Wednesday, January 20, 2021

Court Amends Restitution to Reduce Restitution for Amounts For Years Other Than Years for Counts of Conviction (1/20/21)

In United States v. Christensen, 2021 U.S. Dist. LEXIS 9306 (D. Ariz 2021), TN here and CL here, Christensen had been convicted on 9 tax counts (evasion for 7 years and failure to file for 2) but acquitted on 5 counts of tax perjury.  The court ordered $1,603,533 restitution.  Christensen appealed and the convictions were affirmed.  Christensen subsequently filed to vacate his conviction under 28 U.S.C. § 2255, alleging ineffective assistance of counsel.  The district court denied the petition and request for certificate of appealability.  The Ninth Circuit denied Christensen’s request for a certificate of appealability.  During the post-trial proceedings (appeal and § 2255 proceeding), Christensen did not contest the amount of the restitution. 

After completing his period of incarceration, the Government sought to collect the restitution through writs of garnishment permitted to collect restitution.  (For some reason, the restitution apparently had not been assessed under § 6201; in any event, the Government acted under the garnishment collection procedures rather than the tax assessment collection procedures)

Christensen filed a writ for error coram nobis arguing attacking the restitution.

The Court first held that the writ of coram nobis was an appropriate remedy for Christensen.  The writ of coram nobis is rarely used, so I will not go into the details for the Court’s holding that it was an appropriate remedy.  (For procedure enthusiasts, the holding is interesting because FRCP 60(e) by its text abolishes the writ, but courts have held that the writ survives under the All Writs Act (28 U.S.C. § 1651(a)) for some purposes; those enthusiasts should review the opinion.)

The Court then rejected Christensen’s broadside argument against the government’s attempt to collect by garnishment based on restitution rather than on assessment of the tax.  Of course, the Government can collect restitution under general collection tools available for restitution.  The additional tool in § 6201(a)(4) permitting assessment of tax restitution (with resulting IRS collection tools) is not required for the use of the general restitution collection tools.  The Court also rejected certain related arguments.

The Court then turned to Christensen’s good argument -- called the "successful Argument -- related to restitution.  (Slip Op. 13-15.)  In the original restitution order, the Court quantified the restitution based on the tax loss.  The problem is that the tax loss can properly include loss for years other than the years of conviction whereas restitution can include loss only for the years of conviction.  The Court accordingly reduced the restitution amount to $579,706 from the original amount of $1,603,533.  The Court also added to that amount prejudgment interest of $202,816.19, thus raising total restitution to $782,522.19.

On making the critical distinction between tax loss and restitution, see On Restitution, Count of Conviction and Tax Loss (Federal Tax Crimes Blog 10/24/13), here.

JAT Comments:

Of course, the IRS can still assess tax, penalty (probably civil fraud) and interest for the years other than the years of conviction if the IRS can prove fraud for those years by clear and convincing evidence.  To do that, the IRS will have to jump through the required hoops (notice of deficiency, etc.).  Whether the IRS wants to jump through those hoops with the amount of restitution it has sustained of course depends upon Christensen's financial condition and future prospects.

Saturday, January 16, 2021

Outstanding Article on Current State of IRS Voluntary Disclosure Practice (1/16/21)

This brief blog today is to alert readers to an outstanding article on the current state and some uncertainties and risks of the IRS Voluntary Disclosure Practice (“VDP”).  Scott Michel and Mark Matthews, The 2020 Revision to the Internal Revenue Manual’s Voluntary Disclosure Practice: More Consistency with Greater Risk (Bloomberg Daily Tax Report 1/12/21), here.  The article is prompted by recent changes to the IRM provisions on the VDP.  IRM 9.5.11.9(1) (09-17-2020), Voluntary Disclosure Practice, here.

This blog post is cross-posted on my Federal Tax Procedure Blog, here.

Friday, January 15, 2021

Another District Court Holds FBAR Nonwillful Civil Penalty Is Per Form Rather Than Per Account (1/15/21)

In United States v. Kaufman, 2021 U.S. Dist. LEXIS 4602 (D. Conn. Jan. 11, 2021), Tax Notes here and CourtListener here, the Court: 

  • Granted the Government summary judgment holding that the summary judgment facts precluded reasonable cause.
  • Granted Kaufman summary judgment holding that the nonwillful FBAR civil penalty was per annual form rather per account (basically $10,000 max each year for deficiencies or delinquencies on FBARs) rather than $10,000 for each account that was not or was incorrectly reported on the annual FBAR.

 The holding on reasonable cause is straight-forward.  Kaufman just had bad facts.

The holding on the nonwillful penalty being per form or per account is not so straight-forward.  The Courts – only three district court cases -- are not in agreement.  See the discussion in the Kaufman opinion.  Of the two cases agreeing with the Government position, the lead on is currently pending after oral argument in the Ninth Circuit.   United States v. Boyd, No. CV 18-803-MWF (JEMx), 2019 WL 1976472 (C.D. Cal. Apr. 23, 2019), appeal argued No. 19-55585 (9th Cir. Sept. 1, 2020).  See Two Cases Sustaining FBAR NonWillful Penalties on Per Unreported Account Basis (4/26/19), here.  The other district court case holding for the taxpayer that maximum penalty is per form is United States v. Bittner, 469 F. Supp. 3d 709 (E.D. Tex. 2020), appeal docketed No. 20-40597 (5th Cir. Sept. 11, 2020).  See District Court Holds FBAR Nonwillful Penalty Is Per Form Rather than Per Account (6/30/20), here

So, it appears to me that at this point the issue is not yet settled and, ultimately, the issue might go either way.

For another treatment of Kaufman, see Robert S. Howitz, IRS Loses Another Non-Willful FBAR Case (Tax Litigator Blog 1/14/21), here.

Wednesday, January 13, 2021

Third Circuit Discussion on Violation of Legal Duty with Other Reasonable Interpretations of Duty (1/13/21)

In United States v. Harra, ___ F.3d ___, 2021 U.S. App. LEXIS 915 (3rd Cir. 2021), here, the Court held (as summarized at the opening of the opinion):

When a defendant is charged with false reporting based on an ambiguous reporting requirement, what is the prosecution’s burden at trial as to the element of falsity? Is it sufficient for the prosecution to prove the statement was false only under the Government’s interpretation of the requirement, or must it prove the statement was false under each objectively reasonable interpretation of the requirement? In the balance hang the convictions of four former executives of Wilmington Trust

Corporation, a bank that, in the wake of the Great Recession of 2008, excluded certain commercial real estate loans from those it reported as “past due” to the Securities and Exchange Commission and the Federal Reserve. The executives maintained that, under a reasonable interpretation of these requirements, the exclusion of the loans was proper, but the District Court denied their requests to introduce evidence concerning or instruct the jury about that alternative interpretation. The jury then found the executives’ reporting constituted “false statements” for purposes of 18 U.S.C. § 1001, 15 U.S.C. § 78m, and related statutes and convicted Defendants on all counts. 

We hold today that to prove falsity beyond a reasonable doubt in this situation, the Government must prove either that its interpretation of the reporting requirement is the only objectively reasonable interpretation or that the defendant’s statement was also false under the alternative, objectively reasonable interpretation. And because the Government here produced insufficient evidence from which a rational jury could find Defendants’ statements false under this rule, we will reverse Defendants’ false statements convictions and remand on those counts for entry of judgments of acquittal. As for Defendants’ conspiracy and securities fraud convictions,  [*6]  however, which were charged in the alternative on an independent theory of liability, we will vacate and remand for retrial.

Harra is not a tax case, but it does involve the interpretation and application of 18 USC § 1001, sometimes deployed in tax cases.  Moreover, I think it has overtones related to other issues in tax crimes.  I will offer points that, from my perspective of interest in tax crimes, I think are potentially important:

The concerns discussed in the decision and the analysis seem to track the Cheek standard for tax crimes.  Under Cheek, a tax crime (such as tax evasion, § 7201) must have been committed "willfully" -- that is, was the “voluntary, intentional violation of a known legal duty.” Cheek v. United States, 498 US 192, 200 (1991) (citing United States v. Bishop, 412 U. S. 346 (1973) and United States v. Pomponio, 429 U. S. 10 (1976) (per curiam) (see also Justice Blackmun’s dissent citing this as the “conclusively established standard for willfulness under the applicable [tax] statute,” Cheek p. 209.).  Cheek established that there is no requirement to negate this element that the defendant prove that the defendant’s belief be objectively reasonable.

Monday, January 11, 2021

Deloitte and Tax Analysts Open Tax Analysts Library to Public Without Subscription (1/11/21)

 Last week, Deloitte posted this news release:  Deloitte and Tax Analysts Take Great Strides to Increase Tax Policy Transparency:  Professional services leader joins forces with nonprofit to make federal tax law library easily accessible to the public, here.  In pertinent part, the release says:

As part of Deloitte Tax’s sponsorship, visitors to the site can now access details about the federal code, regulations, and other primary source documents, including the Internal Revenue Code of 1986; proposed, final and temporary regulations; rules for lawyers, accountants and others practicing before the IRS; Treasury decisions, IRS guidance, and private rulings; court and legislative documents; public comments on regulations; rate tables; and other correspondence, press releases and miscellaneous tax documents.

The site for access appears to be here:  https://www.taxnotes.com/research

This is a tremendous service to the public.  Thnks to Tax Notes and Deloitte.

I have not tested the search mechanisms for the various categories of documents.  Some quick simple testing indicates that the search and results are not of the sophisticated type for on the major legal research platforms such as Westlaw and Lexis.  Still, creative use of the search tools might make it very useful.

I generally use the Lexis platform and like it because it permits me to do date limited research -- i.e., pick up all new cases involving a search topic (e.g., FBARs) after a certain date (e.g., the date I last did that date limited search).  That permits me to pick up new materials (cases and articles).  I don't know if that can be done in the Tax Notes databases, although I did see that topics can be selected for search and the results shown in reverse chronological order.

JAT Addition (1/12/21)

Friday, January 8, 2021

Corporate Transparency Act – Beneficial Ownership of Shell Corporations Must Be Disclosed (1/8/21)

On January 1, 2021, Congress overrode the President’s veto of the National Defense Authorization Act for Fiscal Year 2021 (“NDAA”), here.  Among the provisions of the NDAA was TITLE LXIV--ESTABLISHING BENEFICIAL OWNERSHIP INFORMATION REPORTING REQUIREMENTS (§§ 6401-6403), which is called and may be cited as “Corporate Transparency Act” (§ 6401).  The CTA adds 31 USC § 5336, titled Beneficial Ownership Information Reporting Requirements.

First I will provide a high level summary (with some links), and Second some brief comments.  I will refer to the provisions by the short name by the initialism CTA for the Corporate Transparency Act.

High Level Summary (drawn from the following three web sites as well as a quick review of the CTA’s provisions: Jen Kirby, The US has made its biggest anti-money-laundering changes in years (Vox 1/4/2021), here, Landmark Bill Ending Anonymous U.S. Companies Is Enacted (FactCoalition 1/1/21), here; and Morris Pearl, Congress just passed the most important anti-corruption reform in decades, but hardly anyone knows about it (Fortune 12/26/20), here):

Certain corporations (non traded or with a small level of activity) will have to register their beneficial ownership with Treasury which will incorporate the information into a database that may be accessed by law enforcement agencies.  Prior to this, there was no federal requirement and states usually did not require that beneficial ownership be disclosed.  The CTA does not prohibit otherwise anonymous shell companies; it just requires that the ownership be disclosed to Treasury.  As noted in the Vox article, however, some compromises were made:

Clark Gascoigne

This is, of course, a compromise, right? If I could have waved a magic wand, this is not the bill I would have written.

 But it is a compromise with integrity. Most importantly, the definition of who is a “beneficial owner” in the bill is very strong and will truly identify the ultimate owners of the companies. That’s a big deal.

 Now, it doesn’t solve all of our money-laundering problems. One big exemption in this is that while it applies to corporations, limited liability companies, it does not apply to trusts or partnerships.

 Partnerships are generally considered lower risk, but trusts are a major issue, particularly because the vast majority of trusts in the United States don’t actually register with their legal contracts.

 So you will still be able to set up a trust that could potentially be abused for money laundering after this. That’s something that we’re going to have to take a look at. There are studies that the Government Accountability Office and Treasury Department are going to have to do on the risks posed by trusts. The bill mandates those studies, and hopefully we’ll be able to address that down the road.

 There’s also some concerns around pooled investment vehicles, like hedge funds and private equity funds, that are operated or advised by a registered investment adviser. Law enforcement will be able to tie the fund to the investment adviser, and they’ll know the beneficial ownership information for the investment adviser, but they won’t know it for the fund itself.

 There is a big concern around that because you’ve got trillions of dollars in money going into these private pooled investment funds that could potentially pose some risk for money laundering.

 Jen Kirby

When it comes to those pooled investments, just to make sure I’m understanding this: So if I have dirty money, and I am putting it into this fund with a lot of other investments, it basically muddies the waters. You know who’s managing the fund, but you have no way to pull out each investment, correct?

 Clark Gascoigne

Correct, yeah.

 JAT Comments:

Wednesday, January 6, 2021

Whistleblower FYE 2020 Report (1/6/21)

The IRS Whistleblower Office has released a report titled Fiscal Year 2020 annual report, here.  The opening message from the Director of the WBO, Lee D. Martin, is (have added links for the publications referenced):

The fiscal year (FY) 2020, which began on October 1, 2019, marked the 14th anniversary of the Whistleblower Office and the Whistleblower Program. I am extremely proud of the dedicated women and men in the Whistleblower Office, Small Business/Self-Employed (SB/SE) Initial Claims Evaluation unit, and other divisions across the Internal Revenue Service (IRS). Since 2007, the Whistleblower Program paid awards to whistleblowers totaling more than $1 billion dollars and has led to the successful collection of $6.14 billion from noncompliant taxpayers. 

Statistically in FY 2020, the Whistleblower Office made 169 awards to whistleblowers totaling $86,619,032 (before sequestration), which includes 30 awards under Internal Revenue Code (IRC) § 7623(b). Proceeds collected were $472,080,014. Included in the proceeds collected, as a result of IRC § 7623(c), are the non-Title 26 amounts collected for criminal fines, civil forfeitures, and violations of reporting requirements amounting to $110,438,166. The Title 26 amounts collected were $361,641,848. Whistleblower claim numbers assigned in FY 2020 decreased by 20 percent from those submitted in FY 2019, and closures decreased by 33 percent. 

During FY 2020, we continued our focus on operationalizing the whistleblower statutes under the Taxpayer First Act of 2019 (TFA 2019). This included adding four analysts to meet the increased workload due to the new provisions. To educate whistleblowers about the new TFA 2019 provisions, we updated Publication 5251, Whistleblower Claim Process and Timeline, and Internal Revenue Manuals 25.2.1 and 25.2.2. On December 3, 2019, we signed a Memorandum of Understanding (MOU) with Alcohol and Tobacco Tax and Trade Bureau (TTB) that put in place procedures between the IRS and TTB to process claims for whistleblower awards under Internal Revenue laws that are administered and enforced by TTB. On April 30, 2020, the Whistleblower Office held its first ever Whistleblower Program Forum. Lastly, like other organizations and businesses, the Whistleblower Office worked diligently to maintain Whistleblower Program operations that were impacted by office closures due to the coronavirus crisis. 

D.C. Circuit Reverses Trial Court Because the Allen Charge, in Context, Was Coercive, But Affirms on Brady Issue (1/6/21)

In United States v. Driscoll, ___ F.3d ___ (D.C. Cir. 1/5/21), here, Driscoll “was convicted of two counts of  wire fraud, one count of first-degree fraud, and two counts of tax evasion.”  Driscoll appealed.  The Court of Appeals dealt with two issue that I summarize here:

First, the Court dealt with a Brady claim that the Government had not disclosed potentially helpful information to the defense.  The background was that an ESPN article disclosed (i) irregularities involving Driscoll with a charitable organization with which she was affiliated and (ii) that a whistleblower had disclosed information to the FBI and planned to disclose via whistleblower complaint to the IRS.  The following month, there was an unrelated hearing in a child custody proceeding between Driscoll and her ex-husband.  An IRS Special Agent (a CI agent) attended to observe the public proceeding.  Driscoll asked the agent who he was, and the agent responded that he was a member of the public.  While attending, the Special Agent heard the testimony of a cousin of the ex-husband.  That cousin happened to be the IRS whistleblower.  The Special Agent took detailed notes and prepared detailed memoranda for all except the last day (the fifth day). On that last day, at the request of Driscoll’s ex-husband, the Special Agent went to lunch with the ex-husband, the ex-husband’s new wife, and the ex-husband’s custody lawyer.

After indictment, Driscoll’s defense lawyer requested inter alia discovery of a “parallel proceeding” issue – whether the government (presumably the IRS) had used the civil audit process to gather information for a criminal case.  The Court cited United States v. Kordel, 397 U.S. 1, 13 (1970) (“Government may not use evidence against a defendant in a criminal case which has been coerced from him under penalty of either giving the evidence or suffering a forfeiture of his property.”).  There seems to be two different claims embedded in the prior to sentences, but I am not sure the Court articulated it that way.  Apparently, the claim was related to the Special Agent’s activities described above did not involve an IRS civil audit or any coercion except what might be implicit in the Special Agent not identifying himself truthfully when Driscoll asked who he was.  Most importantly, the prosecutors did not disclose the Special Agent’s role or information within the time normally required for Brady disclosures (during the pretrial discovery processes).

Thursday, December 31, 2020

FinCEN Notice 2020-2 to Make Virtual Currency Foreign Accounts FBAR Reportable (12/31/20; 1/16/21)

 FinCEN Notice 2020-2, here, provides (cut and pasted in full):

Report of Foreign Bank and Financial Accounts (FBAR) Filing Requirement for Virtual Currency FinCEN Notice 2020-2 Currently, the Report of Foreign Bank and Financial Accounts (FBAR) regulations do not define a foreign account holding virtual currency as a type of reportable account. (See 31 CFR 1010.350(c)). For that reason, at this time, a foreign account holding virtual currency is not reportable on the FBAR (unless it is a reportable account under 31 C.F.R. 1010.350 because it holds reportable assets besides virtual currency). However, FinCEN intends to propose to amend the regulations implementing the Bank Secrecy Act (BSA) regarding reports of foreign financial accounts (FBAR) to include virtual currency as a type of reportable account under 31 CFR 1010.350.

The IRS continues to focus on cryptocurrency.  See the following resources:

  • Virtual Currencies, here.
  • Frequently Asked Questions on Virtual Currency Transactions, here.
  •  IRS 2020 draft 1040 puts crypto question front and center (Accounting Today 8/24/20), here.
Added 1/16/21 5:30 pm:

A good article on developments on Virtual Currency in this context is James Creech, FinCEN Moves To Include Convertible Virtual Currency On FBAR Form (Procedurally Taxing Blog 1/15/21), here.

Wednesday, December 23, 2020

Fifth Circuit Denies Rehearing En Banc in Controversial Client Identity Privilege Case (12/23/20)

I have previously reported on the Fifth Circuit’s rejection of the client-identity privilege (a subset of the attorney-client privilege) in Fifth Circuit Rejects Attorney-Client Identity Privilege for Law Firm Documents (Federal Tax Crimes Blog 4/26/20), here.   See Taylor Lohmeyer Law Firm P.L.L.C. v. United States, 957 F.3d 505 (5th Cir. 2020), here.

On December 4, 2020, the Fifth Circuit denied rehearing en banc.  The vote was 9 to 8.  Six of the judges dissenting to denial of rehearing en banc filed a dissenting opinion.  The denial and dissenting opinion are here.    

The panel opinion was controversial.  Amicus briefs on petition rehearing en banc were filed by the National Association of Criminal Defense Lawyers, here, and by the American College of Tax Counsel, here.  

I am not sure what the dissenting opinion really adds to the panel decision other than suggesting a possible interpretation of Fifth Circuit law unaffected by the original panel opinion.  Perhaps it will offer some basis for continuing the fight on remand and in other cases.  Perhaps not.  

An excerpt from the dissenting opinion (footnote omitted):

The amici raised important concerns about how to interpret the opinion in this case. However, the opinion assures us, in its citations to Jones and Reyes-Requena II, that it does not diverge from our settled precedent. Taylor Lohmeyer Law Firm P.L.L.C. v. United States, 957 F.3d 505, 510–11 (5th Cir. 2020). I take the opinion at its word. Whenever disclosing a client’s identity would reveal the confidential purpose for which the client consulted the attorney, attorney-client privilege applies. This protection may obtain even if the government does not know the specific, substantive legal advice that was provided to the client.

In the district court, the enforcement order is currently stayed and the case has been administratively closed to facilitate our review of the enforcement order. Once our mandate issues, it may be that the case is reopened and the stay lifted. If so, the May 15, 2019 enforcement order provides that the Lohmeyer law firm will have the opportunity to produce a privilege log, asserting privilege on particular responsive documents. If the law firm does so, the district court may choose then to conduct an in camera review of those documents. I am confident that any such review will be guided by the following: “[i]f the disclosure of the client’s identity will also reveal the confidential purpose for which he consulted an attorney, we protect both the confidential communication and the client’s identity as privileged.” Lohmeyer, 957 F.3d at 511 (quoting Reyes-Requena II, 926 F.2d at 1431).

First Criminal Cases from Abusive Syndicated Conservation Easements (12/23/20; 12/29/20)

Abusive conservation easements have been a topic on this blog for some time now.  See here.  DOJ and the IRS have noised about criminal prosecutions, but until this past week none have surfaced.  Now, we have two criminal cases with a pre-wired plea on the filing of the criminal informations.  See DOJ Press Release: Atlanta Tax Professionals Plead Guilty to Promoting Syndicated Conservation Easement Tax Scheme Involving More Than $1.2 Billion in Fraudulent Charitable Deductions (12/21/20), here

Relevant excerpts from the press release are:

According to court documents, from at least 2013 through 2019, S. Agee and C. Agee, then partners at an Atlanta accounting firm, marketed, promoted, and sold together with co-conspirators,  investments in fraudulent syndicated conservation easement (SCE) tax shelters. The SCE tax shelters were designed to produce tax deductions for high-income taxpayers through partnerships that purported to make “real estate investments.” In truth, the partnerships were a sham, lacking economic substance and serving no legitimate business purpose. The placement of conservation easements over the real estate was a foregone conclusion, which fraudulently enabled the investors to shelter their income from the IRS with no economic risk and to claim substantial tax deductions to which they were not entitled. S. Agee, C. Agee, and their co-conspirators marketed the SCE tax shelters by promising investors that for every $1 invested in the partnership, the investor would receive more than $4 in charitable tax deductions. 

“The defendants’ and their co-conspirators' criminal conduct enabled their clients to claim more than $1.2 billion in fraudulent tax deductions and generated hundreds of millions of dollars of tax loss to the United States,” said Principal Deputy Assistant Attorney General Richard E. Zuckerman of the Justice Department's Tax Division.

* * * *

Conservation easements were created by Congress to be a key tool used for protecting environmentally and historically important land. The donated conservation easement typically restricts the use or development of land in order to protect its conservation value. When legitimately created and used in compliance with the Internal Revenue Code, the conservation easement can both protect the environment and provide tax incentives. By contrast, abusive SCEs are designed to game the system and generate inflated and unwarranted tax deductions, often by using inflated appraisals of undeveloped land and partnerships devoid of legitimate business purpose.

According to court documents, S. Agee and C. Agee additionally solicited investors after the end of the tax year and advised them to backdate payments and documents to make it appear that the “investments” were timely made before the end of the tax year. S. Agee and C. Agee also prepared and assisted in the preparation of false tax returns for clients who agreed to invest in the SCE shelters. In exchange for their promotion of the abusive SCE tax shelters, between 2013 and 2019, S. Agee and C. Agee each received more than $1.7 million in commissions.

S. Agee and C. Agee both pleaded guilty to one count of conspiracy to defraud the United States which carries a maximum penalty of five years in prison. They also face a period of supervised release, restitution, and monetary penalties.

The CourtListener dockets for these cases are:  Stein Agee, here, and Corey Agee, here.

Details are set forth in the Stein Agee Criminal Information and Factual Basis available at CourtListener here and here.  I have not attempted to determine if there are material differences in the fact patterns for Stein and Corey Agee, but have instead focused generally on Stein Agee.  As with conspiracy charges generally, the details are summarized in cascading fashion in the Manner and Means and Overt Acts paragraphs of the Criminal Information (pars. 103 and 104, pp. 21-30 (repeated in the Factual Basis, pars. 101 and 102, pp. 22-31)).  Those wanting to know at least the summary details should focus on those paragraphs.

JAT Comments:

Note:  I have substantially revised the Comments portion to present the materials in a way that I think will be helpful to Tax Crimes students, focusing on the potential sentencing considerations indicated by the Agee pleas.

Monday, December 7, 2020

Court of Appeals Rejects Lawyer Defendant's Proffered Instruction that Cheek Requires Knowledge that Conduct Is Criminal (12/7/20)

In United States v. Gilmore, 2020 U.S. App. LEXIS 37861 (3rd Cir. 2020), here, a nonprecedential opinion, the Court affirmed the convictions of Gilmore, a lawyer, for tax and financial crimes.  The Court rejected Gilmore’s claims that (i) the trial court erred in excluding expert testimony as to a mental-health disorder with respect to willfulness; (ii) the trial court erred in stating in the jury instruction that willfulness require only that the defendant know the conduct was unlawful rather than criminal; and (iii) the evidence was sufficient to support the convictions.

I focus only on the second holding – regarding the jury instruction.  The Court’s discussion is brief, I include it all:

Gilmore next challenges the District Court's jury instructions on willfulness. The Court instructed that willfulness could not be found if Gilmore believed in good faith that "the tax laws did not make his conduct unlawful." App. 2412. Gilmore requested the word "criminal" be used instead of "unlawful." App. 335. Gilmore claims the instruction was legally erroneous because it equated belief of "unlawful" action with belief of "criminal" action. Gilmore Br. 43.

Contrary to Gilmore's claims, willfulness in the context of tax crimes merely requires knowledge and violation of a duty. It does not require knowledge that one is committing a criminal act. As the Supreme Court has made clear, "the standard for the statutory willfulness requirement is the voluntary, intentional violation of a known legal duty." Cheek v. United States, 498 U.S. 192, 201 (1991) (internal quotation marks omitted). Thus, to prove willfulness, the Government had to show "that the law imposed a duty on the defendant, that the defendant knew of this duty, and that he voluntarily and intentionally violated that duty." Cheek, 498 U.S. at 201 (emphasis added). There is no requirement that a person must be aware that the conduct is criminal. It is enough that he knew he had a legal duty and violated it-in other words, that he acted unlawfully.

For these reasons, we hold the District Court did not err in instructing the jury on the willfulness requirement.

JAT Comments:

1. I don’t think it is uncommon for persons to transmute the Cheek willfulness requirement of intentional violation of a known legal duty to requiring that the defendant know that the conduct (violating a known legal duty) is criminal (or a crime).  For example, take the simple case of failure to file which is a crime under § 7203.  The law requires a taxpayer to file a return, assuming the predicate requirements specified in § 6012 are met.  For conviction, all that the Government must show is that the defendant knew of the obligation to file and the defendant chose not to file.  There is no requirement that the defendant know that failure to file is a crime.

Summons Enforced Against Prominent U.S. Director, Producer, Writer and Convicted Felon After OVDP Termination for Not Disclosing Foreign Indictment (12/7/20)

In United States v. Agrama, 2020 U.S. Dist. LEXIS 226136 (C.D. CA 2020), CL here, the Court enforced a summons issued with respect to an IRS investigation commenced after the taxpayer was terminated from the 2009 OVDP because the taxpayer failed to notify the IRS that he was under criminal tax indictment by Italy.  

Some background which I have drawn (sometimes by inference) from the Agrama opinion and from Agrama’s Wikipedia page, here:  Wikipedia opens with a summary description of Agrama as “an American director, producer, writer, and convicted felon.”   The Wikipedia page says that the Italian tax evasion indictment was issued in 2006 and led to Agrama’s conviction in 2012. Agrama did not serve time because of an Italian amnesty law to reduce prison overcrowding.  I think that is enough background for now, but the key point is that Agrama was under Italian criminal tax indictment when he sought 2009 OVDP and was terminated from OVDP because of failure to advise the IRS of the indictment.

Apparently incident to the Italian investigation leading to the 2006 indictment, the Italian prosecutor sought assistance from the U.S. and some other countries (Switzerland, Hong Kong and Ireland) pursuant to each of those countries' respective MLAT treaties with Italy.  The U.S.  obtained and executed a search warrant at Agrama’s home and business in Los Angeles.  Italian authorities, including a forensic expert, were present during the executions of the search warrants.  After some commotion about whether the U.S. agents executing the search warrant exceeded the scope of the search authorized, the U.S. withdrew the warrants and returned all of the property seized.  Apparently, none of that property seized and returned was delivered to Italy or to the IRS for use in any other proceedings.  Italy’s officials, including a forensic expert, had participated and obviously had some information learned in the execution of the search warrants, although not the documents seized.   Pursuant to the MLAT requests to the other countries, searches were executed and documents seized.  Italian authorities, including the forensic expert, was involved in those seizures and apparently obtained the documents seized.  The forensic expert then produced a report for use in the Italian investigation and  indictment.

In 2009, Agrama and his wife applied to join the 2009 OVDP and was accepted.  In the course of the OVDP process, “the Agramas represented that they were not under criminal investigation by any law enforcement authority.”  Then, according to the court:

In 2012, the IRS learned that Agrama was, in fact, under criminal indictment in Italy. Indeed, Agrama was convicted of tax evasion later that year in Italy, and received a three-year sentence. The Agramas were subsequently removed from the IRS' voluntary disclosure program in early 2013.

After the IRS terminated the Agramas from OVDP in 2013, the IRS started an audit of the Agramas, an audit which at the time of the summons and court petition to enforce covered “the Agramas' tax liability for fourteen tax years, ranging from 1997 to 2011.”  The summons in question arose from that audit and included the following description:

documents, including all documents related to Agrama's two criminal trials in Italy, documents related to Agrama's challenge to Italy's MLAT request to Ireland, and all documents provided to the Italian government from other countries, including Hong Kong, relating to Agrama's two trials in Italy (i.e., the MLAT documents).

Agrama produced some documents but not the MLAT documents.  The IRS then petitioned to enforce the summons.

With that background, I summarize the Court’s holdings:

Sunday, December 6, 2020

Eleventh Circuit Rejects a Marinello Claim that Nexus to Pending Proceeding Not Shown (12/6/20)

In United States v. Graham, ___ F.3d ___, 2020 U.S. App. LEXIS 37871 (11th Cir. 2020), here, the Court affirmed Graham’s convictions for (i) passing a fictitious financial instrument, in violation of 18 U.S.C. § 514(a)(2), and (ii) corruptly endeavoring to obstruct the administration of the Internal Revenue Code, in violation of § 7212(a), tax obstruction.  The tax obstruction conviction was the principle point addressed.

Graham raised a Marinello objection that his use of fictitious financial instruments to pay off his substantial tax debt that the IRS had been trying to collect for years.  As stated by the Court “The question for us is whether the IRS's collection activity qualifies as a ‘particular administrative proceeding.’ We hold that it does.”

After reviewing Marinello’s holding, the Court said (Slip Op. 6-9, footnote omitted):

So, the question is, did Graham's submission of a falsified bill of exchange to the IRS have a "relationship in time, causation, or logic" with some administrative proceeding? Graham thinks not. He suggests that "liens, levies, and related notices" do not qualify as "administrative proceedings" under Marinello. A "proceeding," he argues, must "take place over a period of time, akin to a grand jury proceeding or other investigatory proceeding," where there is "summoning of witnesses and documents" and "questioning under oath." And the IRS's tax collection activities do not bear those particular marks.

Our Court has not had occasion to further define the "nexus" requirement since Marinello. But we do not think the Court's definition of a "proceeding" was so narrow. The Supreme Court nowhere suggested that a defendant must interfere with a quasi-judicial proceeding-like Graham describes-to violate the Omnibus Clause. Indeed, the Court was careful not to identify exhaustively what qualified as an "administrative proceeding" or "other targeted administrative action." Id. at 1109-10. Its concern, instead, was to exclude relatively innocuous conduct from prosecution under the Omnibus Clause. Id. The government could not prosecute someone for interfering with "routine, day-to-day work carried out in the ordinary course by the IRS, such as the review of tax returns." Id. There had to be something more-some "targeted administrative action." Id. at 1109.

We need not draw a perimeter setting out what that "something more" encompasses. This is not a borderline case. For years, the IRS took targeted administrative action against Graham well beyond the "ordinary course" of the agency's interaction with taxpayers. It began to take specific steps to collect on Graham's tax debt in 2009. It assigned two revenue officers to his case over a five-year period. These officers issued him notices of liens and levies. They oversaw seizure and sale of some of his property. And only weeks before Graham submitted the international bill of exchange, the IRS sent him another notice of levy reminding him that he owed about $3.6 million. He even attached a copy of this notice to the $3.6 million bill of exchange that he provided to the IRS. The IRS's regular and persistent contact with Graham went well beyond the "routine, day-to-day work" of the agency and we have no difficulty concluding that this collection action qualified as a "targeted administrative action." See id. at 1109- 10.

IRS Group Requests to Swiss FTA for Swiss Bank Customer Information Behind Aggregation Information Disclosures Under FATCA (12/6/20)

The U.S. IRS has made group requests to the Swiss Federal Tax Administration (“FTA”) for customer account information from Swiss banks provided aggregate information under FATCA.  At U.S. Behest, Swiss Pry Open Bank Accounts: Geneva Blocks Funds in U.S. Tax Case (Finews 12/4/20), here.  The FTA has notified the Banks of a process to respond to such requests.  See notices on the Swiss FTA sight here; as listed the banks are (with an indication of which of them joined the DOJ Swiss Bank Program, here):

  • AROFIN SA
  • Bank Vontobel AG
  • Banque Pictet & Cie SA
  • Barclays Bank (Suisse) SA
  • CA Indosuez (Switzerland) SA / Crédit Agricole (Suisse) SA
  • FIBI (Suisse) SA en liquidation (entretemps radiée)
  • Hinduja Banque (Suisse) SA
  • Mirabaud & Cie SA
  • Notenstein La Roche Privatbank AG (Bank Vontobel AG)
  • PKB PRIVATBANK SA (DOJ Swiss Bank Program)
  • Schroder & Co Bank AG (DOJ Swiss Bank Program)
  • Union Bancaire Privée, UBP SA (DOJ Swiss Bank Program)
  • Zuger Kantonalbank (DOJ Swiss Bank Program

I have not compared the various notices to see if they are all alike except for the names of the banks involved, but I provide the English part of the notice for two of the Banks -- Banque Pictet & Cie SA  and Union Bancaire Privee, UBP SA.

Banque Pictet & Cie SA, here 

Bedrosian on Remand -- Held Bedrosian Acted Recklessly and thus Subject to FBAR Civil Willful Penalty (12/6/20)

In Bedrosian v. United States, 2020 U.S. Dist. LEXIS 228208 (D. Pa. 2020), CL here, the district court on remand from the Third Circuit in Bedrosian v. United States, Dep't of Treasury, IRS, 912 F.3d 144 (3d Cir. 2018), held that Bedrosian acted recklessly with respect to the FBAR obligation and  thus was willful for purposes of the FBAR civil willful penalty.  For a discussion of the Third Circuit’s opinion remanding the case, see Bedrosian on Appeal; Interesting and Potentially Important Opinion on Jurisdiction in FBAR Penalty Cases (12/21/18; 1/10/19), here.  

The remand was to permit the district court to consider the more objective reckless standard (somewhat like a civil willful blindness standard) in determining whether Bedrosian active willfully so as to be subject to the FBAR civil willful penalty.  The  Court made supplemental findings of objective facts that indicated reckless disregard of the FBAR requirements, concluding that its prior opinion for Bedrosian relied almost entirely on Bedrosian’s subjective intent but that consideration of the objective facts,  relied on in other cases by other courts, indicated that Bedrosian acted willfully.   Readers of this blog will know that this objective spin on willfulness for the FBAR civil willful penalty is the clear trajectory of authority.

The opinion is short, so I just refer readers to the opinion.

Friday, December 4, 2020

Discussion of Criminal Tax Issues in Oral Argument in CIC Services (12/5/20)

Earlier this week, the Supreme Court held oral argument in CIC Servs., LLC v. IRS, 925 F.3d 247 (6th Cir. 2019), reh., en banc, denied 936 F.3d 501 (2019), cert. granted 140 S. Ct. 2737 (2020), a case involving the interface of tax law and administrative law.  I discuss the oral argument on my Federal Tax Procedure Blog.  CIC Services Supreme Court Oral Argument (12/3/20), here, where I link the oral argument recording and transcript.  In the oral argument some of the discussion turned to willfulness and the difference between willfulness for tax crimes and for other types of crimes.  Readers of this blog will know that for most Title 26 tax crimes,  where an element of the crime is that the defendant act “willfully,” a very high level of intent  is required -- The intentional violation of a known legal duty.  See Cheek v. United States, 498 U.S. 192 (1991). 

I thought I would offer here certain excerpts of the discussions on willfulness and potential criminal liability.  First some key background.  CIC wanted to contest an IRS notice that imposed reporting obligations on captive insurance companies and their advisors.  Arguably, failure to comply with the reporting obligations could subject those captive insurance companies and advisors to significant civil penalties and potentially even criminal penalties.  CIC complained that, if the AIA (§ 7421(a)) precluded pre-enforcement review, then the only way to contest the administrative action in the Notice in question would be to not file the disclosures required by the notice and potentially be subject to those civil and criminal penalties.  The key potential criminal penalty is failure to file in § 7203 which has a requirement that the defendant act willfully in failing to file.  Willfully, as noted, would be met if the defendant knew the legal obligation and failed to meet it.  The problem, though, is that if the defendant knew of the Notice, in good faith did not think it was lawfully imposed, and failed to file on that belief, he could subject himself to the risk of civil and criminal penalties by awaiting the normal channel of tax litigation on the substantive merits in a tax refund suit.  That risk is unacceptable and should justify a pre-enforcement review, which for much administrative rulemaking is the norm.

Key to the discussion is that the penalty, as with many tax penalties, is defined as a tax, thus potentially invoking the AIA.

CIC’s argument is that imposing the obligation by Notice rather than notice and comment regulation is unlawful. 

So that sets up the problem articulated by several of the justices.  Should a taxpayer or advisor have to risk civil or criminal penalties for failure to comply with an administrative rule which they do not think was validly imposed?  This concern is expressed throughout the argument and seems to have some gravitas with several of the Justices.  I select only a portion of the discussion on the criminal willfulness issue.  The page numbers are to the transcript which is here:

[*4]

MR. NORRIS [CIC Counsel)

Third, CIC cannot raise its claims in a refund suit. There is no tax for CIC to pay here. The notice is not a tax, and CIC is a material advisor, not the  taxpayer. To file a refund suit, CIC would have [*5] to gin up a tax by violating the reporting  requirements, risking criminal and professional sanctions, and hoping the IRS agrees to assess it a penalty. The Anti-Injunction Act cannot require this, as this Court held in South Carolina versus Regan.

* * * * 

[*21]

And I think, while South Carolina [in South Carolina v. Regan, 465 U.S. 367 (1984)] truly had no refund suit available, we are in the same situation in the sense that the only way we can get a refund is by committing a crime, risking imprisonment and massive fines, and violating our professional obligations as attorneys and accountants.

[*29]

JUSTICE BARRETT: Would it be cleaner for us to go the Regan [South Carolina v. Regan] route but maybe, you know, phrase it this way, that this is covered by the AIA; however,  because you would have to incur criminal penalties in -- in -- in order to sue, that you have no adequate alternative remedy, so even though the AIA applies, it doesn't bar your suit? Would you be satisfied [*30] with that approach?

 MR. NORRIS: We would, Justice Barrett. We just want to go litigate our APA claims, and that -- that resolution would be  fine with us.

 JUSTICE BARRETT: Thank you. 

* * * *

In FBAR Collection Case, NYT and WSJ Articles on U.S. Offshore Efforts Admissible Against Avid Reader of the Publications (12/4/20)

In United States v. Briguet, 2020 U.S. Dist. LEXIS 221467 (E.D. N.Y. 2020), CL here, in an FBAR collection suit, the Court denied Briguet’s motion in limine to exclude certain New York Times and Wall Street Journal articles published prior to the FBAR filing date.  The Court describe the articles (Slip op. p. 1):  “The 96 newspaper articles in question discuss the Government's efforts to identify U.S. taxpayers with offshore bank accounts and UBS's agreement to provide the Government with account holder information.” The Government sought to introduce the evidence to show that Briguet knew (or should have known in the acting recklessly sense) of the FBAR filing requirements because of the articles in conjunction with Briguet’s testimony that he reads the financial pages of these two publications every day.

In a very short opinion, the Court holds:  (i) the articles are not hearsay because introduced as circumstantial evidence of Briguet’s state of mind and not for the truth of the content of the articles; (ii) the articles are relevant because of Briguet’s testimony except possibly for articles after the FBAR filing deadline; and (iii) the articles would not unduly prejudice the jury’s deliberations reasoning (Slip Op.3)

Defendant argues that if the articles are admitted "the jury may be left with the impression that the UBS case, DOJ's Swiss bank crackdown, and the IRS's offshore voluntary disclosure program were 'hot issues' to investors who read the New York Times and Wall Street Journal and . . . infer . . . that Mr. Briguet probably read some of the articles at issue." Def. Mot., ECF No. 44 at 4-5. Although somewhat overstated, Defendant's observation is valid but in fact supports the admissibility of the news articles. There is nothing unduly prejudicial about the articles. Evidence is prejudicial, but in this instance any prejudicial effect is entirely coextensive with the probative value of the articles and therefore not unduly prejudicial. That said, there may be other valid Rule 403 considerations with regard to the articles published after the filing deadline in question. For that reason, the Court defers ruling on that portion of the defense motion.

In this case, Briguet demanded a jury trial which will, presumably, address the issue of willfulness.