The Daugerdas Indictment - Part #4 - The Lie (6/16/09)

I have blogged before that tax shelter prosecutions are about the lie. Often, the claim is that the tax shelters lack economic substance, but in these prosecutions the real complaint is the lie that is designed to give an appearance of economic substance. The jury will not understand the complex, convoluted tax structure and byzantine legal analysis, but the jury will understand the lie. In this blog, I will look principally at the indictment's claims as to the big lie. I caution readers that I address here only my understanding of the Government's unilateral claims about the lie in the indictment. I make no attempt here to develop nuance or present defenses to those claims that the defendants may have.

The Big Lie

The big lie is the taxpayers' representations that they had a nontax business reason for participating in the shelter. "In truth and fact," the indictment asserts repeatedly, the taxpayers participated in order to achieve the touted artificial tax benefit and not for a nontax business reason (sometimes the indictment alleges "substantial" nontax business reason). And, in truth and fact, the promoters knew the taxpayers' real tax motivation, despite their formalistic reliance on the taxpayers' "representations" of business reason.

Economic Substance Doctrine Tax Felonies (6/1/11)

I write today to provide viewers access to Jasper Cummings' article, Jasper L. Cummings, Jr., Economic Substance Doctrine Felonies, 131 Tax Notes 977 (May 30, 2011) and 2011 TNT 104-10 (5/31/11). (This article is provided with the permission of Tax Analysts.)  Mr. Cummings writes on the use of the economic substance doctrine in criminal tax cases. Most particularly, he writes about Mr. R. J. Ruble who was convicted in the first round of Son-of-Boss criminal prosecutions. In that case, Ruble, a tax lawyer, was convicted along with John Larson and Bob Pfaff who provided financial services in the conceptualization and implementation of the shelters. Two prominent subsequent shelter prosecutions have also used the economic substance doctrine in the charges to the jury.

First, let me disclose that I represented one of the dismissed defendants in the sprawling prosecution that ended up in the conviction of Messrs. Ruble, Larson and Pfaff. Once my client was dismissed along with 12 others before trial, I no longer had an immediate interest in the case but I did observe the progress of the proceedings through conviction and appeal and now pending petition for certiorari in the Supreme Court. I was particularly interested in whether and how the economic substance doctrine would be presented to the jury.

Tax Crimes -- the Role of the Lie (6/20/09)

In several prior blogs I have asserted that tax crimes -- particularly tax shelter crimes -- are about the lie. Some who have read the Title 26 criminal tax provisions and the common Title 18 provisions used in prosecutions of what are at the core tax crimes will not find the word lie mentioned. Some of the tax crimes do require a lie via false statement under penalty of perjury (tax perjury, §7206(1) or false document (aiding and assisting, §7206(2)), but as I develop in this blog, the lie is the common feature critical for proscution of tax crimes even where the text of the criminal provision does not have some similar meaning.

I divide the universe of the crimes usually charged in tax crimes into two categories as follows:

On the Manafort Tax, FBAR and Bank Fraud Trial - Complex White Collar Crimes Are About the Lie (8/16/18)

In the Manafort prosecution, each side claims that lies from the other side entitles it to win.  During the closing arguments yesterday, WAPO had a running commentary of the oral arguments and the lie word (or some variant) came up early and often on both sides.  See Rachel Weiner, Matt Zapotosky, Lynh Bui and Tom Jackman, Paul Manafort trial Day 12: Case heading to jury, deliberations start Thursday (WAPO 8/15/18), here.

Of course, the defendant who rests without putting on evidence has few defenses he can credibly argue. As I noted earlier, the defendant's lawyer can argue that the Government's evidence does not prove guilt beyond a reasonable doubt.  The defendant can make that argument credible if he can convince the jury that key government witness(es) lied.  So, not surprisingly, Manafort's lawyer, Kevin Downing (formerly of tax prosecution repute, Wikipedia here) makes that claim.

From the prosecution perspective, these complex financial crimes cases are about lies, which is why the prosecution hammered that claim home.  Juries may not understand complex financial, accounting and tax rules, but they do understand lies.

I have had a number of posts about "The Lie."  Those posts are collected here but the key ones for purposes of this discussion with appropriate excerpts (in chronological order) are:

• DOJ Tax's Further Attempts to Drum Up Business / Revenue (Federal Tax Crimes Blog 12/26/09), here.

4. Another good snippet reputedly from Downing consistent with his man on a righteous mission persona is: "I want to go after the privileged people who've had the benefits of this country and are cheating their taxes, get them in front of local juries and convict them." Lee A. Sheppard, The UBS Endgame, 2009 TNT 186-1 (9/29/2009). Even the crusty Lee Sheppard is enthralled by Himself, following up with: "It is reasonable to assume that the blasé Swiss and the complacent rich American tax cheats never counted on meeting up with a guy like Kevin Downing, senior trial counsel in the Justice Department's Tax Division, who has been leading the prosecutions against Swiss bank UBS AG. Downing, a former Marine." 

5. Jeff Neiman, an AUSA for SD Florida who is prominently involved in these prosecutions, said that he wanted to "avoid technical tax issues." Sheppard paraphrased: "Whether the defendant is lying, cheating, and stealing is what the argument to the jury boils down to for Neiman." See my earlier blogs on The Lie. This statement echoes the theme of the Enron prosecutions: "This is a simple case. It is not about accounting. It is about lies and choices." John C. Hueston, Behind the Scenes of the Enron Trial: Creating Decisive Moments, 44 Am. Crim. L. Rev. 197, 207 (2007). See also Stuart P. Green, Lying, Cheating, and Stealing: A Moral Theory of White Collar Crime 246-48 (2006)

And, in case you did not already know, that is the same Kevin Downing who is the lead defense lawyer.

More on the Quellos Individuals Indictment - It is About the Lie (6/8/09)

I have now had the opportunity to review the Quellos indictment in more detail. It is all about the lie that, if the allegations are proved, a jury will understand. A jury almost certainly would not understand -- or need to understand -- the complex tax rules which might have applied if the key factual underpinning were true. The jury will understand the lie. And, the gravamen of the instructions to the jury will be that, if the jury finds that prosecutors prove the lie they allege, the defendants should be found guilty.

Let's look at the counts and the lie. At the risk of oversimplication, I simplify and thus omit much of the detail.

Mr. Cummings' Defense of Aggressive Tax Shelter Professionals (2/28/13)

I write to offer readers the following article:  Jasper L. Cummings, Jr., DOJ Criminal Tax Overreach, 138 Tax Notes 745 (Feb. 11, 2013), here, permitted with the permission of Tax Analysts.  I also offer below a brief summary and my comments.

Mr. Cummings, a frequent commentator on the tax law and its ripples (including criminal tax law), advises right up front that his principal points are:

This article makes the following principal points: 

•  The tax bar should have been somewhat more concerned about the way the Department of Justice Tax Division has prosecuted selected major law and accounting firm tax professionals who participated in the planning of, opinions on, or audit defense of some structured transactions during the most recent tax shelter boom that ended in the early 21st century. 

•  The type of arguments that the DOJ pursued against defendants like those in the Coplan case, recently affirmed in part and reversed in part by the Second Circuit, n1 might produce numerous convicted felons if applied to activities in which many readers have participated in.
   n1 United States v. Coplan, No. 10-583 (2d Cir. 2012), Doc 2012-24490, 2012 TNT 231-17 . [JAT Note:  the citation for Coplan is 703 F.3d 46 (2d Cir. 20122) and the opinion is here.]

•  The most troubling aspect of the Coplan and other prosecutions is that they follow a trend to criminalize advising, and even defending, a transaction that the DOJ believes does not produce the desired tax results under the (civil) economic substance doctrine.

Mr. Cummings uses the Coplan case as a point of departure.  (For my prior blogs on Coplan, see Major CA2 Decision on E&Y Tax Shelter Convictions (11/29/12), here, with links to the 8 other blogs on aspects of the Second Circuit's decision in Coplan.) He laments that the tax bar has just rolled over to prosecutions and convictions in tax shelter cases as a way to do damage control for their franchise in the aggressive tax planning area.  (Let a few be prosecuted so that the others can continue to play with relatively minor risk because only a few can be prosecuted).  He says (footnote omitted):

Taxpayer Playing the Bullshit Tax Shelter Game Tries to Shift Blame to the Enablers (1/16/14)

I recently posted on Blum v. Commissioner, 737 F.3d 1303 (10th Cir. 2013).  See Another Bullshit Shelter Bites the Dust (Federal Tax Crimes Blog 12/19/13), here. One aspect of Blum was the effect of the decision in related civil litigation where Blum tried to recover for his costs of getting into a too good to be true tax shelter which created basis out of thin air (actually more like a vacuum; thin air is still some air).  In the tax case, the Tax Court had questioned whether Blum was an innocent duped by the tax shelter promoters.  In the civil case where Blum was trying to portray himself in that light, the district court felt otherwise, perhaps relying in part on the Tax Court's assessment of his role.

In a recently filed civil case, a prominent and sophisticated taxpayer is suing Deutsche Bank and BDO Seidman over the taxpayer's investment in a bullshit tax shelter of similar genre to the one involved in Blum.  See Deutsche Bank, BDO Seidman Sued by Lane Over Tax Shelter (Bloomberg News 1/3/14), here.  The case is R. J. Lane v. Deutsche Bank AG, et al. (Cook Cty Circuit Court).  The opening paragraph describes the key background for Lane's desire to engage in the maneuver which brought him woe:

1. Plaintiff R.J. Lane ("Lane" or "plaintiff") is the former president and chief operating officer of a Fortune 100 computer software company ("Software Company"). In the year 2000, Lane exercised a portion of his stock option holdings in the Software Company. The Software Company reported this option exercise to the Internal Revenue Service as more than $250,000,000 in ordinary income to Lane. Lane, like many well-compensated executives, relied on a variety of tax and legal advisors to help him manage and account for his income -- such as the income reported to the IRS from the options he exercised in 2000. 

2. By the time the Software Company paid Lane his year 2000 compensation, Lane had already established a tax planning and financial advisory relationship with an attorney, Michael S. Kerekes ("Kerekes"). Kerekes was, at the time, a senior tax partner and attorney at the accounting and financial services firm known in the United States as BDO Seidman, LLP (now known as BDO USA, LLP and referred to herein as "BDO"). 

3. Lane trusted Kerekes and believed that Kerekes possessed the type of investment, tax and legal expertise necessary to help him make good financial decisions. Even though Lane was a very successful businessman and corporate executive, he nonetheless relied on Kerekes and BDO to provide him with the best and most current advice with respect to tax planning and complex financial investments. Put another way, Lane's corporate acumen did not make him a tax or financial planning expert.

Kerekes previously pled to conspiracy and tax evasion for his role in promiting bullshit tax shelters.  Judge Apportions Restitution in a Massive Tax Shelter Case (8/20/12), here, and The Daugerdas Indictment - Part #1 - the Players (6/11/09), here.  And, of course, as alleged ad nauseum in the lengthy complaint, other prominent players involved in Lane's adventures have been subject to the criminal justice system.  Most prominently, Deutsche Bank entered a NonProsecution Agreement, BDO Seidman entered a Deferred Prosecution Agreement and a prominent partner in a prominent law firm pled guilty.  So there is no doubt that the tax shelter was a fraudulent tax shelter and that the parties who promoted the shelter to Lane misbehaved.

The question in the Lane's case is whether Lane is quite the innocent that he alleges.  I don't know the other side of the story.  But, like Blum, Lane is a sophisticated person.

Again, I don't know Lane's facts but I can speak generally from my observations of the investors in bullshit tax shelters.  In most cases, they knew the gambit was too good to be true and paid the big bucks to the promoters in order to get one or more "opinions" that, they hoped, would give them some imagined defense to penalties -- civil and criminal -- for playing the too good to be true game.  Blum got called out on the gambit by the Tax Court and the District Court.  Lane hopes to fare better.

Addendum:  Remember that, in this genre of tax shelter, the taxpayer was required to make a representation as to his purpose for participating -- that he engaged for profit independent of tax savings.  The shelter would not have been  implemented without that representation.  As sophisticated as these taxpayers were, they must have known that the representation -- which requires no special tax expertise -- is untruthful.  So the shelter went forward because they told a lie.  That lie could have been the basis for criminal charges, at least in the more egregious cases, but it appears that none of the investors have not been prosecuted for the big lie.  So, they got the major benefit for which they paid the enablers -- at least no criminal prosecution.

How many of these taxpayers would have entered these shelters -- paying exorbitant fees for the steps in the shelters -- solely for the alleged profit potential independent of the purported tax benefits?  Not one, I dare say.

And,  many of these taxpayers had independent advisers who certainly must have told them that all they were really getting for the exorbitant fees was some type of potential reliance argument to avoid civil and criminal penalties.  And the good independent advisers would have told them that even the penalty protection might not work.  And,  on the merits, good independent advisors would have told them that they could not conclude that the shelters would more likely than prevail.

Daugerdas Retrial Jury Instructions - Part 07 Tax Evasion Instructions Part 3 Economic Substance (11/27/13; 11/29/13)

I address in this blog the relationship to the defendants served as enablers and the taxpayers whose taxes were allegedly evaded.  In the prior cases, as I recall it, the Government conceded that the taxpayers themselves were innocent.  That would mean that the enabler defendants could not have aided and abetted the taxpayers' tax evasion.  It is not clear to me that the Government made that concession in this Daugerdas retrial.  So, I suppose, the jury could have applied an aiding and abetting construct to say that the enabler defendants aided and abetted some or all guilty taxpayers, but I think on the instructions given which did not develop the aiding and abetting concept, they would have had to find the defendants directly guilty of the crime of tax evasion which they could do because tax evasion can apply to enablers directly without the help of derivative liability provisions.

But, I want to focus on the taxpayers because it was their taxes that had to be evaded in all events for the crime of tax evasion as charged in Daugerdas.  What would it require for their taxes to have been evaded via the tax shelters promoted by the enabler defendants?  In the Tax Due and Owing instruction, Judge Pauley explained that the critical issue as to whether there was a tax due and owing was whether the shelters lacked economic substance.  (I have previously written on what I perceive as major difficulties in presenting the concept of economic substance to juries; they can be reviewed via the "Economic Substance" link.)  One uncertainty is whether the two component tests commonly applied to determine economic substance are in the disjunctive or the conjunctive.  That uncertainty has existed for a long time.  So, Judge Pauley asked the jury to apply the test in the conjunctive -- the most defendant-friendly application of the economic substance test.

Judge Pauley explained in explaining Tax Due and Owing:

The Government claims that the reason the taxpayers * * * * owed more taxes than they reported is that the losses they claimed on their tax returns as a result of the Short Sale, SOS, Swap, or HOMER tax shelters were not allowable. The Government contends that these losses were not allowable because they stemmed from transactions that lacked “economic substance.” 

A transaction that lacks economic substance cannot enter into tax computations. Any deduction claimed for a tax loss allegedly sustained in such a transaction is not properly claimed on a tax return. 

In order to establish that a transaction lacks economic substance, the Government must prove, beyond a reasonable doubt, two components. 

The first component is that the relevant taxpayer had no genuine business purpose for engaging in the transaction in question apart from the creation of the tax deduction.  

The second component is that there was no reasonable possibility that the transaction would result in a profit.

The Role and Culpability of the Taxpayers Participating in Bullshit Tax Shelters (5/4/14)

I write today to collect and update some thoughts I have expressed before on this blog.  The background is the bullshit tax shelters on which I have written and even fulminated, if not eloquently, at least often.  I start with my own definition from my Tax Procedure Book (footnotes omitted).

  Abusive tax shelters are many and varied.  Some are outright fraudulent, usually wrapped in a shroud of paper work designed to present the shelter as a real deal.  The more sophisticated are often without substance but do have some at least attenuated, if superficial, claim to legality.  Some of the characteristics that I have observed for tax shelters that the Government might perceive as abusive are that (i) the transaction is outside the mainstream activity of the taxpayer, (i) the transaction is incredibly complex in its structure and steps so that not many (including specifically IRS auditors) will have the ability, tenacity, time and resources to trace it out to its illogical conclusion (this feature is often included to increase the taxpayer’s odds of winning the audit lottery); (iii) the transaction costs of the arrangement and risks involved, even where large relative to the deal, still have a favorable cost benefit/ratio only because of the tax benefits to be offered by the audit lottery, (iv) the promoters of the adventure make a lot more than even an hourly rate even at the high end for professionals (the so-called value added fee, which is often insurance type compensation to mediate shift potential penalty risks to the tax professional or the netherworld between the taxpayer and the tax professional) and (v) the objective indications as to the taxpayer's purpose for entering the transaction are a tax savings motive rather than any type of purposive business or investment motive.  More succinctly, Michael Graetz, a Yale Law Professor, has described an abusive tax shelter as “[a] deal done by very smart people that, absent tax considerations, would be very stupid.”  Other thoughtful observers vary the theme, e.g. a tax shelter “is a deal done by very smart people who are pretending to be rather stupid themselves for financial gain.”

The bullshit tax shelter with which I am most familiar is the Son-of-Boss shelter.  That shelter purported to generate offsets to taxable income.  The offsets were wrapped in commotion but ultimately simply created from thin air -- very thin, indeed a perfect vacuum.  Bullshit shelters appear in many guises other than Son-of-Boss.  The commotion they are wrapped in serve two purposes:  (i) creating the illusion of some basis for the magical tax benefits and (ii) hiding the fact that the illusion is an illusion.  Bottom-line, several courts have characterized the imagined benefits as "too good to be true" and indeed recognizably "too good to be true."

As readers of this blog know, many bullshit tax shelter promoters have been convicted for their participation in the bullshit tax shelters.  Taxpayers themselves have not been prosecuted or convicted.  I do understand that some taxpayers have been named targets or subjects of grand jury investigations for their participation but those investigations ended in only promoter prosecutions.

On the Klein/Defraud Conspiracy Used by Special Counsel Against Russian Targets; A Tool for Use Against Trump? (10/9/18)

In my federal tax crimes practice and writing I have often lamented the potential sweeping scope of what is called the "Klein conspiracy," which is the defraud conspiracy under 18 USC § 371.  There are two types of conspiracy in the statute -- (i) a conspiracy to commit an offense otherwise prescribed by statute, such as a conspiracy to commit tax evasion as defined in § 7201 (called an offense conspiracy) and (ii) a conspiracy to defraud the U.S., worded variously but generally stated as a conspiracy to impair or impede the lawful functions of a U.S. agency.  The second, the defraud conspiracy, is commonly called a Klein conspiracy named for a leading defraud conspiracy case.  The Klein conspiracy does not require a separate offense as the object of the conspiracy; it simply requires that two or more persons conspire together simply to impair or impede the Government agency.  The Klein conspiracy is frequently used for larger tax crimes where the alleged object is to impair or impede the IRS, but can be used in other agency settings as well.  (Klein itself was a tax case.)

A good general article on the potential dangers of the Klein conspiracy is here:  Eric Felten, A Conspiracy So Vast . . .: But where’s the crime? (The Weekly Standard 10/9/18), here.  I am quoted in the article because I have written, copiously about my concerns about the potential breadth of the Klein conspiracy.  (See links to the principal writings collected at the end of this blog entry.) Felten's article does not get into the twists and turns explored in my thrashings on the issue, but does provide a good summary overview for knowledgeable reader not otherwise steeped in the details of the law of conspiracy theories.  The particular interest of the article is the deployment of the Klein conspiracy by the special counsel in the investigation into Russian meddling in the 2016 election.

Here are some quotes from the article:

Dreeben argued that the United States needs only “to prove a conspiracy to defraud the United States.” But “we do not need to prove a criminal violation of the underlying statute,” he told the judge. In other words, the prosecution is claiming that a conspiracy to do “x” can be criminal even if “x” is not itself a criminal act. This may sound strange, but it’s not a mistake. Pressed by Judge Dabney Friedrich, the deputy solicitor general restated it: “There’s a legion of cases,” Dreeben said, that “have specifically said you don’t need to have an underlying illegality in a conspiracy to defraud.” 

He’s right. Conspiracy law is notoriously elastic. Even so, a prosecutor would rather have conspirators dead to rights on a clear, willful violation of a law than have to establish that colluding to do something not proved to be a crime is nonetheless a crime in and of itself. The latter sort of scenario is why you might need a deputy solicitor general on your team. 

The specific acts Concord is alleged to have engaged in—paying Russians to write social media posts about American politics—aren’t necessarily illegal. Such activities may violate the spirit of U.S. election law and the Foreign Agents Registration Act, but they don’t necessarily fit the elements of any crime on the books. That’s where the conspiracy charge comes in handy. Concord’s lawyers say their client has been charged “for a contrived crime not specifically defined in any statute, without notice and under a standard known only to the special counsel.” 

Yes, and so what? responds the special counsel’s office. Quoting case law, Mueller’s team asserts, “The [conspiracy to] defraud clause does not depend on allegations of other offenses.” And because of that, “even otherwise ‘lawful activity may furnish the basis for a conviction under [Section] 371’ ”—that is, the section of federal law dealing with criminal conspiracies. 

* * * * 

How did we get to a place where agreeing with someone to do something otherwise legal can be prosecuted as a criminal conspiracy? And is Concord Management likely to have any luck challenging the constitutionality of such a law?

Carl Sagan on Spotting Baloney -- aka Bullshit (1/3/14)

I have written much -- at least in quantity -- on bullshit tax shelters.  I thought readers might like this offering from Brain Pickings:  Maria Popova, The Baloney Detection Kit: Carl Sagan’s Rules for Bullshit-Busting and Critical Thinking (Brain Pickings 1/3/14), here.  The rules are excerpted from Carl Sagan's The Demon Haunted World, here.  The key chapter in that book for the topic is titled "The Fine Art of Baloney Detection."  

Sagan approaches the subject from the most vulnerable of places — having just lost both of his parents, he reflects on the all too human allure of promises of supernatural reunions in the afterlife, reminding us that falling for such fictions doesn’t make us stupid or bad people, but simply means that we need to equip ourselves with the right tools against them.

Sort of reminiscent of investors in the bullshit tax shelters.  They sought the supernatural of the tax world -- as some courts have described it, too good to be true.  They weren't true.

Sagan's 10 rules as presented in the Brain Pickings Blog are:

1. Wherever possible there must be independent confirmation of the “facts.”
2. Encourage substantive debate on the evidence by knowledgeable proponents of all points of view.
3. Arguments from authority carry little weight — “authorities” have made mistakes in the past. They will do so again in the future. Perhaps a better way to say it is that in science there are no authorities; at most, there are experts.
4. Spin more than one hypothesis. If there’s something to be explained, think of all the different ways in which it could be explained. Then think of tests by which you might systematically disprove each of the alternatives. What survives, the hypothesis that resists disproof in this Darwinian selection among “multiple working hypotheses,” has a much better chance of being the right answer than if you had simply run with the first idea that caught your fancy.
5. Try not to get overly attached to a hypothesis just because it’s yours. It’s only a way station in the pursuit of knowledge. Ask yourself why you like the idea. Compare it fairly with the alternatives. See if you can find reasons for rejecting it. If you don’t, others will.
6. Quantify. If whatever it is you’re explaining has some measure, some numerical quantity attached to it, you’ll be much better able to discriminate among competing hypotheses. What is vague and qualitative is open to many explanations. Of course there are truths to be sought in the many qualitative issues we are obliged to confront, but finding them is more challenging.
7. If there’s a chain of argument, every link in the chain must work (including the premise) — not just most of them.
8. Occam’s Razor. This convenient rule-of-thumb urges us when faced with two hypotheses that explain the data equally well to choose the simpler.
9. Always ask whether the hypothesis can be, at least in principle, falsified. Propositions that are untestable, unfalsifiable are not worth much. Consider the grand idea that our Universe and everything in it is just an elementary particle — an electron, say — in a much bigger Cosmos. But if we can never acquire information from outside our Universe, is not the idea incapable of disproof? You must be able to check assertions out. Inveterate skeptics must be given the chance to follow your reasoning, to duplicate your experiments and see if they get the same result.

Article on Importance of Jury Instructions in White Collar, including Tax, Crime Cases (1/29/13)

I write today to direct readers to a recent very good article by Susan E. Brune and Laurie Edelstein titled Jury Instructions: Key Topics in Federal White Collar Cases, 36 Champion 26 (2012), here.  The authors' web site is here and their bios are here (Brune) and here (Edelstein).

The introduction:  "The right jury charge can make the difference between conviction and acquittal. "  The article then explores some contexts in which instructions can be particularly helpful in white collar crime cases.  As most readers will know (and as I remind my Tax Fraud class), tax crimes are a subject of white collar crimes, hence it is not surprising that the authors deal with instructions in tax crimes cases.

The six areas discussed are (1) Reasonable Doubt, (2) Willful Blindness, (3) Venue, (4) Securities Fraud, (5) Tax Evasion: Economic Substance, and (6) Antitrust.  I will focus on the comments on (1) Reasonable Doubt, (2) Willful Blindness and (3) Tax Evasion: Economic Substance.

Reasonable Doubt

The authors clearly summarize the courts' continuing inability to formulate instructions to explain reasonable doubt to a jury in a way that we can have confidence that the jurors understand the concept.  None of the various circuit courts' formulations is perfect, but the suggest that (footnotes omitted):

Defense counsel might consider proposing the Federal Judicial Center's (FJC) pattern instruction on reasonable doubt, which Justice Ginsburg highlighted in Victor. This instruction does away with the "hesitate to act" analogy and instead focuses on whether the government has met its burden of proof: "Proof beyond a reasonable doubt is proof that leaves you firmly convinced of the defendant's guilt." The "firmly convinced" standard, which certain circuits have approved, more accurately reflects the state of certainty required to find a defendant guilty.  

* * * * 

Because the Supreme Court's decision in Victor effectively held that problematic words or definitions in a reasonable doubt charge can be neutralized by words or phrases that preclude the jury from requiring more than a reasonable doubt to acquit, it is unlikely that a reasonable doubt charge will provide grounds for reversal of a guilty verdict on appeal. Advocating for a charge that focuses on the government's burden and instructs the jury that it cannot convict unless it is firmly convinced of the defendant's guilt thus can be critical. It may help secure an acquittal in the first instance.

Sixth Circuit Rejects Argument that False Statement to CI Agent Should be Sentenced as Obstruction Rather than Tax Offense (3/9/17; 3/10/17)

In United States v. Ballard, ___ F.3d ___, 2017 U.S. App. LEXIS 3832, 2017 FED App. 0051P (6th Cir. 2017), here, the taxpayer lied to an IRS CI special agent about his employment and the timing of his income (attributing it to prior years).  The taxpayer was charged for tax obstruction, § 7212(a), here.  He pled guilty to that charge.  The issue was the appropriate Sentencing Guideline to apply -- the tax Guideline under § 2T.1 or the obstruction of justice Guideline under § 2J1.2.

Where two possible Guidelines can apply, the Guidelines instruct that the "most appropriate" Guideline to the conduct applies.  U.S.S.G. App. A, Introductory cmt.  The taxpayer preferred the obstruction Guideline because it produced the lower sentencing range.  The sentencing court held that the tax Guideline applied.  Given the tax context, that holding does not seem unexceptional.  But, one has to give the taxpayer some credit for trying.

What was his argument?  He urged that he really did not have an intent to evade tax, because all he was doing was trying to delay payment of the tax.  Ergo, he alleged, the crime was obstruction rather than a tax crime.

Here is how the sentencing court framed the taxpayer's argument in rejecting it:  "he never intended to evade paying his taxes but was merely delaying the payments (merely obstructing justice in other words) until he made real money—apparently more than $500,000 a year."

The Court of Appeals dispatched the argument as follows:

The district court thought the most appropriate guideline for Ballard's crime was § 2T1.1, and so do we. Consider the description of his offense conduct, as outlined in the indictment:  that he "falsely stat[ed] to an Internal Revenue Service—Criminal Investigations Special Agent investigating [Ballard's] outstanding debt for taxes due . . . that commission checks [Ballard] received from NFP Securities, Inc. in January 2009, April 2009, May 2009, June 2009, August 2009, and December 2009 were for work done at an earlier date, and that he was not working in 2009, whereas in truth and in fact [Ballard] then well knew that these commission checks were for work done" in the months the checks issued. R. 1 at 1. 

This is just the sort of "Willful Failure to . . . Supply Information[] or Pay Tax" that § 2T1.1 is built for. He lied to an IRS agent. Why? To throw off the investigation of his "outstanding debt for taxes." R. 1 at 1. That offense conduct could have been charged under other statutes punishable under § 2T1.1. See, e.g., 26 U.S.C. §§ 7201 (tax evasion), 7203 (willfully failing to supply required information). And the government would have incurred a tax loss of over $800,000 if that lie, in conjunction with his many other uncharged evasions, had succeeded. Even if Ballard is telling the truth about always intending to pay his tax bill once he hit it big—even indeed if he had already started repaying his outstanding taxes—§ 2T1.1 has a provision explaining how to account for that circumstance: Change nothing about the tax loss calculation. All of that points to § 2T1.1 as the right guideline. Yes, § 2J1.2 covers a broad genus of obstruction offenses, including Ballard's. But when another possible guideline explicitly includes the offense conduct, in addition to covering offenses that are close cousins of that conduct, that's where the offense belongs. See Neilson, 721 F.3d at 1188-89. 

Ballard objects. Because he always admitted he owed taxes, because he had always intended to pay them one day, and because the only charged conduct was one false statement, he claims that his offense is more like obstruction of an investigation than tax evasion. Like the district court, we think these points are fair. But like the district court, we think they are unpersuasive in the end. Ballard's promise about intending to eventually pay his taxes is irrelevant to our determination of which guideline is the right one; the only facts that matter are the ones in the criminal information. See U.S.S.G. § 1B1.2; United States v. Malki, 609 F.3d 503, 510 (2d Cir. 2010). Ballard stipulated that he lied to IRS investigators in order to avoid having to pay taxes at that time and that he failed to pay the debt even though he earned a significant income in 2009, conduct quite similar to tax evasion. But even if we looked outside the charges, we have nothing but Ballard's word to indicate that he was going to pay one day. His promise is less than credible, we think, in context—particularly in the context of his efforts to outmaneuver the IRS over a dozen years and the sudden appearance of his noble intentions only after being caught. 

Nor are we swayed by the fact that the charged conduct was just one lie. The egregiousness of the offense does not determine which of these two sections is appropriate (though it can, and here did, drive the district court to vary below the guidelines range). What matters in the choice between two guidelines sections is which section is more precisely tailored to reflect offense characteristics—like tax evasion and tax loss—and which section covers a more closely related group of crimes. What Ballard did, and what the government charged, was a lie to the tax collector about his earnings. The district court sentenced Ballard accordingly.

Addendum 3/10/17:

RICO Claim Dismissed Against Bullshit Tax Shelter Promoters (11/19/19; 11/22/19)

In Menzies v. Seyfarth Shaw LLP, __ F.3d ___ (7th Cir. 2019), here, the Court dismissed a RICO claim arising out of an alleged fraudulent tax shelter peddled to the taxpayer (Menzies) by a lawyer, law firm and two financial services firms.  The Court held that fraudulent tax shelters can be subject of RICO claims, but Menzies had failed to properly assert the claims in the pleadings.

The particular shelter involved was of the bullshit shelters, often a topic discussed on this blog.  Here is my definition from my Tax Procedure books (Practitioner Edition p. 905 (footnotes omitted); Student Edition p. 616):

Abusive tax shelters are many and varied.  Some are outright fraudulent, usually wrapped in a shroud of paper work and cascade of words designed to mask the shelter as a real deal.  The more sophisticated are often without substance but do have some at least attenuated, if superficial, claim to legality.  Some of the characteristics that I have observed for tax shelters that the Government might perceive as abusive are that (i) the transaction is outside the mainstream activity of the taxpayer, (ii) the transaction is incredibly complex in its structure and steps so that not many (including IRS auditors, if they stumble across the transaction(s)) will have the ability, tenacity, time and resources to trace it out to its illogical conclusion (this feature is often included to increase the taxpayer’s odds of winning the audit lottery); (iii) the transaction costs of the arrangement and risks involved, even where large relative to the deal, offer a favorable cost benefit/ratio only because of the tax benefits to be offered by the audit lottery, (iv) the promoters (and other enablers) of the adventure make a lot more than even an hourly rate even at the high end for professionals (the so-called value added fee, which is often insurance type compensation to mediate potential penalty risks by shifting them to the tax professional or the netherworld between the taxpayer and the tax professional) and (v) the objective indications as to the taxpayer's purpose for entering the transaction are a tax savings motive rather than any type of purposive business or investment motive.   

More succinctly, Michael Graetz, a Yale Law Professor, has described an abusive tax shelter as “[a] deal done by very smart people that, absent tax considerations, would be very stupid.”  Other thoughtful observers vary the theme, e.g. a tax shelter “is a deal done by very smart people who are pretending to be rather stupid themselves for financial gain.”  Others have described the abusive tax shelters as “too good to be true.” 

I could not ascertain precisely what the steps in the fraudulent tax shelter scheme were other than, like Son-of-Boss transactions, the scheme created artificial losses that, presumably, offset the gain on sale of AUI stock, although it is not clear whether that gain was ever reported in order to use artificial losses. (I perhaps just missed something there.)  Here is the best explanation from Judge Hamilton’s dissenting opinion (Slip Op. 33-35):

More on the Honest Services Supreme Court Cases and Tax Obstruction

I have previously blogged here the possibility that the pending cases before the Supreme Court on honest services fraud might portend some constriction of the scope of the Tax Obstruction Crimes. I found this discussion of the issue in the sentencing hearing transcript (pp. 49-59) in United States v. Coplan (SD NY No. (S1) 07 Cr. 453 (SHS) (the full transcript is here); the Judge is Sidney Stein and the attorney is Dennis Riordan of Riordan & Horgan who apparently will work on the appeal but handled the honest services issue connection to the conviction):

MR. RIORDAN: And Nat Lewin, who is going to be appellate counsel for Nissenbaum, are present in court today and we have been in intensive discussions for several months about this juncture that we are reaching here where we would present these questions to the court. I don't know -- and as a result of that we sort of have divided responsibility. So there are issues that I am prepared to address, but we will be cross-referencing each other's presentations and I don't know whether the court would prefer that at the end of the sentencings for Mr. Nissenbaum and Mr. Shapiro the three of us jointly address this question or whether you would like me to present some argument on the issues that I was prepared to address.

THE COURT: Well, I guess the answer to that question is, tell me what substantial question of law or fact is going to be raised on appeal that is likely to result in reversal or an order for a new trial. That's what I want to know. Tell me what your argument is.

MR. RIORDAN: Yes, your Honor. I will do that. There is going to be a major issue in this case, and I don't have the burden of asking the court to find any error on its own part because this issue did not exist at the beginning of this trial and did not really germinate fully until well after the convictions were returned, and that is that when this case is argued in the Supreme Court -- in the Second Circuit, the Second Circuit --

The Giffen Plea -- The Cost of Justice (8/18/10)

James H. Giffen, the target of an extensive FCPA investigation and indictment (including two superseders), recently resolved at least criminal woes -- at least some of them -- through a plea agreement. I write on that plea agreement because the plea is to a tax count and it raises some interesting issues. The plea agreement and the information with the count of conviction pursuant to the plea are here and here. First I will just provide a summary of the plea agreement and then raise the issues that interest me.

Giffen pleads to the one information count charging "willfully failing to supply information regarding foreign bank accounts, in violation of Title 26, United States Code, Section 7203" for the year 1996. The reference is to the foreign account question on Schedule B of the 1996 return. Section 7203 is a misdemeanor with a maximum incarceration period of one year and, according to the plea agreement, a maximum fine of $25,000. Giffen waives the statute of limitations for the charge to which he pleads. That statute of limitations expired normally six years after the date he filed the return (approximately March 27, 1997, according to the information).

Credit Suisse Criminal Venue in EDVA; More on Venue in Tax Cases (5/23/14)

There is a good article in NYT's DealBook on how the Credit Suisse criminal investigation and prosecution ended up in the United States District Court for the Eastern District of Virginia ("EDVA"). Ben Protess, From Virginia, Chasing Down Credit Suisse (NYT DealBook 5/23/14), here.

This is a good write up on how the USA EDVA snared the Credit Suisse investigtion and brought it across the goal line.  Why EDVA?  That is a good question.  The article offers insight into the answer to the question.

Federal prosecutors have a lot of power over where to locate prosecutions.  The word for placing the prosecution of a federal crime is venue.  Venue has constitutional dimensions.  I offer at the end of this blog, a cut and paste of some portions of my Federal Tax Crimes book discussing venue.  Suffice it to say for now that, for tax prosecutions alleging a conspiracy (either offense or defraud), the conspiracy will often directly or indirectly touch a lot of federal districts that could thereby serve as sufficient nexus for venue for the prosecution.

The big tax shelter prosecutions of the mid-to-late 2000s were brought in SDNY.  A lot of people with their substantial presence outside SDNY and less than strong connections with SDNY in terms of the crimes alleged were herded into the prosecution in SDNY simply because some conduct of the alleged conspiracies occurred in SDNY.

Readers will recall that much of the visible criminal prosecution activity regarding Swiss banks and Swiss bank enablers has been in SDNY.  The Wegelin actions were in SDNY.  And, I understand that USAO SDNY is conducting some other Swiss bank criminal investigations.

So, it appears at this time, for the Swiss banks, SDNY and EDVA are the centers of activity.

Here is the cut and paste (footnotes omitted):

Other Players in “Abusive” Tax Shelters

Most of the public angst over abusive tax shelters have been targeted at the promoter promoters, including the law firms rendering more likely than not legal opinions (“MLTN opinions”) used to promote the shelters. I write this column to talk about the other key players – the taxpayers and the taxpayer tax advisors, including some of the most prominent law firms in the country.

My take-off point for this discussion is a letter by Professor Marvin Chirelstein dated July 13, 2009 published in 124 Tax Notes 183 (July 13, 2009). Professor Chirelstein rails against “the astonishing role that law firms have played in justifying -- that is, helping to promote -- so many of these egregious and transparent tax shelter schemes.” He refers to the law firms whose partners issued the MLTN opinions used by the tax shelter promoters to sell the tax shelters. (I refer to these law firms as the “promoter law firms.”) For purposes of this response only , I accept Professor Chirelstein's premise that the MLTN opinions he refers to were blatantly false. That does not mean that I agree with that premise, but I only want to explore here the consequences if the premise were correct.

I wonder, though, why Professor Chirelstein limits his indictment to the promoter law firms. Indeed, Professor Chirelstein acknowledges that he assists those at the center of the shelters -- the taxpayers without whom the shelters would not have existed to recover against the promoter and promoter law firms. The taxpayers were generally sophisticated taxpayers who had all the objective indicia that the shelters were too good to be true. The too good to be true test is not a tax specific test, but a test that functioning people perform in all of life’s contexts. Accepting the Chirelstein premise as to a blatantly false MLTN opinions, the taxpayers had on their intuition enough indicia of problems with the opinions. Certainly as to the critical representations the taxpayers made as to their own profit motive independent of tax benefits, the taxpayers themselves made those representations, and the taxpayers knew that representation was not truthful (again assuming the premise). It is no answer that the representations were usually scripted by the promoters; they were still the taxpayers’ representations and the taxpayers knew that they were making the representation. Indeed, beyond knowing that the shelter was too good to be true, those taxpayers had their own independent tax advisors -- including partners in name brand law firms -- from whom they received independent advice and paid for that independent advice.

Let's play out the variations that surely occurred between the taxpayer and his independent advisor regarding these shelters:

Taxpayer: This seems too good to be true. By simply paying promotion costs of $20 million dollars, I can avoid $60 million in tax -- $40 million net in my pocket. Since it does seem too good to be true, I need to make sure that it is legal. I don't want to go to jail, and I don't want the ultimate real costs of this gambit to take away my profit (or worse) from entering the transaction.

Taxpayer's Lawyer's Alternative Responses:

Alternative #1

Taxpayer's Lawyer: I have spent -- and charged you handsomely for -- for several hours of my time to review the proposed promoter law firm shelter opinion. The shelter is blatantly illegal. I really could have spent less time, because it was so patently illegal, but I knew you wanted me to do some work and I knew you could afford my usual exorbitant rates. This shelter is nothing more than an illegal play of the audit lottery. If you are caught, you lose. Don't get in it. However, if despite my advice, you do play in it, the MLTN opinion from the promoter law firm is patently wrong, and I can give you no assurance that you will not face potential criminal and large civil penalties. You certainly cannot rely upon my advice as reasonable cause or justification for playing the audit lottery, whether in a civil or criminal context.

Analysis of Alternative #1. Under Professor Chirelstein's key premise (blatant illegality), this would appear to be the only advice that the taxpayer's lawyer could give. Of course, under Professor Chirelstein's analysis, if the taxpayer gets in the shelter anyway, he certainly is not relying on the promoter law firm's MLTN opinion except as he imagines it offers him some civil or criminal penalty protection despite his own lawyer's advice to the contrary.

Alternative #2

Taxpayer's Lawyer: I have spent -- and charged you handsomely for -- for several hours of my time to review the proposed promoter law firm shelter opinion. The shelter is blatantly illegal. I really could have spent less time, because it was so patently illegal, but I knew you wanted me to do some work and I knew you could afford my usual exorbitant rates. This shelter is nothing more than an illegal play of the audit lottery. If you are caught, you lose. Don't get in it. The shelter is illegal. Still, if you were to win the audit lottery, you stand to gain so much by it (the taxes hereby evaded), that you might find it acceptable on a cost / benefit analysis. Critical to this cost benefit analysis is that you assert to the IRS something that you and I know is untrue – that you really “relied” upon the MLTN opinion from the promoter law firm that you know is garbage. I do have to caution that, based on what you know, that assertion would be a criminal act in itself, but the IRS may have limited ability to determine whether you relied upon the MLTN opinion. There is some possibility that an IRS agent might believe that you really did rely upon that opinion; if so (despite the fact that you did not rely upon the opinion), you avoid both criminal potential and potentially draconian civil penalties. So, get in it and play the lottery if that is your desire. I can't tell you that I recommend that course of conduct for, to quote President Nixon in a not wholly dissimilar context, "that would be wrong;" but you are a big boy and can make your own choices.

Analysis of Alternative #2. Under Professor Chirelstein's key premise (blatant illegality), this advice (or any variation of it) is wrong. The Taxpayer's lawyer is simply signaling the taxpayer that the audit lottery may be right for him depending upon his tolerance for risk.

In either of these scenarios, the taxpayer did not rely upon the promoter law firm MLTN opinion and the taxpayer got exactly what he bargained for -- a known faulty opinion that he imagined gave him risk free access to the audit lottery. The taxpayer is certainly equally culpable as the promoter and the promoter law firm. The taxpayer paid the promoter and the promoter law firm to give him the potential for risk free access to the audit lottery.

Would it make any difference if the taxpayer went to his own tax lawyer with a limited request -- I ask that you not advise me as to the merits of the shelter but instead only advise me as to my criminal and civil risks of getting into the shelter? I know what my potential benefit is ($20 million in this example), but want to understand my downside potential (which I would like to be only the promotion cost of $10 million plus the tax involved ($30 million). In this regard, I asked for and the promoters refused to give me a guaranteed return of the fees in the event I have to pay the tax. Could the taxpayer's lawyer give such penalty advice without some predicate assessment of the merits of the shelter which, as posited by Professor Chirelstein, would be blatantly illegal. I doubt it.

Bottom line, I question whether these taxpayers should be recovering damages from anybody. They made their bed and are not men enough to lie in it. They seek comfort from Professor Chirelstein who surely must know that without the taxpayers and the taxpayers' own independent advisors (including prominent law firms), the abusive shelters of which he complains would have gone nowhere. Why should one thief under Professor Chirelstein's analysis recover from another? Is Professor Chirelstein not enabling these culpable taxpayers by assisting them in their recovery for their own culpability?

Indeed, if Professor Chirelstein is correct that the shelters were blatantly and it logically follows that the taxpayers knew they were (whether on their own or with the assistance of their tax advisors), why does the Government not line them up for criminal prosecution. If the Government really wants to stop abusive shelters of the type Professor Chirelstein posits, there should be many taxpayers and taxpayer advisors (including from prominent law firms) who played and enabled, respectively, playing the blatantly illegal game.

I conclude by cautioning that I am not calling anyone a thief here; I merely accept for this discussion Professor Chirelstein's premise that the shelters were blatantly illegal and taking that where it I think it logically goes. I think Professor Chirelstein’s premise is faulty. Perhaps that is why the Government has not lined up the taxpayers and their advisors for criminal prosecution.

Update on the Daugerdas indictment -- Guilty Plea by Defendant Greisman (BDO)

Robert S. Greisman, former DBO Seidman former partner, pleads guilty. See the USAO SDNY press release here. The plea is to three counts - (i) the (ubiquitous) defraud / Klein conspiracy (18 USC § 371), (ii) tax evasion (§ 7201), and (iii) tax obstruction (§ 7212). The parts of the press release that addresses the big issue - the lie - previously discussed in the blogs here are:

Sentencing for Defendant Implicated in Early UBS Disclosures (8/21/16)

On Friday, Judge Pauley of SDNY sentenced Rowen Seibel to one month in prison after his plea to one count of tax obstruction, § 7212(a).  Jesse Drucker has a good report on the sentencing:  Restaurateur Seibel Sent to Jail, Then Kitchen, in Tax Scam (Bloomberg 8/19/16), here.

I offer the following documents related to the sentencing:

• The information (the charging document in lieu of an indictment usually after a plea agreement arrangement has been reached), here.
• The defendant's sentencing memo, here.
• The Government's Sentencing Letter , here (like a Sentencing Memo, but SDNY does a lot of filings by letter rather than a more formal pleading document).
• The defendant's supplement submission in response to the Government's Sentencing Letter,  here.

My own summary of the operative facts is:

In 2004, when Mr. Seibel was just 23 years old, he and his mother traveled to Switzerland to set up a numbered account (having a moniker of CQUE, followed by an account number).  I refer to Mr. Seibel as Seibel and to his mother as "Mother."  That action had some relationship to Brad Birkenfeld of UBS and whistleblower fame.  The account was set up in Seibel's name and he was designated beneficial owner.  It appears, however, that he was not -- at least allegedly not -- the beneficial owner of the account and that Mother was instead the beneficial owner.  Mother was given full power of attorney over the account.  It appears, however, that Seibel had the significant contacts with UBS about the account.  Seibel directed UBS not to send account statements or other correspondence to the U.S.  The account was initially seeded with $25,000, but quickly grew via other deposits to slightly above $1,000,000, all supposedly the Mother's money.  (There is perhaps some intrigue about the source of the deposits, but I don't think the documents I have read really definitively clarifies the matter.)

In 2008, after reading press reports about the IRS initiatives against UBS, Seibel traveled to UBS in Switzerland to withdraw the money, specifically mentioning to the bankers that his concerns related to the press reports.  By that time, the value of the account had increased to over $1,300,000, apparently due to interest and investments.  He then proceeded to deposit the bulk of the amount withdrawn into another bank, Bank Safra (which, by the way, joined the DOJ Swiss Bank Program as a category 2 bank).  The deposit was made in the name of Mirza International, a Panamanian company set up by Seibel owned and controlled by Seibel.  The documents gave Seibel signatory authority over Mirza's Bank Safra account.

The information recites that Seibel had filed 2008 and 2009 returns omitting interest and dividends from the UBS account and failing to report that he had an interest in or signatory authority over the account.  (There is some fuzziness here; if it were the Mother's account as the beneficial owner, Seibel would not have had to report the income from the account.)

After that shuffle to further hide the money, apparently sometime in 2009, an IRS special agent attempted to contact Mother about the account, leaving his card at her residence.  Mother quickly contacted an NYC attorney.  Mother at first misrepresented to her attorney key facts about the account (including her alleged beneficial ownership).  (In his affidavit, the attorney says that she "ultimately" did tell him about having the account which she closed in 2008; the affidavit is Exhibit A, Part One, to the Government's sentencing submission).  The attorney then presumably advised she had a serious problem.  In October 2009, the attorney advised her about the IRS voluntary disclosure program, OVDP as announced in May 2009.  He advised her, however, that she did not qualify because of the agent's attempt to contact her.  He advised, however, that Seibel might qualify, provided that he applied to the program by its then schedule end date of October 15, 2009.  So, allegedly based solely on conversations with the mother, the lawyer set about drafting a submission including some facts and omitting others (that the attorney may or may not have know about).

The handling of the drafts for Seibel's submission is interesting and relevant to this discussion.  The Mother and Seibel were in Florida at the time.  The attorney was in New York.  The attorney says that he only discussed the facts with Mother and not with Seibel.  The attorney emailed drafts of Seibel's submission to Seibel who printed and delivered them to Mother for her to discuss with the attorney.  The implication (although not a direct statement anywhere I could find) is that Seibel was just a messenger for the drafts but did not read the drafts.  (I discuss that implication below in comments.) After Mother and attorney had agreed upon the final draft, the attorney prepared the final document for submission and a Form 2848 which is a power of attorney for the attorney (and a representation that the attorney was the attorney for Seibel at least by that time) and emailed them to Seibel with the instructions to sign and mail them by October 15, 2009.  Seibel claims that he did not read the submission document he signed and submitted to the IRS.  The implication from Seibel's submissions for sentencing is that he did not know the contents of the document he signed, either by reading the drafts or from discussions with Mother (although they were together throughout the process).  The submission (i) made false statements as to Seibel's knowledge about the UBS account and (ii) claimed that the funds may have disappeared rather than disclosing the Bank Safra gambit noted above upon closing the UBS account.