Friday, October 16, 2020

One Big Fish Indicted and Lesser Big Fish Achieves NPA for Cooperation (10/16/20)

I write today about two related developments involving the tax misdeeds of private equity moguls that readers will have probably already read about in the popular news:  (i) Robert T. Brockman the biggest mogul and alleged tax cheat of the two was indicted in the Northern District of California (the indictment is here and the Court Listener Docket Entries is here), with an alleged criminal amount of $2 billion (revised at 5:00pm - I understand this is the omitted income amount rather than the bottom line tax loss); and (ii) Robert F. Smith, the smaller mogul (but still a large one) and now admitted tax cheat, reached a nonprosecution agreement (“NPA”) wherein he agreed to pay $139 million in tax and penalties (presumably with interest thereon as appropriate (the US Attorney’s press release on the NPA is here, the NPA and an Exhibit are linked on the press release)).

So, what’s this commotion all about?  I have not studied the indictment in detail, but here are key points (some with my inferences) that I derive from either the press release and two articles (Kadhim Shubber  & Miles Kruppa, Billionaire Robert Brockman charged in $2bn tax evasion case (Financial Times 10/15/20), here; and Jaclyn Peiser, A Texas billionaire evaded $2 billion in taxes, feds say. Now he’s charged in the ‘largest-ever’ tax fraud case (WAPO 10/16/20), here)

  • This is said to be the largest tax fraud case ever.  The criminal cases against the Son-of-Boss professional enablers involved, in the aggregate more dollars, but I assume the this is the largest single taxpayer (as opposed to enabler of multiple taxpayers) case.
  • Smith is not named in the indictment except by pseudonym which is typical for uncharged co-conspirators.  Smith has agreed to cooperate to achieve his NPA.  (The NPA is linked in the press release linked above.)  In addition to cooperation against Brockman and perhaps others, Smith agreed to pay about $139 million in tax and penalties.  Smith achieved some positive notoriety in 2019 by agreeing to “pay off all the student loans for the graduating class of Morehouse College, an all-male, historically Black college in Atlanta.  (WAPO article.)  I discuss aspects of the NPA below in my comments.  (I wonder whether Smith's generosity at the time was motivated in significant part to contribute in some way to achieving an NPA.)
  • The pattern alleged for Brockman’s offshore evasion is just a variation of a theme that we have seen in offshore tax evasion but ramped up with many intrigues outlined in the indictment.
  • The charges also included allegations that between 2008 and 2010, Brockman lied to investors and allegedly bilked them out of nearly $68 million. (WAPO article.)
  • Smith attempted a voluntary disclosure in 2014 but apparently was already on the IRS radar screen and was rejected.  He probably attempt to do a voluntary disclosure because one or more of the offshore banks had turned information over to DOJ Tax or the IRS.
  • The US attorney said Mr Smith had used a Houston lawyer to direct his offshore nominees.  The Houston lawyer is not named.

The counts charged against Brockman are from the attachment to the indictment (some of these have multiple counts):

  • 18 U.S.C. § 371 – Conspiracy (Offense and Defraud)
    5 yrs prison, $250k fine, 3 yrs sup. rel., $100 special assessment;
  • 26 U.S.C. § 7201 – Tax Evasion
    5 yrs prison, $250k fine, 3 yrs sup. rel., $100 special assessment, costs of prosecution;
  • 31 U.S.C. §§ 5314 & 5322(b) –FBAR Violations
    10 yrs prison, $500k fine, 3 yrs sup. rel., $100 special assessment;
  • 18 U.S.C. § 1343 – Wire Fraud Affecting a Financial Institution;
    30 yrs prison, $1M fine, 5 yrs sup. rel., $100 special assessment;
  • 18 U.S.C. § 1956(a)(1)(B)(i) – Concealment Money Laundering;
    20 yrs prison, $500k fine or twice the gross gain or loss (whichever is greater), 3 yrs sup. rel., $100 special assessment;
  • 18 U.S.C. § 1956(a)(1)(A)(ii) – Tax Evasion Money Laundering;
    20 yrs prison, $500k fine or twice the gross gain or loss (whichever is greater), 3 yrs sup. rel., $100 special assessment;
  • 18 U.S.C. § 1956(a)(2)(B)(i) – International Concealment Money Laundering;
    20 yrs prison, $500k fine or twice the gross gain or loss (whichever is greater), 3 yrs sup. rel., $100 special assessment;
  • 18 U.S.C. § 1512(b)(2)(B) – Evidence Tampering;
    20 yrs prison, $250k fine, 3 yrs sup. rel., $100 special assessment;
  • 18 U.S.C. § 1512(c)(1) – Destruction of Evidence;
    20 yrs prison, $250k fine, 3 yrs sup. rel., $100 special assessment;

Even without considering the multiple counts the concept of stacking will tell readers that the maximum sentence if conviction on all counts is around 130 years. (revised 10/17/20 11:40am: my actual calculations of all counts shows 800 years maximum incarceration). Of course, the Sentencing Guidelines and Booker variance (if appropriate) will produce a much smaller actual sentence.  My rough and ready calculation of the offense level considering only $2 billion tax loss and acceptance of responsibility (although he has not accepted yet) shows a sentencing range of 168-210 months with good time credit of 21.6-27 months.  revised at 5pm: this is true even if $2 billion was the omitted income amount because it would almost certainly produce at tax loss of $550 million, the top of the table and even if the tax loss were less, the Guidelines calculation would not be reduced much).  

(Added 9:30pm):  The following is a summary of key facts (selective) from the Smith NPA Exhibit A, Statement of Facts:  Foreign Bank notified Smith of intent to participate in the Swiss Bank Program that would require outing Smith.  Smith filed preclearance request for OVDP.  The preclearance request was denied.  Smith filed a false FBAR omitting accounts and filed income tax return omitting income and including false Form 8275.  Smith attempted Streamline disclosure, filing false FBARs and false income tax returns.  (Although not stated in the Statement of Facts, the Streamlined filing would have required that Smith represent that his conduct was not willful, a representation that based on other admission would have been false.)  These actions were willful.

JAT Further Comments:

Tuesday, October 13, 2020

District Court Grants Summary Judgment for Government on § 7431 Wrongful Disclosure Claims to Third Party Recordkeepers but Not Other Third Party Summonses (10/13/20)

In Williams Dev. & Constr. v. United States, 2020 U.S. Dist. LEXIS 187212 (D. S.D. 10/8/20), CL here, the IRS Criminal Investigation (“CI”) agent issued 15 IRS administrative summonses falling into two relevant categories:  (i) third party recordkeeper summonses (here to financial institutions) and (ii) third party summonses that are not third party recordkeeper summonses.  The summonses stated that they were issued "In the Matter of Craig A. or Craig Arthur Williams." From the opinion, it appears that Williams is a Houston, TX, based taxpayer and has several related companies.  The IRS subsequently withdrew two summonses.  The taxpayer and related companies originally petitioned the district court in South Dakota to quash all of the summonses.  One problem on the motion to quash was that there was only one summonsee in South Dakota, the venue in which the taxpayer sought to quash all summonses.  Thus, the action to quash could continue only as to the South Dakota summonsee, Citibank, N.A.  (See prior Magistrate’s Order dated 12/10/19, here.)

While the case was pending, the taxpayer filed an amended complaint including a claim for damages under § 7431 for unauthorized disclosure of return information.  The new claim was that the summonses (all of them) improperly disclosed taxpayer return information in violation of § 6103.  In relevant part, the claim was that the disclosure of (i) the taxpayer subject to the investigation, (ii) the taxpayer’s address, (iii) the IRS agent's identity as a CI agent and (iv) the taxpayer identification number.  The Government moved for summary judgment.  The Court mostly granted the IRS motion but denied as to disclosures of tax identification numbers to the third party (i.e., nonrecordkeeper) summonses.

The discussion of the issues resolved in the opinion may be summarized:

  • All of the items (subject of the investigation, fact of CI investigation and taxpayer identification) are return information.  So, the question is whether the disclosures were authorized under § 6103(k)(6), called the investigatory purposes exception.  As explained by the Court, “The investigatory purposes exception authorizes IRS employees to ‘disclose return information’ in connection with their official duties relating to a criminal tax investigation ‘to the extent that such disclosure is necessary in obtaining information, which is not otherwise reasonably available.’”  Further,

Thursday, October 8, 2020

New IRM provision on Offers in Compromise Including FBAR Penalties (10/8/20)

I just picked up this provision in the IRM, here: (09-24-2020)

Foreign Bank and Financial Reporting (FBAR) Assessments

An offer may be submitted which includes FBAR assessments or a taxpayer who submitted an offer to compromise their tax liabilities also has assessments based on FBAR. Since, the IRS does not have authority to compromise assessments based on FBAR, the taxpayer should be requested to submit an amended offer to remove FBAR liabilities which are included on the Form 656.

Note: FBAR penalties are assessed under Title 31 and do not appear in IDRS.

If the taxpayer has a liability for assessments under FBAR, an offer for tax liabilities other than the FBAR may be investigated. During the review of the taxpayer’s financial information, the OE/OS should conduct additional investigation actions to determine if the taxpayer continues to have assets outside the United States. Review the ICS history to determine what research may have been conducted by a field revenue officer. The OE/OS may also issue an other investigation (OI) to an ATAT or International RO group to research FinCEN and/or CBRS to assist in identifying current foreign assets in which they retain an interest.

Note: The taxpayer may also have pending assessments related to Offshore Voluntary Disclosure Initiative.

If the taxpayer is unable or unwilling to submit an amended offer removing the FBAR liabilities, the offer should be closed as a processable return.

JAT Comments:

1.  I am not sure how or if compromises of the FBAR penalties may be achieved.  I assume that there is some way to do that outside the IRS processes for tax liabilities.

2.  The known route to compromises of tax liabilities may be a side benefit of avoiding an FBAR penalty assessment under the various IRS programs (e.g., OVDP and Streamlined) where a substitute penalty is assessed as a miscellaneous tax penalty (sometimes called the “in lieu of” penalty).

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

Sunday, October 4, 2020

Second Circuit Affirms Conviction of Lawyer Offshore Account Enabler (10/4/20)

In United States v. Little, 2020 U.S. App. LEXIS 31384 (2d Cir. 9/30/20), here, the Court affirmed the conviction and sentencing of Michael Little, a lawyer who enabled the Seggerman family to cheat on their taxes, using in part failure to file FBARs.  I have written on Little before (see blogs on him, including in some blogs the Seggermans), here

I discuss here only two points from the opinion.

1. Willfulness.

The Court rejected Little’s Cheek defense that there was insufficient evidence to prove that he knew the legal duty.  The Court handled the defense summarily (Slip Op. pp. 5-6):

            We conclude that substantial evidence supports the jury verdict on each of the challenged counts. In a nutshell, Little contends that he merely misunderstood the byzantine tax code. But Little is a British-trained barrister admitted to the New York Bar with a quarter-century of experience in complex international financial transactions who, for much of his life, has claimed German domicile for tax [*7]  purposes. A reasonable juror could easily conclude that the failures of such a sophisticated professional to report his income to the IRS, including compensation from the Seggerman family, and to report foreign bank accounts into which his compensation was funneled, were willful acts. See United States v. MacKenzie, 777 F.2d 811, 818 (2d Cir. 1985) (permitting the inference of "knowledge of the law" from the "[d]efendants' backgrounds," including education). Similarly, Little's sophistication supports a conclusion that he was willfully misleading the Seggerman family's accountants when he informed them that the transfers from Lixam Proviso were merely "gifts from a kind benefactor from overseas" and not distributions.

2. Jury Instructions on Conscious Avoidance / Willful Blindness

The Court rejected Little’s claim that the conviction should be reversed because the Court improperly instructed the jury on conscious avoidance (usually called willful blindness, but the Second Circuit often uses conscious avoidance).  Again, the Court rejects the defense summarily as follows (Slip Op. 6):

First, Little challenges the "conscious avoidance" instructions on the failure to file return counts, the failure to file FBAR count, and the conspiracy count; and second, that the district court's instructions as to willfulness erroneously converted the standard into a reasonableness standard. Conscious avoidance instructions are permissible only when the defendant mounts a defense that he lacked "some specific aspect of knowledge required for conviction" and "a rational juror may reach the conclusion beyond a reasonable doubt that the defendant was aware of a high probability of the fact in dispute and consciously avoided confirming that fact." United States v. Coplan, 703 F.3d 46, 89 (2d Cir. 2012) (citation and internal quotation marks omitted). Here, each predicate is met: Little defended himself by claiming ignorance of his obligations under the Tax Code and, because of Little's legal education and the relative straightforwardness of his obligations, a reasonable juror could conclude that Little was aware of a high probability that his actions were unlawful.

 So, in this case, the conscious avoidance / willful blindness instruction was properly given.

 JAT Comments:

Tuesday, September 22, 2020

ICIJ Investigations In the News - Panama Papers and Suspicious Activity Reports (9/22/20; 9/25/20)

I offer two related items in which the International Consortium of Investigative Journalists (“ICIJ”) is involved.  I have written on ICIJ with respect to the so-called “Panama Papers” which involved ICIJ’s investigation into offshore accounts via access to and disclosure of the Panama-based law firm Mossack Fonseca’s files helping tax evaders, including persons subject to U.S. tax.  Most readers of this blog will already be familiar generally with the Panama Papers.  

1. Yesterday, DOJ posted this release:  “U.S. Taxpayer in Panama Papers Investigation Sentenced to Prison (DOJ 9/21/20), here.  The defendant, Harald Joachim von der Goltz (also identified with several pseudonyms) pled guilty to “one count of conspiracy to commit tax evasion; one count of wire fraud; one count of money laundering conspiracy; four counts of willful failure to file Reports of Foreign Bank and Financial Accounts, FinCEN Reports 114; and two counts of false statements.”  The pattern is familiar.  Von der Goltz conspired with others to conceal assets and income (defraud / Klein conspiracy), using offshore accounts and shell companies.  He was assisted by Mossack Fonseca and others, including a Panamanian lawyer and a U.S. accountant.

2. ICIJ is at it again having gained access to a trove of FinCEN Suspicious Activity Reports that indicate some inattention by major banks and perhaps FinCEN who should be paying attention and even likely violations of money laundering, tax and related laws. The entry page for ICIJ’s revelations is here.  See also ICIJ’s the following ICIJ pages for further information:

  • FAQs on “What is the FinCEN Files investigation?”, here.
  • About Suspicious Activity Reports, here.
  • About the FinCEN Files investigation, here.

The latter article summarizes:

The FinCEN Files investigation was able to trace banks’ roles in hiding money looted from government treasuries, scammed from pensioners, and generated through drug sales, illegal gold mining and other illegal activities.

The findings expose – from the inside – the consequences of allowing banks themselves to lead the world’s anti-money laundering defenses against kleptocracy, crime and terror, even as they earn huge profits from these same malefactors.

They also show how laundered money provides the lifeblood for corrupt authoritarian regimes and the enemies of democracy worldwide.

The Treasury Department documents reveal how major banks continued to move staggering sums of suspect cash even while on criminal probation after highly touted money-laundering crackdowns by U.S. and U.K. authorities.

ICIJ’s analysis of the FinCEN Files and U.S. authorities’ enforcement actions indicates that imposing fines and deferring prosecutions of banks and declining to prosecute bank executives hasn’t stopped banks from continuing to profit from moving suspect transactions

3.  (Added 9/25/20 11:30am).  Relating to Item 1 above, Richard Gaffey, aka Dick Gaffey, 76, the accountant / enabler for von den Goltz and other offshore tax cheats was sentenced by the same judge on 9/24/20 "to 39 months in prison for wire fraud, tax fraud, money laundering, aggravated identity theft, and other charges."  See DOJ Press Release, titled U.S. Accountant in Panama Papers Investigation Sentenced to Prison (9/24/20), here.  As described in the press release, Gaffey was a bad actor as enabler of offshore and related tax cheating.

JAT Comments:

Saturday, September 19, 2020

District Court Grants Government Summary Judgment on FBAR Civil Willful Penalty (9/19/20)

In United States v. Toth, 2020 U.S. Dist. LEXIS 169173 (D. Mass. 2020), CL here, the Court granted the Government’s motion for summary judgment that Toth was liable for the FBAR civil willful penalty.  The holdings break no new ground, so I just list the holdings:

1. The maximum penalty is the greater 50% of the account(s) that should have been reported or  $100,000, rather than being capped at $100,000.  This is the mainstream holding (after a couple of early aberrations).  (Slip Op. 7-10.)

2. The submissions on the motion satisfied the Government’s burden to prove Toth’s failure to file FBAR for 2007 was willful.  (Slip Op. 10-12.)

3. Lenity does not apply to reduce the amount of the willful penalty.  (Slip Op. 12-13.)

4. The Eighth Amendment’s excessive fines prohibition does not apply. (Slip Op. 13-18.)

5. The penalty does not violate Due Process. (Slip Op. 18-19.)

The CL docket entries are here.

Prior blog entries on the Toth case (in reverse chronological order) are:

  • In Willful FBAR Collection Suit, District Court Rejects Reconsideration of Finding of FBAR Willfulness As Discovery Sanction (Federal Tax Crimes Blog 12/28/19), here.
  • Government FBAR Willful Penalty Suit Survives Motion to Dismiss (Federal Tax Crimes Blog 5/9/17), here.

Friday, September 18, 2020

District Court Holds Failure to Properly Report Foreign Accounts on a Fifth Amendment FBAR Is Subject to FBAR Willful Penalty (9/18/20)

In United States v. Bernstein, 2020 U.S. Dist. LEXIS 167278 (E.D. N.Y. 2020), CL here and GS here, the Court granted the Government’s motion for summary judgment determining that the defendants, husband and wife (“Bernsteins”), were each subject to the willful FBAR penalty.  Those interested in the motions (and commotions) can find it in the Court Listener docket entries, here, where the motions are available free.

The key facts are;  For many years prior to 2010, the year for which the willful FBAR penalties were assessed, the Bernsteins had foreign accounts.  For the per-2010 years, they did not file FBARs, answered “no” to the Form 1040 Schedule B question about the foreign accounts, and did not report the income from the foreign accounts.  Over the years, they did not tell their accountant about the foreign accounts because they wanted to keep the accounts secret. That conduct, the Court found on summary judgment, was to cheat on their U.S. taxes.

They had the misfortune of having selected UBS as their foreign bank (although they moved the accounts into a single account at Bank Sal Oppenheim after they realized that UBS was caving to Government pressure as readers of this blog already know).  The following series of events then occurred:

Daniel Bernstein later consulted with a U.S. tax attorney, who told him that it was "nothing serious" because the account held "only a million dollars" and therefore the Government would not likely pursue it. Furthermore, Nemirovski, who consulted with a Swiss attorney, conveyed to Mr. Bernstein that the attorney had assured him that their account information had not been turned over to the IRS. Thus, the Bernsteins decided not to take any action in response to the letter and, specifically, not to participate in the Government's voluntary disclosure program.

In April 2011, the Government advised the Bernsteins that it was auditing their 2007 tax return. By that time, the Bernsteins were aware of publicity about the Government's prosecution of UBS account holders. They returned to the U.S. tax attorney who had told them not to worry two years earlier, but this time he told them, "I can't help you; you need a white-collar criminal attorney." He referred them to Lawrence S. Feld, Esq., who is known for his white-collar practice with a specialty in tax prosecutions, and the Bernsteins retained him.

Attorney Feld effectively disagreed with the prior decision not to participate in the voluntary disclosure program. He found the facts as presented to him "deeply disturbing" and believed that there was a "substantial risk" of criminal prosecution. He advised the Bernsteins to file an FBAR for the 2010 tax year in which they would invoke their privilege against self-incrimination under the Fifth Amendment of the U.S. Constitution. He prepared an addendum to the FBAR describing the basis for the privilege in which the Bernsteins offered to make more detailed disclosures if they received use immunity from criminal prosecution. In addition, the Bernstein's 2010 tax return and Schedule B invoked the Fifth Amendment with regard to any questions about foreign accounts.

Attorney Feld believed that this would protect the Bernsteins from criminal prosecution, although they still might be required "to pay [a] fine." The Bernsteins followed his advice and filed an FBAR for the year 2010 in which they did not provide information about the accounts, instead, in the spaces calling for account information, inserting "Fifth Amendment" in answer to each question. At their depositions, the Bernsteins testified as to their belief, based on the advice from Attorney Feld, that by submitting the FBAR in this manner, they had complied with the disclosure requirements for 2010.

The advice given by Attorney Feld appears to have been sound as there is no suggestion in the record that the Bernsteins are subjects or targets of a criminal investigation. However, in May 2017, the IRS assessed a penalty in the amount of $262,288.50 each for the 2010 tax year. 

The Government brought this collection suit  for the FBAR willful penalties.

Mr. Feld, the attorney advising the Bernsteins to file Fifth Amendment FBARs, is a prominent tax lawyer practicing in the criminal tax arena and is  a co-author of Ian Comisky,  Lawrence Feld,  Steven Harris, Tax Fraud and Evasion (Thomson Reuters), here.

Thursday, September 17, 2020

Updated CTM Chapter on Tax Related Conspiracies (9/17/20)

DOJ Tax has updated its Criminal Tax Manual (“CTM”) chapter 23.00 titled Conspiracy to Commit Offense or to Defraud the United States (Revised September 2020), here.  I have reviewed the chapter very cursorily.  Although I did not compare the old and new versions, except in two instances noted below, I don’t think much has changed except to add some recent cases in chain citations or in examples.  In identifying items of interest, I leaved through the whole chapter (60 pages) and did searched for year from 2012 through 2010.  Here are my quick comments.:

1. 23.04[2][a] Limitation on Naming Unindicted Co-conspirators, p. 5.  Prosecutors should not name in the indictment unindicted co-conspirators, citing Justice Manual 9-11.30 (April 2018). “The recommended practice in such cases is to merely allege that the defendant ‘conspired with another  person or persons known’ and supply the identity, if requested, in a bill of particulars.”

2. 23.07[2][c] Overbreadth Concerns, pp. 42-43. Not sure if this is new but it is a subject I have been interested in).  Discusses the interpretation of the defraud clause which, in United States v. Coplan, 703 F.3d 46, (2d Cir. 2012), cert. denied 571 U.S. 819 (2013), the Second Circuit expressed “skepticism” about the correctness as an original matter of the Supreme Court’s statutory interpretation of the defraud clause in Haas v. Henkel, 216 U.S. 462 (1910), and Hammerschmidt v. United States, 265 U.S. 182, 188 (1924).  I discussed that aspect of Coplan in Coplan #1 - Panel Questions Validity of Klein Conspiracy (Federal Tax Crimes Blog12/1/12), here.

3. 23.07[2][d] Precedent Governing Different Statutes, pp. 43-44.  This is new, generated by the holding in Marinello v. United States, 138 S. Ct. 1101 (2018)  that tax obstruction, § 7212(a), requires knowledge of a pending proceeding.  Some defendants argued that, because of potential overlapping and overbreadth concerns, Marinello’s pending proceeding required should apply to the defraud / Klein conspiracy.  The position of the Government is that that element of § 7212(a) does not apply to defraud / Klein conspiracies.  The Government’s position has been sustained in the cases.  The section discusses two 2020 cases:  United States v. Atilla, 966 F. 3d 118 (2d Cir. 2020); and Marinello v. United States, 138 S. Ct. 1101 (2018).  I discussed the Flynn case Eighth Circuit Holds that Marinello Pending Proceeding Nexus in § 7212(a) Does Not Apply to Defraud / Klein Conspiracy (Federal Tax Crimes Blog 8/17/20), here

Tuesday, September 15, 2020

Second Circuit Applies the Foregone Conclusion Doctrine to Overcome the Fifth Amendment's Act of Production Doctrine (9/15/20)

In United States v. Fridman, ___ F.3d ___ 2020 U.S. App. LEXIS 28449 (2d Cir. 2020), CA2 here and GS here, the Court held that the Government had overcome Fridman’s claim of Fifth Amendment privilege (via Act of Production doctrine) under the foregone conclusion doctrine which requires “the Government must establish with reasonable particularity its knowledge as to (1) existence of the documents, (2) the taxpayer's possession or control of the documents and (3) the authenticity of the documents.” Fridman, Slip Op. 13.  The Court also held that a “traditional trust” is a collective entity that could not assert a Fifth Amendment privilege.

I focus here on the Act of Production Doctrine under which production can be testimonial and the exception known as the foregone conclusion doctrine.  The Court discusses and applies these concepts at Slip Op. 13-29.  Readers can study the opinion for the particular application of the law to the facts.  I thought that it would be most helpful to most readers to excerpt the general discussion of the applicable law.  I do caution that the Court calls it the Act of Production Privilege; the privilege involved is the Fifth Amendment privilege; Act of Production is is not a separate privilege but a doctrine as to a particular application of the Fifth Amendment privilege.   In this excerpt, I have substantially cleaned up for easier readability (footnotes omitted):

The Fifth Amendment provides that no person shall be compelled in a criminal case to be a witness against himself. U.S. Const. amend. V. In Fisher v. United States, 425 U.S. 391, 409-11 (1976), the Supreme Court defined the contours of the Fifth Amendment as it applies to document requests. The Court held that documents voluntarily prepared prior to the issuance of a summons were not compelled testimony, so there was no Fifth Amendment protection for the contents of these records. At the same time, however, the Court recognized a narrow privilege against the act of production. Because producing documents tacitly concedes the existence of the papers demanded and their possession or control by the taxpayer as well as the taxpayer's belief that the papers are those described in the subpoena, the Court concluded that the act of production could, in some cases, communicate incriminatory statements and thus may fall under the Fifth Amendment's protection against self-incrimination; but the Court hinted that such a determination would be conditioned on the facts and circumstances of particular cases. Similarly, when a defendant must make extensive use of the contents of his own mind in identifying the hundreds of documents responsive to the requests in the subpoena, he or she contributes to a "link in the chain" of their prosecution in violation of the Fifth Amendment privilege. United States v. Hubbell, 530 U.S. 27, 42-43 (2000).

The act-of-production privilege is not an absolute one. Fridman challenges the district court's ruling that two exceptions to the act-of-production privilege permitted enforcement of the requests at issue in this case.

I. The Foregone Conclusion Doctrine

IRS Continues Efforts to Crack Cryptocurrency (9/15/20)

The IRS is offering to pay private contractors who can ““reliably produce useful results on a variety of real-world CI cryptocurrency investigations involving Monero and/or Lightning.”  Kelly Phillips Erb, IRS Will Pay Up To $625,000 If You Can Crack Monero, Other Privacy Coins (Forbes 9/14/20), here.  I don’t expect readers of this blog to jump at the opportunity, but readers of this blog should be aware of this and related developments that constrict taxpayers’ ability to hide untaxed income in cryptocurrency.  

Key excerpts:

The IRS has made no secret that it believes that taxpayers are not correctly reporting cryptocurrency transactions. An IRS dive into the data showed that for the 2013 through 2015 tax years, when IRS matched data collected from forms 8949, Sales and Other Dispositions of Capital Assets, which were filed electronically, they found that just 807 individuals reported a transaction using a property description likely related to bitcoin in 2013; in 2014, that number was only 893; and in 2015, the number fell to 802.

Cryptocurrency Compliance Efforts

A new cryptocurrency compliance measure for taxpayers was introduced in 2019 in the form of a checkbox on the top of Schedule 1, Additional Income and Adjustments to Income (Schedule 1 is used to report income or adjustments to income that can't be entered directly on the front page of form 1040). And in 2020, the IRS noted that it will post a cryptocurrency question right on the front page of your Form 1040.

In 2019, the IRS also announced that it was sending letters to taxpayers who might have failed to report income and pay the resulting tax from virtual currency transactions or did not report their transactions properly. The names of these taxpayers were obtained through various ongoing IRS compliance efforts.

* * * *

About Privacy Coins

Tuesday, September 8, 2020

Tax Travails of the Rich (Perhaps Famous) Enablers of the Rich (Perhaps Famous) (9/8/20)

USAO D NJ issues a press release, Former Luxury Car CEO and Luxury Watch Dealer Admit Tax Charges in Connection with Scheme to Misallocate Limited Edition Sports Cars, here.


The former chief executive officer [Maurizio Parlato, 58] of a New Jersey-based importer of Italian luxury cars admitted today that he failed to report to the IRS as income kickback payments he received for misallocating limited edition sports cars, Attorney for the United States Rachael Honig announced.

A luxury watch dealer [Gigi Knowle, 69] also admitted failing to report to the IRS commission he received for helping facilitate the unauthorized sale of one of those limited edition sports cars.    

* * * *

Parlato was a resident of Florida and served as the CEO of a company (Company B) based in Englewood Cliffs, New Jersey, from 2002 to 2009. Company B was responsible for distributing automobiles that were produced by a luxury automobile manufacturer (Company A) based in Maranello, Italy. Company B distributed Company A’s luxury automobiles in the Western Hemisphere through dealers based in the Americas.

Company A produced several highly desired automobile models in small quantities. Parlato had some measure of authority over the allocations of those limited edition automobiles.  In 2013, Company A announced it was creating its most exclusive model to date: a “supercar,” limited to only 500 units and carrying a manufacturer’s suggested retail price (MSRP) of approximately $1.4 million. Company A and Company B established a formula to determine which customers would be placed on the approved list to buy a supercar. 

After resigning as CEO of Company B, Parlato assisted Company B dealers and supercar purchasers in misallocating supercars in exchange for kickback payments. Between 2015 and 2017, Parlato received approximately $2.8 million from Company B dealers and supercar purchasers in exchange for, among other things, assisting them in misallocating supercars to customers who were not on the list of approved purchasers. Parlato admitted that he failed to report the $2.8 million in kickback payments he received as income on his federal individual income tax returns. Parlato also admitted that he attempted to hide some of these funds from the IRS by depositing them in a bank account in Spain and failing to disclose the existence of that bank account.  Parlato admitted that he avoided paying more than $1.1 million in taxes.

Knowle also received payments in connection with his role in misallocating a supercar.  In 2015, Knowle lived in Florida and worked as a luxury watch dealer. That year, Knowle assisted Parlato in facilitating the sale of a supercar to another individual who was not on the approved list. Knowle received approximately $560,000 as commission for his role in the sale, some of which Knowle distributed to Parlato and others who were also involved in misallocating the supercar to the unapproved purchaser. Knowle failed to disclose the commission on his personal income tax returns. Knowle admitted that he avoided paying approximately $175,000 in taxes. 

Tuesday, September 1, 2020

District Court Sustains FBAR Willful Penalty But Rejects Fraudulent Failure to File Penalty for Income Tax (9/1/20)

In United States v. DeMauro (D. N.H. Dkt. 17-cv-640-JL Order and Verdict After Bench Trial dtd. 8/28/20), CL here, the Court sustained the FBAR willful penalty but rejected the fraudulent failure to file penalty.  In both cases, in broad strokes the conduct penalized is the same.  If that statement is correct, the difference in outcome is based on the differing burdens of persuasion.  The Government must prove application of the FBAR willful penalty by a preponderance of the evidence; the Government must application of the fraudulent failure to file penalty by clear and convincing evidence.

The willful FBAR penalty requires that the conduct penalized (failure to report) be willful.  In the FBAR civil penalty context, the Courts have held willfulness is (i) specific knowing failure to file (more or less the Cheek standard) or (ii) willful blindness or reckless disregard of the obligation to report.

The fraudulent failure to file penalty, like the civil fraud penalty for filed returns companion in § 6663, requires fraud.  The following is from my Federal Tax Procedure Book in discussing civil fraud under § 6663, but the same applies for the fraudulent failure to file:

The Code does not define fraud, but it may be viewed as the civil counterpart of criminal tax evasion in § 7201. n1 Examples of how courts have stated civil fraud under § 6663 are:  (i)  civil fraud requires “intentional commission of an act or acts for the specific purpose of evading tax believed to be due and owing”; n2 and (ii) civil fraud requires that “the taxpayer have intended to evade taxes known to be due and owing by conduct intended to conceal, mislead or otherwise prevent the collection of taxes and that is an underpayment.”n3  In making the determination, as with criminal cases, courts will often look to certain common patterns indicating fraud–referred to as badges of fraud, such as unreported income, failure to keep adequate books, dealing in cash, etc.n4  The key differences between the two is that § 6663 is a civil penalty and has a lower burden of proof (clear and convincing rather than beyond a reasonable doubt) as I note later.
   n1 Anderson v. Commissioner, 698 F.3d 160, 164 (3d Cir. 2012), cert. denied 133 S. Ct. 2797, 133 S. Ct. 2797 (2013) (“the elements of evasion under 26 U.S.C. § 7201 and fraud under 26 U.S.C. § 6663 are identical.”).
   n2 Erikson v. Commissioner, T.C. Memo. 2012-194.
   n3 Nelson v. Commissioner, T.C. Memo. 1997-49; Zell v. Commissioner, 763 F. 2d 1139, 1142-1143 (3rd Cir. 1985) (“Fraud means "actual, intentional wrongdoing, and the intent required is the specific purpose to evade a tax believed to be owing.”); and Fiore v. Commissioner, T.C. Memo. 2013-21 (“Fraud is the ‘willful attempt to evade tax’” and using the criminal law concept of willful blindness to find the presence of civil fraud; note that, in the criminal law, the concept of willful blindness goes by several names.)
   n4 E.g., Kosinski v. Commissioner, 541 F.3d 671, 679-80 (6th Cir. 2008).  For use of a negative inference from assertion of the Fifth Amendment privilege in concluding that the IRS had met its burden of proving civil fraud by clear and convincing evidence, see Loren-Maltese v. Commissioner, T.C. Memo. 2012-214.

Saturday, August 29, 2020

Article on U.S. as World's Banking Policeman (8/29/20)

I refer readers to this article in Q&A format from the Washington Post, Henry Farrell, The U.S. has become the world’s banking policeman. How did it happen? (WAPO 8/27/20), here.   The Q&A is with Pierre-Hugues Verdier is the John A. Ewald Jr. Research Professor of Law at the University of Virgnia School of Law, here, and author of “Global Banks on Trial: U.S. Prosecutions and the Remaking of International Finance” (Oxford University Press 2020), which “explains the dramatic increase in U.S. criminal enforcement actions against global banks.”  The link on Amazon to the book is here.

The Q&A is short, so I don’t attempt to excerpt it here.  The article summarizes certain levers of power that the U.S. has to encourage compliance from financial institutions that misbehave by assisting U.S. tax evasion. The article also notes, following the U.S. lead, “Eventually, the OECD adopted a multilateral automatic tax information exchange system that has become operational and expanded quickly — something almost no one thought possible a decade before.”  Finally, the article notes that, although corporate prosecutions are down in the Trump administration, they are likely to increase in the Biden administration (if there is a Biden administration).

Wednesday, August 26, 2020

District Court Sustains Tax Convictions but Grants Acquittal on Wire Fraud Convictions Because No Fraud (8/26/20)

In United States v. Barringer (W.D. VA Dkt No. 1:19CR00051 Order Dated 8/21/20), CL here, Barringer “convicted by a jury of three counts of willfully failing to pay over payroll taxes, two counts of wire fraud, and three counts of making false statements to federal agents.”  Broadly speaking, the gravamen of the conduct charged was an attempt to keep a business afloat by not paying over the employee’s withheld tax.  That pattern of behavior is not uncommon.  Also, it appears that Barringer’s conduct was to help her keep a good paying job.  That pattern also is not uncommon.  The interesting twist in this case is the wire fraud counts under 18 U.S.C. § 1343, and conviction on those counts.  The district court entered judgment of acquittal on the two wire fraud counts.

The factual background for the wire fraud convictions was Barringer’s effort to withdraw funds from her 401(k) plan to use the funds, perhaps in part, to keep the employer afloat.  Barringer first asked the provider of the account, a financial company, for guidance on withdrawing funds she needed to keep the employer in operation.  The provider said that that was not a permitted reason to withdraw from the account.  Barringer then applied for the withdrawal to prevent foreclosure on her primary residence, which was among the permitted reasons to withdraw.  In fact, though, Barringer was ahead on her residence payments and was not under threat of foreclosure.  The provider made the distribution.  Barringer used some of the money to pay the employer’s creditors without paying to the IRS on the withholding tax obligations and used some for her own purposes.  Then, in an interview with the IRS she repeated the lie as to her reason for withdrawal from the 401(k) account.  These facts are the basis for the wire fraud counts and for one of the false statement counts (17 U.S.C. § 1001).

The Court held that, on the record, the Government did not prove the critical element of fraud.  Although it was clear that Barringer misrepresented her reason for the withdrawal in order to fit one of the permitted reasons for withdrawal, the question was whether she thereby sought to and did commit a fraud against another person.  She was, after all, withdrawing her own money.  Here is what the Court said about that (Slip Op. 9-:

            The defendant’s main challenge is directed towards her wire fraud convictions. I agree that the government failed to prove that the defendant’s deceit deprived another of a property interest. To obtain a conviction for wire fraud, in violation of 18 U.S.C. § 1343, the government must show that the defendant “(1) devised or intended to devise a scheme to defraud and (2) used the mail or wire communications in furtherance of the scheme.” United States v. Wynn, 684 F.3d 473, 477 (4th Cir. 2012). The element “to defraud” has “the common understanding of wronging one in his property rights by dishonest methods or schemes, and usually signify the deprivation of something of value by trick, deceit, chicane, or overreaching.” Carpenter v. United States, 484 U.S. 19, 27 (1987).

            The defendant’s sufficiency challenge is that the government did not present evidence that she deprived, or intended to deprive, another of something of value because the government did not present evidence of who or what might have been deprived of their property interest by her deception and that she believed she was the sole owner of her 401(k) plan assets. * * * *

Monday, August 24, 2020

Report that Prominent Billionaires Are Subject to Criminal Investigation (8/24/20)

This is a fascinating report of a tax investigation in process against two very prominent billionaires, Robert Brockman and David Smith.  David Voreacos & Neil Weinberg, Billionaire Robert Smith Fighting U.S. Criminal Tax Inquiry (1) (BloombergLaw 8/21/20), here.  This is an ongoing investigation, so charges may never be brought and, if they are, the  shape of the charges are uncertain.

What caught my eye and, I think may be of interest to readers of this blog is the following discussing divorce proceedings between Smith and his estranged wife:

            Experts on both sides of the divorce pored over the family finances. In 2014, Smith approached the IRS seeking amnesty from prosecution under a program used by more than 56,000 Americans who failed to report offshore assets, according to two of the people familiar with the matter. Through the program, the IRS collected more than $11 billion in back taxes, fines and penalties, while learning who enabled offshore tax evaders.

            But the IRS rejected Smith, according to people familiar with the matter. The agency typically turned down taxpayers if it already knew they had undeclared offshore accounts.

Now, I don’t know but assume that, because of the specificity (although limited), the investigators are correct about his attempt to go into the voluntary disclosure program and being rejected.  The article does not state whether Smith attempted the OVDP or Streamlined or OVDP with Streamline transition.  The Streamlined Procedures were adopted in 2014 the year that the article indicates he approached the IRS.  Of course, if Smith’s tax underpayment and FBAR failure to file (or file correctly) are the subject of a criminal investigation, the IRS must now think him willful which would have in 2014 disqualified for the Streamlined Procedures (even the Transition).  But, if the IRS already had Smith on the radar screen knew when he attempted to join OVDP, he would have been disqualified as the article notes. 

We don’t know whether he was disqualified from OVDP because of already being on the radar screen or he attempted Streamlined (either direct or through transition from OVDP) and was rejected because his nonwillful certification was inadequate.  Of course, if he attempted Streamlined via OVDP transition and was rejected, he still could have solved his criminal problem by staying in OVDP and not opting out.

Some unanswered questions and surely there must be more questions.  And the statutes of limitations may be an issue since one would assume that the targets of the investigation have kept their income tax filings current and, within a range, proper, at least in the case of Smith who knew when he was rejected (in 2014) that he had potential criminal issues.

Taxpayers Who Entered OVDP Closing Agreement Seek Their Money Bank Under the APA (8/24/20)

In Harrison v. IRS (D. D.C. Dkt. 1:20-cv-00828) (key pleadings at CourtListener here), the taxpayers, husband and wife, joined the IRS OVDP at a time when the miscellaneous (or in lieu of penalty) was 27 1/2% of the high amount in the account(s) over the covered years.  While taxpayers were in process on the OVDP, the IRS announced the Streamlined Process which would permit nonwillful taxpayers to obtain the same relief with a 5% miscellaneous penalty.  The IRS announced also that qualifying taxpayers in OVDP process could transition to the Streamlined Process.  The key qualification for the Streamlined Process was that taxpayers be nonwillful.  The taxpayers attempted to transition into the Streamline Process but were denied transition by the IRS committee that must approve the transition.  (Taxpayers refer to this process as governed by Transition Rules.)  At that point, their options were to either accept the OVDP civil penalty result or opt out and hope to achieve a lesser costs (principally the FBAR nonwillful penalty or no penalty at all).  The taxpayers did not opt out and entered a Closing Agreement under the OVDP penalty structure (notably 27 1/2% miscellaneous penalty as noted).

One would think that the Closing Agreement put the matter behind the taxpayers and the IRS.  But, the taxpayers had another trick (real or imagined) up their sleeves.  

In this case, taxpayers seek their money back and have packaged the request in APA clothing (rather than refund clothing), urging that the IRS had failed to provide guidance for when the request for transition relief would be approved and failed to provide guidance as to willfulness.  Moreover, they assert, the IRS did not adopt the rules (whatever they were) by informal rulemaking procedure (notice and comment), which would have given interested parties an opportunity to comment.  I presume that the claim is that the transition process and whatever unpublished guidance governed it were legislative rules (with force and effect of law) under the APA, for only legislative rules require notice and comment; interpretive and procedural rules do not require notice and comment.  The claim also is that the Transition Rules denying them transition (whatever those Rules are) are arbitrary and capricious.  Further they allege that the Transition Rules violate Due Process.  Finally, they reallege all of the foregoing and assert that the Closing Agreement is invalid.  They seek declaratory relief and a "refund of all money that Plaintiffs paid to Defendant through their participation in OVDP's penalty structure.

DOJ moved for summary judgment.  Taxpayers responded.  No decision o the motion to date.  These motion documents can be retrieved from the Court Listener docket sheet linked above.

JAT Comments:

Monday, August 17, 2020

Eighth Circuit Holds that Marinello Pending Proceeding Nexus in § 7212(a) Does Not Apply to Defraud / Klein Conspiracy (8/17/20)

In United States v. Flynn, 969 F.3d 873 (8th Cir. 2020), here, the Court opens as follows:

Scott Phillip Flynn pleaded guilty to conspiracy to defraud the United States and filing a false tax return. See 18 U.S.C. § 371; 26 U.S.C. § 7206(1). He tried to withdraw his plea before sentencing, but the district court 1  denied his motion and sentenced him to 87 months in prison—60 months for the conspiracy charge and 27 months for the false return—and ordered him to pay roughly $5.4 million in restitution. Flynn appeals, arguing that he should have been allowed to withdraw his guilty plea, his conspiracy conviction is void for vagueness, the restitution order was procedurally improper and clearly erroneous, and the district court wrongly applied an organizer or leader enhancement when it calculated his sentence. We find no error and affirm. 

The issue in the case that I think is interesting is the argument that the defraud / Klein conspiracy charge (18 USC 371) should have the same pending proceeding nexus element for tax obstruction, § 7212(a).  See Marinello v. United States, 584 U.S. ___, 138 S. Ct. 1101 (2018).  I have written on this issue before.  Basically, the issue is whether, although the defraud / Klein conspiracy statute and the tax obstruction statute are differently worded, because the interpretation of the defraud / Klein conspiracy parallels the tax obstruction statute the elements should be the same.  See What Are the Implications for Marinello on the Defraud / Klein Conspiracy? (Federal Tax Crimes Blog 3/24/18), here.  I have posted subsequent blog entries on that issue as courts have addressed the claim.  The gravamen of the case authority to date is that the tax obstruction pending proceeding nexus element does not apply to the defraud / Klein conspiracy.  The Flynn case so holds.

Flynn made the Marinello argument in the context of attempting to withdraw his guilty plea (see Slip Op. 5-6) and the argument that allegedly missing element made charge void for vagueness (see Slip Op. 8 n. 4).  The Court rejected both arguments.

The briefing in the case is quite good, so I offer here a zip file with the briefs and other submissions relevant to the Marinello issue.

One point, I omitted in my earlier discussion of the issue is the following from my most recent (now discontinued) Federal Tax Crimes Book (p. 123 n. 231, here):

In a prior version of the CTM, DOJ Tax asserted that tax obstruction may be charged where the Klein conspiracy is “unavailable due to insufficient evidence of conspiracy.”  CTM 17.02 (2001 ed.).  The 2008 version of the general subject is in § 17.00 and refers to Directive 129 which superseded Directive 77. The language quoted in the text from the 2001 version incorporating Directive 77 is omitted from the superseding Directive 129. I don't think that omission is a concession of the point, however.

The point is that, at least at one time, DOJ felt that the two crimes substantially overlapped with the critical difference being that the defraud / Klein conspiracy required more than one actor / conspirator.

Wednesday, August 12, 2020

A Bit of History: Andrew Mellon and Tax Fraud (8/12/20; 8/14/20)

Andrew Mellon is a name well-known to historians and, probably, most tax lawyers.  See Wikipedia page, here.  He was very wealthy and powerful and served as Secretary of Treasury in Republican administrations from 1921 to 1932.  Among his prominent legacies was the seeding of the National Gallery of Art in Washington, D.C.

A Mellon anecdote that I previously had not focused on was his tax travails where, after he left his Treasury Secretary position on Roosevelt’s election to the Presidency, the Government attempted unsuccessfully to indict him for tax evasion (11-10 vote in grand jury) and then issued a notice of deficiency seeking large deficiencies; somehow fraud was in issue (presumably either because of the civil fraud penalty or the statute of limitations).  Mellon v. Commissioner, 36 B.T.A. 977 (1937), here.  Robert Jackson, Wikipedia here, who later became Supreme Court Justice and chief prosecutor at the Nuremberg Trials, led the BTA case for the IRS.  The BTA rejected the IRS claim of fraud (36 B.T.A., at 1054-1055.

I picked subject up from the following blog posting today:  Andrew Mellon's Tax Trial (Tax Prof Blog 8/11/20), here, which links to Andrew Mellon's Tax Trial (PrawfsBlawg 7/18/20), here.  Both posts note the PrawfsBlawg’s suggestion that “A tax scholar and a con law scholar should get together and write this paper.”  It seems to me to be a subject for such an article, so I post it for readers of this blog to pursue if they wish. (I’m not sure I fit either description; in any event, I do not plan to pursue it.)

The PrawfsBlawg offers the following very interesting links:

  • A page on the Robert H. Jackson Center’s site:  The Andrew Mellon Case: 1934-1937, here, that seems to be a teaching exercise for high school studentsdescribed as follows:

This lesson addresses the content understanding:

PROSPERITY AND DEPRESSION (1920-1939): *The 1920s and 1930s were a time of cultural and economic changes in the nation.  During this period the nation faced significant domestic challenges including the Great Depression. *Taken from:  New York State K-12 Social Studies Framework (New York State Education Department, 2014), p. 39

Students will examine:-The background reasons for the tax fraud case brought against Andrew Mellon-Robert H. Jackson’s role in the Andrew Mellon tax case-The results and consequences of the Andrew Mellon tax case-Andrew Mellon’s role in founding the National Gallery of Art in Washington, DC