust for such year” that includes, inter alia, “the aggregate amount of the distributions so received from such trust;” the penalty for violating this obligation is 5% (by substitution for the 35% amount) for the § 6048(c)(1) penalty). § 6677(b)(2).
• § 6048(c)(1) requires U.S. owners “of any portion of a foreign trust” to “ensure that . . . such trust makes a return for such [taxable] year which sets forth a full and complete accounting of all trust activities and operations for the year” and “other information as the Secretary [of the Treasury] may prescribe;” the penalty is 35% of the gross reportable amount.  § 6677(a)

For those wanting to read the statutes, § 6048 is here and § 6077 is here.

Based on that holding, the Court reversed the district court’s holding that a U.S. person subject who was both owner and distribution beneficiary could be subject to only the owner penalty of 5%.

Basically, the Court’s reasoning is that the plain meaning of the statutes imposes two separate reporting obligations and separate penalties for each without any indication that only one penalty applies for a pattern of conduct that violates both reporting obligations.  

Tax Court Finds Offshore Account Owner Not Credible; Determines Income Tax Deficiency and Civil Fraud Penalty (8/1/21)

In Harrington v. Commissioner, T.C. Memo. 2021-95, GS here, the Court (Judge Lauber) determined deficiencies and the civil fraud penalty for a taxpayer who played the offshore account game (a pernicious variation of the audit lottery) and lost.  The taxpayer was a UBS depositor; UBS disclosed the taxpayer’s information and documents.  And the rest was, in a sense, inevitable. I won’t detail the particular facts of the taxpayer's audit lottery gaming, but will discuss the role of credibility.

I offer a series of excerpts directly or indirectly addressing the Court’s credibility assessments which did not go well for the taxpayer (boldface supplied by JAT except for title headings).

[*5] 

Petitioner testified that he lent this $350,000 to EWH as part of his effort to stabilize the company, by showing “potential creditors that * * * [EWH] had money in the bank.” There is no evidence that petitioner executed a loan agreement with Mr. Glube [Canadian lawyer] or EWH, and we did not find petitioner’s testimony credible.  We find that petitioner was impressed with Mr. Glube’s proficiency at secreting assets in the Cayman Islands and wished to secure the same treatment for his $350,000 nest egg.

A UBS document dated May 2002 identified petitioner and his wife as the “beneficial owners” of the Reed Account. In 2003 he traveled from New Zealand to the Cayman Islands and signed a variety of documents, one of which gave him a “power of attorney for the management of [Reed International’s] assets.” Despite being a beneficial owner of the Reed Account and having a power of attorney to manage the company’s assets, petitioner testified that he did not have “any access or control * * * to get the money back.” We did not find that testimony credible.

On the badges of fraud considered in imposing the civil fraud penalty: 

Government Abuse of Rule 6(e)’s Grand Jury Secrecy Requirement (7/31/21)

In Harbor Healthcare System, L.P. v. United States, 2021 U.S. App. LEXIS 20988  (5th Cir. 7/15/21) (Unpublished), here, a nontax case, the Court had this interesting footnote (Slip Op. 6 n. 1):

   n1 The government asserts several times in its brief that “Harbor is a subject of a grand jury proceeding.” Under Rule 6 of the Federal Rules of Criminal Procedure, the government’s attorneys “must not disclose a matter occurring before the grand jury.” Fed. R. Crim. P. 6(e)(2)(B)(vi); see also In re Grand Jury Investigation, 610 F.2d 202, 213, 219 (5th Cir. 1980) (“Punishment for contempt of court is the sanction specifically authorized by Rule 6(e)(1) for violations of its provisions, and a contempt citation will generally provide an adequate remedy for such violation.”); Wayne R. LaFave et al., Secrecy Requirements, 4 Crim. Proc. § 15.2(i) (4th ed. 2020) (discussing the need to “keep secret the subject of the grand jury’s inquiry while it is considering the possible issuance of an indictment” (citing United States v. Proctor & Gamble Co., 356 U.S. 677, 681 n.6 (1958))). An exception exists for “[t]he court [to] authorize disclosure—at a time, in a manner, and subject to any other conditions that it directs—of a grand-jury matter preliminarily to or in connection with a judicial proceeding.” Fed. R. Crim. P. 6(e)(3)(E)(i). The government has not pointed to such authorization by this or another court.

JAT Comments:

1. I am sure that attorneys with substantial experience in white-collar crimes, including tax crimes, have had instances, particularly in the old days when the Thompson memorandum applied, where the Government let the entity know that an employee was not “cooperating” after the employee asserted the Fifth Amendment either in a proffer session or before the grand jury.

D.C. SDNY Approves John Doe Summons re Offshore Enablers (7/30/21; 7/31/21)

In The Matter of the Tax Liabilities of John Does, United States Taxpayers (S.D. N.Y. 7/15/21), CL here, the Court ordered the service of a John Doe Summons upon several prominent financial services businesses related to taxpayers who may have used an offshore law firm, Panama Offshore Legal Services for U.S. tax noncompliance.  I first cut and paste the order (short 2 pages) and then link to and excerpt from the USAO SDNY Press Release explaining more about the perfunctory order.

1. The Order

UNITED STATES DISTRICT COURT FOR THE
SOUTHERN DISTRICT OF NEW YORK

IN THE MATTER OF THE TAX
LIABILITIES OF:

JOHN DOES, United States taxpayers who, at any time during the years ended December 31, 2013, through December 31, 2020, used the services of Panama Offshore Legal Services, including its predecessors, subsidiaries, and associates, to establish, maintain, operate, or control any foreign financial account or other asset; any foreign corporation, company, trust, foundation or other legal entity; or any foreign or domestic financial account or other asset in the name of such foreign entity.

Case No. 21 Misc. 424

ORDER GRANTING EX PARTE
PETITION FOR LEAVE TO
SERVE “JOHN DOE”
SUMMONSES

THIS MATTER is before the Court upon the United States of America’s “Ex Parte Petition for Leave to Serve ‘John Doe’ Summonses” (the “Petition”). Based upon a review of the Petition and supporting documents, the Court has determined that the “John Doe” summonses to Federal Express Corporation a/k/a FedEx Express; Fed Ex Ground Package System, Inc. a/k/a FedEx Ground; DHL Express (USA), Inc.; United Parcel Service, Inc.; the Federal Reserve Bank of New York; The Clearing House Payments Company LLC; HSBC Bank USA, N.A.; Citibank, N.A.; Wells Fargo Bank, N.A.; and Bank of America, N.A. (the “Summoned Parties”) relate to the investigation of an ascertainable group or class of persons, that there is a reasonable basis for believing that such group or class of persons has failed or may have failed to comply with any provision of any internal revenue law, and that the information sought to be obtained from the examination of the records or testimony (and the identities of the persons with respect to whose liability the summonses are issued) are not readily available from other sources. Moreover, the information sought to be obtained by the summonses is narrowly [*2] tailored to information that pertains to the failure (or potential failure) of the group or class of persons to comply with one or more provisions of the internal revenue law. It is therefore:

ORDERED AND ADJUDGED that the Internal Revenue Service, through Revenue Agent Katy Fuentes or any other authorized officer or agent, may serve Internal Revenue Service “John Doe” summonses upon the Summoned Parties in substantially the form as attached as Exhibits A-F to the May 4, 2021 Declaration of Katy Fuentes, Dkt. No. 4, and Exhibits G-J to the July 15, 2021 Letter from Talia Kramer, Dkt. No. 18. A copy of this Order shall be served together with the summonses.

Teacher Certificate Revocation Based on Fraud in Defraud Conspiracy; Wrong (7/29/21)

There are collateral consequences to being convicted of a tax crime (as well as other crimes).  Some of the collateral consequences for tax crimes are covered in Michael Saltzman and Leslie Book, IRS Practice and Procedure (Thomsen Reuters 2015), ¶ 12.06 Collateral Consequences.  (Note, I am the principal author  of Chapter 12, titled Criminal Penalties and the Investigation Function.)  Some of those are civil consequences.

In Certificate Revocation · "Crime of Moral Turpitude" · 18 U.S.C. §371 (Pennsylvania Law Weekly 7/20/21), the former teacher had his teaching certificate revoked after pleading guilty to a tax defraud conspiracy in 18 USC 371.  I don’t have a link to the article, but a Google search indicates that it is behind the Law.com paywall here.

The question addressed was whether the defraud conspiracy was a crime of moral turpitude.  The article says: “it was clear that conspiracy to defraud the United States was a crime of which fraud was an element.” 

As I have noted many times, the defraud conspiracy (commonly called a Klein conspiracy in a tax context) does not require fraud in its traditional meaning; thus, fraud (in its traditional meaning) is not an element of the crime.  Conduct falling far short of fraud is within the scope of the word defraud for the defraud conspiracy.  See  John A. Townsend, Tax Obstruction Crimes: Is Making the IRS's Job Harder Enough, 9 Hous. Bus. & Tax. L.J. 255, 330 ff. (2009), SSRN here.  It is true that at least deceit not involving fraud is required for conviction, but the point is that it is wrong to assume that because defraud is an element, fraud is an element.  It is not.

Accordingly, from the article, and without more, it would appear that the revocation was improper if it was based on a conclusion that the element of the crime was fraud in its traditional sense.  Of course, the Commission had the indictment in which, as usual, the prosecutors probably fluffed to manner and means to include some tax loss, so the intent to cause the tax loss would be fraud.  But, if that were the case, the offense was an offense conspiracy rather than a defraud conspiracy.  And, since this was a tax crime, the Government rarely charges without a tax loss -- which is the tax the defendant intended to evade so that there is a tax loss for sentencing.  Still, my understanding is that this type of consequence should be based on the elements of the crime.  A tax loss is not an element of the defraud conspiracy crime.  Hence, fraud is not an element of the defraud conspiracy.

ABA Tax Section Recommendation to IRS for Priority Guidance to Disavow Application of WSLA and Further Comments Re Same (7/23/21)

I have written several times on the Wartime Suspension of Limitations Act (“WSLA”), 18 U.S.C. § 3287, here.  In part relevant to tax crimes, the WSLA suspends “the running of any statute of limitations applicable to any offense involving fraud or attempted fraud against the United States or any agency thereof in any manner, whether by conspiracy or not.”  (Cleaned up.) The statute of limitations is suspended from the date of the “specific authorization for the use of the Armed Forces until 5 years after the termination of hostilities as proclaimed by a Presidential proclamation, with notice to Congress, or by a concurrent resolution of Congress.”  (Cleaned up.)

Where the WSLA is applicable, there are several authorizations that might establish the starting point for the suspensions.  Authorizations that have never been revoked were passed in 2001 and 2002 related to the activity after the 9/11 event.  So, for purposes of this discussion, I assume that the WSLA authorizes tax crimes prosecutions with the general 6-year statute of limitations for conduct back to 1995 or 1996 and the statute continues until 5 years after the authorizations are terminated.

Caveat:  There could be even earlier starting dates under the WSLA for earlier authorizations not yet revoked:  (1) a 1991 authorization incident to the Gulf “War”; and (2) a 1957 authorization (although it might not meet the “specific authorization” required by the WSLA.  Matthew Waxman, Remembering Eisenhower’s Middle East Force Resolution (LawFare 3/9/19), here.  The House has recently passed resolutions to revoke these authorizations.  See Karoun Demirjian, House votes to repeal military authorizations dating to Gulf War, Cold War (WAPO 6/29/21), here.

I have stated my belief that tax evasion under § 7201 is within the literal language of the WSLA.  That would mean also that the offense conspiracy to commit tax evasion would likely be within the literal language of the WSLA.  (The defraud conspiracy, in my view, would not be within the WSLA because the defraud conspiracy for some strange reason does not require fraud per Hammerschmidt v. United States, 265 U.S. 182, 188 (1924); see John A. Townsend, Tax Obstruction Crimes: Is Making the IRS's Job Harder Enough, 9 Hous. Bus. & Tax. L.J. 255 (2009), here; I think (perhaps speculation) that if the crime’s elements do not include fraud in the traditional sense of the term (defraud conspiracy does not), the WSLA would not apply.)

However, for some reason as yet unnanounced, at least in recent memory, DOJ Tax has asserted only the traditional six-year tax crime statute of limitations.  The CTM’s discussion of statutes of limitations does not even mention the WSLA.  DOJ CTM 7.00 STATUTE OF LIMITATIONS, here.  So how long DOJ Tax will forebear asserting the WSLA is open.  Further, in cases where the defendant challenges the normal statute of limitations, a court might sua sponte invoke the WSLA to deny the challenges.

Court Reverses TOP Offset Against Social Security Payments That Exceed Court's Restitution Schedule for Payments (7/21/21; 8/2/21)

In United States v. Taylor, No. CrimAction 06-658-03, 2021 U.S. Dist. LEXIS 134638 (E.D. Pa. July 20, 2021), CL here, the Court found that the Treasury Offset Program (“TOP”) collection, via offset, of criminal restitution from Social Security Benefits was not permitted under the Court’s schedule for restitution ($100 per year) and ordered return of the collections in excess of the Court’s restitution schedule.

Key points of the holding:

1. In January 2008, Taylor was convicted of the defraud / Klein conspiracy In ordering restitution in the earlier criminal case, the Court determined restitution was $3,300,000 but that Taylor could pay not more than $100 per year and scheduled that she pay that amount per year.  

2. Taylor thereafter began receiving Social Security monthly payments.

3. The Federal Government has a Treasury Offset Program (“TOP”) permitting the Government to collect against debts a person owes to the Government by offsetting payments the Government owes to the debtor.  The Court’s discussion of the TOP program is good, so I quote it (Slip Op. pp. 5-6; cleaned up):

TOP is a federal program authorized by the Debt Collection Act of 1982, as amended by the Debt Collection Improvement Act of 1996, which permits the Treasury Department to collect delinquent debts owed to federal agencies. See 31 U.S.C. § 3716. Under TOP Congress has subjected to offset all funds payable by the United States,’ § 3701(a)(1), to an individual who owes certain delinquent federal debts. The contours of TOP program have been described in the following terms: 

The practice of withholding federal payment in satisfaction of a debt is known as an administrative offset.” The Debt Collection Improvement Act of 1982, 31 U.S.C. §§ 3701 et seq., authorizes the Treasury Department “to collect non-tax debts by withholding funds paid out by other federal agencies.” Pursuant to the TOP, any federal agency with a claim against the debtor, after notifying the debtor that the debt is subject to administrative offset and providing an opportunity to dispute the debt or make arrangements to pay it, may collect the debt by administrative offset. In order to do so, the creditor agency must certify to Treasury that the debt is eligible for collection by offset and that all due process protections have been met. If properly certified, the Treasury Department must administratively offset the debt. 

Under TOP, Social Security benefits are eligible for offset pursuant to the Debt [*6] Collection Improvement Act. n6  
   n6 An offset to a person’s Social Security benefits, however, cannot exceed 15% of the monthly covered benefit payment. 31 C.F.R. § 285.4(e).

Judge Holmes Weighs (At Length) Against Taxpayers Involved in Complex Bullshit Tax Shelters; Fraud Penalties Approved (7/14/21; 7/15/21)

Back in my younger years in the practice of tax law, I heard something like an aphorism or at least a pithy statement meant to suggest some truth that the difference between a doctor and a lawyer cheating on their taxes is that the doctor will file a false return underreporting tax liability (a felony) whereas the lawyer will file no return (generally a misdemeanor).  While there may be some truth in the statement, there is probably not as much truth as those acting on it by failing to file would like to hope.

I was reminded of that statement in today’s opinion in Ernest S. Ryder & Associates, Inc., APLC. v. Commissioner, T.C. Memo. 2021-88, here.  The opinion. 191 pages long and with a table of contents to help one navigate the opinion, is written by Judge Holmes who weighs in with his usual gusto in writing.

Here is the opening (Slip Op. pp.  4-5,  footnotes omitted):

Ryder & Associates, Inc., APLC (R&A), marketed six tax-reduction strategies that produced over $31 million in revenue between 2003 and 2011. The firm’s fixed costs were low, and its out-of-pocket expenses not very large. Yet year after year it paid no income tax. Its revenue flowed instead into 560 accounts and into Ryder Law Corporation, a related S corporation.  It flowed into more than 1,100 ESOPs,  other S corporations, LLCs, and other passthroughs. It flowed into ranches in Arizona, and it flowed into other ranches in New Mexico. And then it mostly seemed to pool in places where it would benefit Ernest S. Ryder and his wife Patricia, who received more than $15 million in distributions between 2002 and 2011 but paid only $31,000 in income tax during the years at issue.

The lead petitioner is a corporation, but the case is consolidated with other cases.  The principal actor in the drama, Ryder, was an accomplished tax lawyer, with an LLM from NYU Law School.  His entry into the law practice in the 1970s was particularly auspicious as noted by Judge Holmes (Slip Op. pp. 6-7): 

His timing was fortunate--he was at the stem-cell stage of his career the year that Congress enacted the Employee Retirement Income Security Act of 1974 (ERISA). When there’s an avulsive change in the law like ERISA, young lawyers can develop valuable expertise in an environment uncluttered with more senior competitors.

Knowledgeable associates in a fast-growing field are a hot commodity, and in 1975 Ryder was hired away by Harrigan, Ruff & Osborne to help that firm’s clients get their retirement plans qualified under the new law. “[T]hat’s when my career really took a turn,” Ryder explained, and he was well on his way to becoming an expert in qualified retirement plans.

Judge Holmes recounts Ryder's trajectory thereafter to include (Split Op. 8 & 9, footnotes omitted):

The aggressiveness of Ryder’s tax-reduction strategies seems to have caused some tension with his partners at Ruff Ryder, and he was asked to leave the firm sometime in 1995. Ruff Ryder’s entire pension department and its profit-sharing clients left with him. With ample experience and a fully staffed pension practice, Ryder decided to open up his own firm in early 1996. And here begins the Ryders’ tax problems. R&A is a professional law corporation and has always been taxed as a C corporation. Ryder has owned 100%, and has acted as president, of R&A since its creation. We find that Ryder also provided 100% of his legal services to clients through R&A during the years at issue. 

Despite its success and longevity, R&A reported zero taxable income from 2002 through 2011. The Ryders also reported minimal taxable income on their individual returns for those years.

I can't help but point out the catchy firm name "Ruff Ryder."

Second Circuit Continues the Strong Consensus Rejecting the Argument that FINCen Regulations Under Pre-2004 Law Limit the Maximum Willful Penalty Prescribed under the 2004 Statutory Amendment (7/14/21)

In United States v. Kahn, ___ F.3d ___, 2021 U.S. App. LEXIS 20622 (2d Cir. 7/13/21), here, the Court held, consistent with the trend of cases after two district court burps, that the FBAR willful penalty in 31 USC § 5321(a)(5), here, as amended in 2004 to increase the maximum amount of the penalty, is not limited by the FINCen’s failure to update the underlying regulations which, consistent with pre-2004 law, capped the willful penalty at $100,000.  Readers of this blog should already be aware of the issue and the trend in the cases.  The majority opinion, while lengthy, does not break new ground in analysis of the issue, so I won’t address the majority opinion further, other than to say that, as of today, it is the definitive opinion, collecting and discussing the key issues and key cases, so it should be a starting point for those wanting to get into the issue as of now.

District Court Holds that Delinquent Payment and Filing After CI Agent Contact Is Admissible in Criminal Case (7/5/21)

In United States v. Thrush, 2021 U.S. Dist. LEXIS 118742 (E.D. Mich. 6/25/21), CL here, “Thrush was indicted on multiple counts of willfully failing to pay over payroll taxes and to file tax returns.”  After being contacted by the CI agent, Thrush “began making payments on his tax liability” and filed tax returns.  In the ensuing criminal case, the Government moved in limine “to exclude evidence of Defendant's delinquent tax payments and returns.”  

The Court held that, under Sixth Circuit precedent, Thrush could introduce the evidence.  After reviewing the case authority, the Court concluded (pp. 9-10):

Defendant's version of events, if believed, would allow a reasonable jury to infer that his failure to pay taxes and file tax returns was the result of ignorance, rather than willfulness. Accordingly, Defendant's [*10]  delinquent filings, if offered in conjunction with the assertions discussed above, would be probative of his mental state during the period in question.

In comparison, evidence of the delinquent filings poses only a modest risk of misleading the jury. The evidence will not, and cannot, be offered to show that Defendant's prior crimes, if any, were somehow vitiated, see Sansone 380 U.S. at 354, and the jury will be clearly instructed as to the elements of the charged offenses and the meaning of willfulness.

Based on the foregoing, the Government has not demonstrated that the probative value of Defendant's delinquent filings is substantially outweighed by the risk of misleading the jury.

JAT Comments:

District Court Holds that FBAR Nonwillful Penalty Survives Death (7/5/21)

In United States v. Gill, 2021 U.S. Dist. LEXIS 12203 (S.D. Tex. 6/30/21), CL here, the court held that an FBAR nonwillful penalty survives the death of the person subject to the penalty.  The decision turned on whether the FBAR nonwillful penalty was remedial or penal in nature.  The general rule is that remedial liabilities survive death, but penal liabilities do not.  The difference between these two categories is based on tests formulated in Hudson v. United States, 522 U.S. 100-101 (1997) (invoking the multi-factor test under Kennedy v. Mendoza-Martinez, 372 U.S. 144, 168–69, 83 S. Ct. 554 (1963)).  Where the cause of action does not fall “neatly” in these categories, the decision is made by “primary purpose of the statute.” (Slip Op. p. 8.)  Applying these tests, the Court finds the FBAR civil nonwillful penalty remedial.

A number of cases (cited by the court in the opinion) have held that the FBAR willful penalty (which in its typical application by the IRS produces larger penalties than would have applied under the nonwillful penalty) was remedial, thus permitting the penalty to survive death. Accordingly, it is not surprising that the nonwillful penalty survives death.

Preliminary Comments on the Trump Organization and CFO Indictment (7/2/21; 7/4/21)

The much-anticipated indictment of the Trump Corporation and components and its Chief Financial Officer (“CFO”), Allen Weisselberg, has been released.  The caption is The People of New York v. The Trump Corporation, et. al. (N.Y. Supreme Court - no number available).  The indictment is here.  (The pdf copies on the web were not adequately OCR’d; I had this copy OCR’d using Adobe Acrobat text recognition; the OCRing came out much better than the copies I found in my quick searches.)

Here are my first general comments (which I may supplement or revise later):

1. The general thrust of the indictment had been reported before the indictment came out.  Basically, through various schemes, certain individuals (including, for purposes of this indictment, the CFO) caused the corporation to underreport and underpay tax liabilities.  Essentially, these individuals caused the corporation to pay compensation that did not appear on the books and filings as corporation subject to various tax obligations – including reporting income of the individuals benefiting from the payments, avoiding payroll tax to the payors and payees, etc.  

2.  This is a fairly common pattern in a closely held corporation except that the payments often go to the owner and the owner’s family rather than to an employee (here the CFO).  In this case, the owner is Trump and the owner’s family are the Trump children and spouses.  Nothing is said about Trump’s off-the-books use of corporate assets, but with the egregious conduct for Weisselberg, one has to wonder whether charges against Trump are waiting in the wings, with the prosecutor hoping Weisselberg will flip.  Given Trump's alleged use of oral instructions (or signals) to avoid putting his conduct in writing to the extent possible, somebody like the CFO would be an important (perhaps not a necessary) witness against Trump if he were indicted.