Monday, November 12, 2018

New LB&I Compliance Campaigns Related to Offshore Matters (11/11/18)

The IRS has announced that new "compliance campaigns" related to offshore matters.  See IRS web page titled "IRS Announces the Identification and Selection of Five Large Business and International Compliance Campaigns," here.  The IRS describes its compliance campaigns as:
LB&I is moving toward issue-based examinations and a compliance campaign process in which the organization decides which compliance issues that present risk require a response in the form of one or multiple treatment streams to achieve compliance objectives. This approach makes use of IRS knowledge and deploys the right resources to address those issues. 
The campaigns are the culmination of an extensive effort to redefine large business compliance work and build a supportive infrastructure inside LB&I. Campaign development requires strategic planning and deployment of resources, training and tools, metrics and feedback. LB&I is investing the time and resources necessary to build well-run and well-planned compliance campaigns.
The new offshore related campaigns are:
  • Offshore Service Providers
Practice Area: Withholding & International Individual Compliance
Lead Executive: John Cardone, director of Withholding & International Individual Compliance
The focus of this campaign is to address U.S. taxpayers who engaged Offshore Service Providers that facilitated the creation of foreign entities and tiered structures to conceal the beneficial ownership of foreign financial accounts and assets, generally, for the purpose of tax avoidance or evasion. The treatment stream for this campaign will be issue-based examinations.
  • FATCA filing accuracy.  
FATCA Filing Accuracy
Practice Area: Withholding & International Individual Compliance
Lead Executive: John Cardone, director of Withholding & International Individual Compliance
The Foreign Account Tax Compliance Act (FATCA) was enacted in 2010 as part of the HIRE Act. The overall purpose is to detect, deter and discourage offshore tax abuses through increased transparency, enhanced reporting and strong sanctions. Foreign Financial Institutions and certain Non-Financial Foreign Entities are generally required to report the foreign assets held by their U.S. account holders and substantial U.S. owners under the FATCA. This campaign addresses those entities that have FATCA reporting obligations but do not meet all their compliance responsibilities. The Service will address noncompliance through a variety of treatment streams, including termination of the FATCA status.
  • 1120-F Delinquent Returns Campaign
Practice Area: Cross Border Activities
Lead Executive: Orrin Byrd, director of Field Operations (East)
The objective of the Delinquent Returns Campaign is to encourage foreign entities to timely file Form 1120-F returns and address the compliance risk for delinquent 1120-F returns. This is accomplished by field examinations of compliance risk delinquent returns and external education outreach programs. The campaign addresses delinquent-filed returns, Form 1120-F U.S. Income Tax Return of a Foreign Corporation.
Form 1120-F must be filed on a timely basis and in a true and accurate manner for a foreign corporation to claim deductions and credits against its effectively connected income. For these purposes, Form 1120-F is generally considered to be timely filed if it is filed no later than 18 months after the due date of the current year's return. The filing deadline may be waived, in situations based on the facts and circumstances, where the foreign corporation establishes to the satisfaction of the commissioner that the foreign corporation acted reasonably and in good faith in failing to file Form 1120-F per Treas. Reg. Section 1.882-4(a)(3)(ii). LB&I Industry Guidance 04-0118-007 dated 2/1/2018 established procedures to ensure waiver requests are applied in a fair, consistent and timely manner under the regulations.
The full list of compliance campaigns is here.  The ones that might be of particular interest to readers of this blog are:

Sunday, November 11, 2018

Offshore Account Enabler Post Conviction Motions for Acquittal and New Trial Denied; Issue on Reliance of Counsel (11/11/18)

I have previously blogged on the indictment and conviction of Michael Little, a lawyer and an offshore account enabler.  I list the prior blogs at the end of this blog entry.  In an Opinion and Order dated November 1, 2018, the district court denied Little's motion for acquittal and alternative motion for new trial.  United States v. Little, 2018 U.S. Dist. LEXIS 187643 (S.D. N.Y. 2018), here.

The opinion is straight-forward. The only thing that caught my attention was this (Slip Op. p. 10):
Essentially, he [little] argues that the evidence was insufficient with respect to the third element—willfullness—because the government failed to disprove his advice of counsel defense. This claim is meritless. An advice of counsel defense is an affirmative defense. As such, the burden is on the defendant to prove the elements of the defense, not on the government to disprove the defense. A successful advice of counsel defense requires the defendant to prove that he (1) honestly and in good faith sought the advice of counsel, (2) fully and honestly laid all the facts before his counsel, and (3) honestly and in good faith followed his counsel's advice, believing it to be correct and intending that his acts be lawful. United States v. Colasuonno, 697 F.3d 164, 181 (2d Cir. 2012).
I think the court errs in saying that the advice of counsel defense is an affirmative defense requiring that the defendant bear the burden of proof.  The defendant does bear a threshold burden on the issue, like a burden of production, to put the reliance on counsel defense in play.  But the Government's burden of proof beyond a reasonable doubt is to prove willfulness and that requires the Government to disprove good faith (including reliance on counsel) when that "defense" has properly been put in play in the case.

Here is the relevant excerpt from Michael Saltzman and Leslie Book, IRS Practice and Procedure (Thomsen Reuters 2015) (disclosure, I am the principal draftsman of Chapter 12):
¶ 12.05[2][b][ii] Blame others —tax professionals. 
A defendant will frequently assert that he or she lacked willfulness because he or she relied upon a tax professional. This is a Cheek argument in that the government failed to meet its burden to prove willfulness rather than a defense per se. The government thus has to show that the defendant did not rely upon the tax professional in order to show willfulness. n524 But, as in Cheek, the defendant has to put the “defense” in play by introducing some evidence of reliance on the tax professional. n525 Once the defendant does that, n526 it is then the government's burden to show that the defendant acted willfully, which means negating the taxpayer's claimed reliance. 
If the defendant does put the reliance defense in play, the following is a typical instruction that the government will request to advise the jury of what it must consider with respect to the defense: 
A good faith reliance upon the advice of a qualified tax accountant is also a complete defense to the charges because such a reliance is inconsistent with the intent required to commit these crimes. In order for the defendant to rely on the advice of a qualified tax accountant in good faith, the defendant must (1) make full and complete disclosure of all tax-related information, (2) to a qualified tax accountant, (3) actually rely upon and follow the advice that was provided, (4) without reason to believe that the advice was not correct. n527

Saturday, November 10, 2018

Court Holds that the Trust Fund Recovery Penalty is a Tax For Purposes of Tax Evasion, § 7201 (11/10/18)

In United States v. Prelogar, 2018 U.S. Dist. LEXIS 188305 (D. Mo. 2018), here), the Court rejected the defendant's argument to dismiss the following count of tax evasion, § 7201 that defendant:  "did willfully attempt to evade and defeat the payment of the Trust Fund Recovery Penalty ("TFRP") due and owing by him to the United States of America . . . and the payment of income tax due and owing by him to the United States of America."  The first thing to note is that two types of evasion are alleged -- one for the TFRP and the other for income tax.  I focus here on the allegation of tax evasion for the TFRP.

Defendant's argument was simple.  Tax evasion requires a tax to be evaded (or, in the language of the statute attempted to be evaded).  The TFRP, as stated in § 6672, is a "penalty" rather than a tax.  Therefore a person evading the TFRP is not evading tax and thus outside the scope of tax evasion.

The Court rejects the defendant's argument as follows:
Count I charges that Defendant "did willfully attempt to evade and defeat the payment of the Trust Fund Recovery Penalty ("TFRP") due and owing by him to the United States of America . . . and the payment of income tax due and owing by him to the United States of America" in violation of 26 U.S.C. § 7201. Defendant argues that § 7201 does not apply to him because the TFRP owed is a penalty and not a tax. In support of this argument, Defendant quotes Section 7201, which prohibits the willful evasion of "any tax imposed by this title or the payment thereof." Id. (emphasis added). Initially, the Court notes that Defendant's argument does not justify dismissal of Count I because Count I alleges that Defendant attempted to evade the payment of both taxes and penalties. At best, Defendant's argument would justify only limiting the scope of Count I. Regardless, the Court does not agree with Defendant that § 7201 applies only to evasion of the tax itself. Section 7201 makes it unlawful to attempt "to evade or defeat any tax", and § 6671(a) states that "any reference in this title to 'tax' imposed by this title shall be deemed also to refer to the penalties and liabilities provided by this subchapter." 26 U.S.C. § 6671(a). As explained in the Report, a "plain reading of Section 6671(a) leads to the inescapable conclusion that a reference to 'tax imposed' in a statute under the Internal Revenue Code [Title 26] must be deemed to include a 'penalty' provided in the subchapter [Subchapter B: Accessible Penalties]." Therefore, Defendant's arguments with respect to Count I are rejected. 
In Defendant's objections to the Report, he argues that the Fifth Circuit supports his claim that a penalty is not a tax for the purposes of § 7201. (Doc. 68, p. 3.)1 In United States v. Wright, 211 F.3d 233 (5th Cir. 2000), the Fifth Circuit addressed whether petitioners could be prosecuted for tax evasion if they owed only interest and penalties. Wright, 211 F.3d at 236-37. The Court based its analysis by relying on Sansone v. United States, 380 U.S. 343 (1965), where the Supreme Court observed that a conviction under § 7201 requires proof of a "tax deficiency." The Fifth Circuit then relied on the tax code's definition of "tax deficiency" - which does not include a tax penalty — to conclude that a conviction under § 7201 cannot be predicated on the willful evasion of a tax penalty. Id. at 236 & n. 3-4 (citing 26 U.S.C. §§ 6211, 6601(e)). The Court declines to follow Wright for several reasons. First, Wright does not discuss § 6671. Second, the phrase "tax deficiency" does not appear in § 7201, so the more limiting definition of "tax deficiency" (as opposed to the definition of "tax" found in § 6671) is inapplicable. Third, the issue in Sansone involved the circumstances under which a person charged with felony tax evasion is entitled to a lesser-included offense instruction for the misdemeanor of willful failure to pay a tax. Thus, it does not appear that when Sansone said the elements of § 7201 included a "tax deficiency," it meant to use the technical definition of the phrase as found elsewhere in the tax code. For these reasons, the Court denies Defendant's arguments with respect to Count I.

Tuesday, November 6, 2018

Second Circuit Offers Excellent Discussion of Accomplice and Conspirator Pinkerton Liability and Exception (11/16/18)

I have previously written on a tax iteration of the use of what I call derivative criminal liability -- i.e., not liability as a principal of the substantive offense but liability as an accomplice (aider or abettor) or a conspirator (Pinkerton liability).  John A. Townsend, Theories of Criminal Liability for Tax Evasion (May 15, 2012), available at SSRN: http://ssrn.com/abstract=2060496.  Basically, my concern was that by charging in the pleading that a defendant was a principal of the crime, an aider and abettor or causer of the crime, and a co-conspirator liable under Pinkerton, the Government was getting an advantage in the jury charge that overstated its case.  At least in the context of tax evasion, liability for the substantive offense for nontaxpayers (return preparers or abusive shelter promoters) incorporated the other potential liabilities and, if the defendant was not liable for the substantive offense, he was not liable for the other nominal offenses.  By charging the jury on all three, the impression could be given to the jury that if he was not guilty of one or two, he still could be convicted of the third.

I write today on a recent Second Circuit decision that, although not a tax case, addresses some of these derivative liability theories so ubiquitous in white collar crimes generally.  In United States v. Hoskins, 902 F.3d 69 (2d Cir. 2018), here, the Court address a related issue in the context of the FCPA.  The Court framed the issue as follows:
In this case, we are asked to decide whether the government may employ theories of conspiracy or complicity to charge a defendant with violating the Foreign Corrupt Practices Act ("FCPA"), even if he is not in the category of persons directly covered by the statute. 
* * * *  
The central question of the appeal is whether Hoskins, a foreign national who never set foot in the United States or worked for an American company during the alleged scheme, may be held liable, under a conspiracy or complicity theory, for violating FCPA provisions targeting American persons and companies and their agents, officers, directors, employees, and shareholders, and persons physically present within the United States. In other words, can a person be guilty as an accomplice or a co-conspirator for an FCPA crime that he or she is incapable of committing as a principal?
I will now offer substantial "cleaned up" quotes (see my discussion of the cleaned up technique here), with most footnotes omitted:

Monday, November 5, 2018

U.S. .Sentencing Commission Quick Facts for Tax Fraud Offenses for fye 2017 (11/05/18)

I offer the U.S. Sentencing Commision's "Quick Facts" on key characteristics for sentencing for "Tax Fraud Offenses for fiscal year 2017.  The pdf is available from the Sentencing Commission's web site here.  I could not find a way to make legible copies of the pages on this blog page.

The facts (mostly statistics) are for offenders sentenced under Sections 2T1.1 land 2T1.4 of the Guidelines Manual which are the tax guidelines.  The 2018 Guidelines Manual is here.  Readers should remember that, previously the Government would assert sentencing for FBAR violations under the tax guidelines. but the Government had a change of mind on the appropriate sentencing for FBAR violations.  See Offshore Account Defendant Sentence with Court Accepting Government's New Position on Guidelines Calculations (1/25/18), here; Questions About New DOJ Tax Policy on FBAR Sentencing Guidelines (12/11/17), here; More on New DOJ Tax Position on FBAR Sentencing Guidelines (11/9/17), hereAnother FBAR Plea And Notice of Government Change of Position on Applicable Guidelines (10/27/17), here.

Certain key items for fiscal year 2017 are:

  • There were 584 tax fraud offenders sentenced, who accounted for 0.9% of all offenders sentenced under the guidelines.  These seem low compared to the IRS statistics for sentencing.  My spreadsheet with the statistics is here.  The spreadsheet has links to the IRS statistics.  I have not tried to reconcile the differences.
  • The majority of tax fraud offenders had little or no prior criminal history (80.5%of these offenders were assigned to Criminal History Category I).
  • The median tax loss for these offenses was $277,576.
  • 87.2% of tax offenses involved tax losses of $1.5 million or less.
  • 19.8% of tax offenses involved tax losses of $100,000 or less.
  • Sentences were increased: (i) 12.5% for sophisticated means; (ii) 8.4% for leadership or supervisory role; (iii) 3.8% for abusing position of public trust; and 8.7% for obstructing or impeding the administration of justice.
  • More than half of tax fraud offenders were sentenced to imprisonment only(59.1%).
  • The average sentence length for tax fraud offenders was 17 months
  • During the past five years, the rate of within range sentences for tax fraud offenders has decreased (from 36.1% in fiscal year 2013 to 26.5% in fiscal year 2017).
  • In each of the past five years, approximately one-quarter of tax fraud offenders received a sentence below the guideline range because the government sponsored the below range sentence.
  • Substantial assistance departures were granted in approximately 15 to 17 percent of tax fraud cases in each of the past five years,  These offenders received an average reduction of 67.3% in their sentence during the five-year time period (which corresponds to an average reduction of 17 months).
  • Other government sponsored departures were granted in approximately seven to thirteen percent of tax fraud cases in each of the past five years,  These offenders received an average reduction of 68.1% in their sentence during the five-year time period (which corresponds to an average reduction of 13 months).
  • The rate of non-government sponsored below range sentences increased during the past five years (from 40.8% of tax fraud cases in fiscal year 2013 to 45.9% in fiscal year 2017). Reductions for non-government sponsored below range sentences were smaller than in cases in which the government sponsored a below range sentence, with an average reduction of 59.0% during the five-year time period (which corresponds to an average reduction of 12 months).
  • Reductions for non-government sponsored below range sentences were smaller than in cases in which the government sponsored a below range sentence, with an average reduction of 59.0% during the five-year time period (which corresponds to an average reduction of 12 months). The average guideline minimum ranged between 24 months and 26 months during that time period.  The average sentence ranged between 15 months and 18 months during that time period.

Outstanding Powerpoint Presentation on All Things FBAR Penalties (Procopio #1) (11/5/18)

I post a Powerpoint Presentation (in pdf format), here, that was offered at the 14th Annual University Of San Diego School Of Law Procopio International Tax Institute last week.  The panel was titled "Summer of Norman, Wahdan, Colliot:Defending Title 31 FBAR penalties: Pre and Post-Assessment, IRS & DOJ Policies and Strategy," and the panelists were
  • Caroline D. Ciraolo, of Kostelanetz & Fink, here.
  • Robert S. Horwitz of Hochman Salkin Toscher & Perez PC, here.
  • Patrick W. Martin of Procopio, et al., here
This is really a great current discussion on all facets of FBARS, including
  • FBAR penalties, 
  • FBAR penalty assessments, 
  • the Offshore Voluntary Disclosure programs, 
  • FBAR Audits and Litigation (including Government collection suits and FBAR penalty refund suits), 
  • FBAR willfulness and reasonable cause, 
  • FBAR administrative collection
  • And more.
When getting permission to post this, I did engage in discussing with the authors one issue related to pp. 32&33 of the PowerPoint.  The FBAR penalty refund suit as stand alone litigation is not a trial to the judge; no jury trial is available.  The FBAR penalty collection suit can be tried to a jury.  Now, as tax lawyers are familiar, subject to the Flora full payment rule in much tax litigation, when the taxpayer files a proper tax refund suit after not paying the full amount (perhaps for other events or years), the Government will counterclaim for the unpaid balance.  For example, in TFRP cases, the putative responsible person can make partial payment and the Government will counterclaim.  The counterclaim is a collection suit in response to the refund suit.  Applying those concepts to the FBAR context (although outside Title 26), in theory the FBAR penalty refund case should be decided by the judge, and the counterclaim / collection case could be tried to a jury if either side demanded a jury.  That is an odd situation and at least offers the theoretical possibility, if not mitigated somehow, that the judge could reach a decision on the refund case that is inconsistent with the jury verdict on the counterclaim / collection case.  I say it is theoretical, because I think it would be unlikely for practical reasons.  Still:

Article on Benefits and Risks of Kovel Accountant, and Case on Topic (11/5/18)

I call readers attention to a very good succinct article on benefits and risk of using a Kovel accountant.:  Maintaining Privileges When Kovel Accountants Prepare Tax Returns by Evan Davis (Hochman, Salkin, Toscher & Perez Blog 10/29/18), here, which links to the article of that name in Tax Notes, here.  The author's bio is here.

On Kovel, I also offer readers the opinion in United States v. Adams, 2018 U.S. Dist. LEXIS 41165 (D. Minn. 2018), here.  (If the link is not working, please let me know at jack@tjtaxlaw.com or by posting a comment.,.  I cut and paste the relevant discussion (cleaned up, beginning on p. 2 of the opinion):
II. Murry LLC Communications 
Mr. Adams has invoked the attorney-client privilege over numerous communications between himself and accountants at Murry LLC, who were retained by his tax counsel under a so-called Kovel arrangement. See United States v. Kovel, 296 F.2d 918, 921–22 (2nd Cir. 1961) (holding that attorney-client privilege may apply to an individual’s communications with an accountant if the communications are “made in confidence for the purpose of obtaining legal advice from the lawyer”). The government raises three challenges to this assertion of privilege. First, the government argues that the protections provided under Kovel are not applicable to the individual communications before the Court for in camera review. Even if the protections of Kovel did apply, the government asserts that any protection was waived by Mr. Adams’s subsequent filing of amended tax returns. Finally, the government argues that the crime-fraud exception vitiates any claim of privilege. 
The Court has conducted an in camera review of the following Murry communications: In Camera Exhibits M, N, O, P, R, S, and T. For the reasons set forth below, the Court rejects the government’s challenge to the assertion of privilege regarding these documents. However, this Court’s decisions regarding the privileged nature of the specific documents at issue is expressly limited to these documents. The Court’s rulings should not be read to strengthen or weaken claims of privilege or discoverability as to other documents, evidence, or testimony as those issues are not now before the Court. 
A. Attorney-Client Privilege 
Federal common law governs questions of privilege in a criminal case such as this. The attorney-client privilege protects confidential communications between a client and an attorney that are made for the purpose of obtaining legal advice. The party asserting that a communication is protected by the attorney-client privilege has the burden to establish that it applies.  
B. Application of Kovel 
With respect to the government’s argument that the protections of Kovel do not apply to the Murry communications, the Court finds that Thomas Brever’s Declaration and Supplemental Declaration sufficiently demonstrate that the attorneyclient privilege extends to the documents at issue. In these declarations, Mr. Brever thoroughly explains how communications with Murry LLC and the information Mr. Adams provided to the accountants assisted in Mr. Brever’s provision of legal advice to his client regarding tax-related matters. This is sufficient to invoke the attorney-client privilege. See Kovel, 296 F.2d 921–22 (explaining that where an attorney retains an accountant to assist the lawyer in providing legal advice to a client concerning tax issues, the attorney-client privilege may extend to communications between the client and the accountant); see also United States v. Cote, 456 F.2d 142, 144 (8th Cir. 1972) (concluding that attorney-client privilege may apply where “the accountant’s aid to the lawyer preceded the advice and was an integral part of it”). The Court’s in camera review of the communications does not contradict Mr. Brever’s explanation. 
C. Waiver By Filing Amended Returns 
The Court also concludes that Mr. Adams’s subsequent filing of amended tax returns for 2008, 2009, and 2010 do not result in a waiver of the privilege as to the Murry communications submitted for in camera review. In Cote, after concluding that the privilege could apply to communications between a client and an accountant who is retained to assist an attorney in providing legal advice on tax matters, the Eighth Circuit reasoned as follows: 
Notwithstanding our recognition that the attorney-client privilege attached to the information contained in the accountant’s workpapers under the circumstances existing here, we find that by filing the amended returns the taxpayers communicated, at least in part, the substance of that information to the government, and they must now disclose the detail underlying the reported data.  
456 F.2d at 144. Too broad an application of the rule of waiver requiring unlimited disclosure by reason of filing an income tax return might tend to destroy the salutary purposes of the privilege which invite confidentiality between the attorney and his client. The Cote court distinguished between “workpapers [that] contain detail of unpublished expressions which are not part of the data revealed on the tax returns,” and other workpapers to which the rule of waiver would apply. Id. (emphasis in original). Here, Mr. Brever explains in his Supplemental Declaration that in responding to a subpoena from the government, he provided copies of files that contain data and
information that that was included on the amended returns for 2008–2010. However, he did not disclose information communicated by Mr. Adams in connection with requests for legal advice. Mr. Brever’s explanation distinguishes this case from Cote, where the accountant “testified that the information on his workpapers was later transcribed onto the amended returns which were filed by the taxpayers with the government,” thereby waiving the privilege. The Court cannot conclude on this record, which includes the Court’s in camera review, that Mr. Adams is claiming privilege over the underlying details for the data that was ultimately transmitted to the IRS when he filed amended returns. Instead, the record suggests that the information conveyed to the accountants at Murry LLC comprised the type of unpublished expressions that were not later revealed on the amended tax returns.

Fourth Circuit Fuzzes the Issue as to Whether Legal Uncertainty Is an Issue for the Court (11/5/18)

In United States v. Burks, 2018 U.S. App. LEXIS 23804 (4th Cir. 2018) (unpublished), here, Burks was convicted of "conspiracy to commit mail and wire fraud, substantive mail and wire fraud, and conspiracy to defraud the United States by impairing the lawful functions of the Internal Revenue Service."  He was sentenced to "176 months incarceration concurrent on the counts involving mail and wire fraud, and 60 months concurrent on the conspiracy to defraud count, as well as being ordered to forfeit $244 million." This should tell you that the defraud / Klein conspiracy was not the principal driver in this case which involved the more serious mail and wire fraud charges for a Ponzi scheme.

I will get to the defraud / Klein conspiracy, but want first to mention that one of the banks involved filed "multiple suspicious activity reports with the United States Treasury."  I won't get further into that, but this is a good warning to the practitioner community that these reports are filed and the depositor is not notified.

The issue that I found particularly interesting was what I called the James issue.  James v. United States, 366 U.S. 213 (1961).  James held that legal uncertainty in the law's commands meant that a defendant could not be convicted of a crime as a matter of law.  I offer here the discussion on James from Michael Saltzman and Leslie Book, IRS Practice and Procedure, ¶ 12.05[2][b][iii] Complexity and uncertainty in the tax law (footnotes omitted; online edition viewed on 11/5/18) (Disclosure:  I am the principal draftsman of that Chapter):
¶ 12.05[2][b][iii] Complexity and uncertainty in the tax law. 
One defense to a tax crime is that the legal duty upon which the criminal charge is based is not sufficiently certain to put the defendant on notice that failure to honor the uncertain duty can be an intentional violation of a known legal duty.
The seminal decision is James v. United States. The issue was whether James could be prosecuted for evasion under Section 7201 for failing to report and pay tax on embezzled income. James had been convicted of failure to report and pay, meaning that the jury determined guilt, which further meant that the jury determined that he intentionally violated a legal duty he knew to report the income. The question was whether, because of legal uncertainty as to the duty, he could be convicted even if he had a subjective intent to violate a duty that he “knew” (at least thought he knew). The Supreme Court majority found that the substantive issue of taxability of embezzled funds was in doubt — a doubt of the Supreme Court's own making. In an earlier case, Wilcox, the Supreme Court held that embezzled funds were not income for federal tax purposes. The underlying premise was that embezzled funds gave rise to an offsetting obligation to pay back, so the defendant had no increase in wealth and thus no taxable income. After that holding and before James, the Supreme Court decided in Rutkin that extorted funds were income despite an obligation to repay, thus rejecting the theoretical underpinning of Wilcox. In Rutkin, the Court expressly declined to overrule Wilcox. That was the state of the law when James was convicted. So Wilcox's express holding that embezzled funds was not income stood un-reversed; James presented the issue of whether James could be criminally prosecuted for failure to report embezzled funds that the un-reversed Supreme Court authority squarely on point held was not income. 
The Supreme Court started its analysis in James by taking the step it had previously declined to take in the intervening case, holding that for civil tax purposes, embezzled funds are income, thus overruling the original holding. Under the Court's reasoning, the law prior to this reversal did not clearly impose a legal duty with respect to embezzled funds (although that might be an even strong inference, it was not a compulsory inference from Rutkin because in Rutkin the Court expressly declined to reverse Wilcox). So even though James subjectively “knew” embezzled funds were taxable and violated that duty known to him (remember the jury so determined), objectively, there was legal doubt as to his duty to report and pay tax on embezzled funds. The duty itself was unknowable in any objective legal sense because of the state of the Supreme Court authority. Emphasizing that it was dealing with a criminal penalty, the Court said the following: 
We believe that the element of willfulness could not be proven in a criminal prosecution for failing to include embezzled funds in gross income in the year of misappropriation so long as the statute contained the gloss placed upon it by Wilcox at the time the alleged crime was committed. Therefore, we feel that petitioner's conviction may not stand and that the indictment against him must be dismissed.
The bottom line holding is that, given the confusion as to the objective legal duty, James could not be prosecuted. It did not matter that the jury had determined that James had willfully failed to report the income, a holding that logically meant that James had not placed any reliance on the confusing Supreme Court authority. It did not matter, as the jury found, that James had the darkest of motives vis-a-vis the federal tax system. All that mattered was that, as a matter of law regardless of the facts, the legal duty was uncertain and thus could not support a criminal prosecution. 
Let's address some conceptual issues inherent in James that may be easily and erroneously conflated. James itself held that uncertainty in the law can preclude prosecution regardless of a defendant's intention to violate what he or she may have thought was a known legal duty. In this inquiry, the defendant's actual intent is irrelevant, and conceptually therefore it is not a jury issue but a judge issue that the judge pre-empts without the existence of actual intent being relevant. This issue turns upon the legal conclusion as to whether the law is “knowable” — meaning that it sets a discernible legal duty. Knowability is a legal issue for the court, as the Supreme Court held in James. The issue for the jury is whether the defendant knew the knowable legal duty and intended to violate it. This is a factual issue for the jury that is only addressed after the court first determines that the legal duty is knowable. (Actually, as in James, the determination that the law is unknowable can be made after the defendant has been found guilty by reversing the conviction.)
James is still viable on this issue. James spawned other cases in which convictions were reversed, but reversals are not common.

Eleventh Circuit Affirms Klein Conspiracy and Tax Perjury Convictions Mostly on Harmless Error But Raising Interesting Tax Crimes Issues (11/5/18)

In United States v. Garcia, ___ F.3d ___, 2018 U.S. App. LEXIS 29554 (11th Cir. 2018), here, the indictment charged the defendant and her late husband (who died before trial) of (i) one count of conspiracy (both offense conspiracy and defraud / Klein conspiracy) and (ii) three counts of tax perjury (§ 7206(1).  Garcia was convicted on all counts.

The principal issue in the appeal was whether Garcia's and her counsel's absence from the trial for three to ten minutes in a trial lasting 49 hours violated her constitutional rights.  That is an interesting discussion but not relevant or only tangentially so to federal tax crimes.  The essence of the court's holding was that, although violating her rights, the error was not prejudicial to her.  One of the factors that the court discussed that made the error not prejudicial is, however, worth noting (cleaned up):
Finally, the jury got to consider the testimony of the defendant who vigorously denied knowingly defrauding the United States. A defendant's testimony is substantive evidence that a jury may -- and indeed in this case did consider and reject. A statement by a defendant, if disbelieved by the jury, may be considered as substantive evidence of the defendant's guilt. As the Supreme Court has explained, a defendant who chooses to take the stand runs "the risk that in so doing he will bolster the Government case enough for it to support a verdict of guilty." McGautha v. California, 402 U.S. 183, 215 (1971) [subsequent case history omitted]  An explanation or denial offered by a defendant at trial that the jury finds implausible or false may form a sufficient basis to allow the jury to find that the defendant had the requisite guilty knowledge. Garcia's decision to testify at trial thus, ironically, added further weight to the prosecution's case.
Focusing on the defraud / Klein conspiracy, often formulated in jury instructions as a conspiracy to impair, obstruct and defeat the lawful function of the IRS, the court instructed that the conspiracy was "attempting to impair, obstruct and defeat the lawful function of the IRS." (emphasis supplied.)  Garcia complained, and the court agreed, that the addition was error and the parties agreed that the addition was a constructive amendment of the indictment.  The court affirmed the conviction because she could not show plain error in the constructive amendment.  None of the trial focused on any attempt, with this being injected for the first time in the instructions.  Further, the conspiracy charge was for both offense conspiracy and defraud / Klein conspiracy.  She was convicted of the offenses that were the object of the offense conspiracy, and hence the error was harmless:  "It is, therefore, remote that the verdict rendered on Count One was somehow based on an attempt to defraud rather than on the actual commission of the substantive crimes. "  [JAT Note; that is a bit fuzzy, but the overall point is clear enough.]

Garcia made another claim about the defraud / Klein conspiracy -- she urged that the trial court did not instruct on it.  I am not sure from the opinion what this claim was, since, as noted in the preceding paragraph, a variation of the defraud / Klein conspiracy, albeit erroneous, was given.  But the Court held that her substantial rights were not affected, saying:
It is abundantly clear that the primary issue contested at trial was whether the defendant knowingly and willfully participated in the tax conspiracy. We repeat that the jury ultimately convicted Garcia on three substantive tax charges, which were included as objects of Count One.

Tuesday, October 30, 2018

GAO Report on IRS Whistleblower Processing and Improvement of Data Controls (10/30/18)

The GAO issued a report titled "Whistleblower Program: IRS Needs to Improve Data Controls for Some Award Determinations (GAO-18-698 published 9/28/18 and publicly released 10/29/18).  The fast facts, highlights and recommendations are here.  The full report is here.

I cut and paste the highlights below:
What GAO Found 
Prior to February 9, 2018, when Congress enacted a statutory change requiring the Internal Revenue Service (IRS) to include penalties for Report of Foreign Bank and Financial Accounts (FBAR) violations in calculating whistleblower awards, IRS interpreted the whistleblower law to exclude these penalties from awards. However, GAO found that some whistleblowers provided information about FBAR noncompliance to IRS. In a sample of 132 whistleblower claims closed between January 2012 and July 2017, GAO found that IRS assessed FBAR penalties in 28 cases. It is unknown whether the whistleblower's information led IRS to take action in all of these cases. These penalties totaled approximately $10.7 million. Had they been included in whistleblower awards, total awards could have increased up to $3.2 million. Over 97 percent of the FBAR penalties collected from these 28 claims came from 10 cases with willful FBAR noncompliance, for which higher penalties apply.
Report of Foreign Bank and Financial Accounts (FBAR) Penalties and Potential Whistleblower Awards for Selected IRS Whistleblower Claims Closed between January 1, 2012, and July 24, 2017
FBAR penalty type
Number of claims
FBAR penalty amount (dollars)
Maximum potential whistleblower awarda(dollars)
Willful penalty
10
10,485,847
3,145,754
Non-willful & negligent penalty
18
263,039
78,912
Total
28
10,748,886
3,224,666

Source: GAO analysis of IRS data. | GAO-18-698
a Maximum potential award is defined as 30 percent of the FBAR penalty amount.
IRS forwards whistleblower allegations of FBAR noncompliance to its operating divisions for further examination. However, IRS Form 11369, a key form used for making award determinations, does not require examiners to include information about the usefulness of a whistleblower's information FBAR and other non-tax issues. After Congress enacted the statutory change, IRS suspended award determinations for 1 week, but resumed the program before updating the form or its instructions, or issuing internal guidance on new information required on the Form. As of June 28, 2018, IRS had not begun updating the Form 11369 or its instructions. The lack of clear instructions on the form for examiners to include information on FBAR and other non-tax enforcement collections may result in relevant information being excluded from whistleblower award decisions.
IRS maintains FBAR penalty data in a standalone database. It uses these data for internal and external reporting and to make management decisions. Because of the change in statute, IRS will need these data for determining whistleblower awards. GAO found that IRS does not have sufficient quality controls to ensure the reliability of FBAR penalty data. For example, IRS staff enter data into the database manually but there are no secondary checks to make sure the data entered are accurate. Without additional controls for data reliability, IRS risks making decisions, including award determinations, with incomplete or inaccurate data. 
This is a public version of a sensitive report issued in August 2018. Information on the FBAR Database that IRS deemed to be sensitive has been omitted. 
Why GAO Did This Study 
Tax whistleblowers who report on the underpayment of taxes by others have helped IRS collect $3.6 billion since 2007, according to IRS. IRS pays qualifying whistleblowers between 15 and 30 percent of the proceeds it collects as a result of their information. However, until February 9, 2018, IRS did not pay whistleblowers for information that led to the collection of FBAR penalties. 
GAO was asked to review how often and to what extent whistleblower claims involve cases where FBAR penalties were also assessed. Among other objectives, this report (1) describes the extent to which FBAR penalties were included in whistleblower awards prior to the statutory change in definition of proceeds; (2) examines how IRS used whistleblower information on FBAR noncompliance, and how IRS responded to the statutory change in definition of proceeds; and (3) describes the purposes for which IRS collects and uses FBAR penalty data, and assesses controls for ensuring data reliability. GAO reviewed the files of 132 claims closed between January 1, 2012, and July 24, 2017, that likely included FBAR allegations; analyzed IRS data; reviewed relevant laws and regulations, and IRS policies, procedures and publications; and interviewed IRS officials. 
What GAO Recommends 
GAO recommends IRS update IRS Form 11369 and improve controls for the reliability of FBAR penalty data. IRS agreed with all of GAO's recommendations.
JAT Comments:

Thursday, October 25, 2018

IRS CI Data Mining (10/25/18)

I am preparing to participate in a panel discussion on "Remaining Offshore Compliance Options and International Hot Topics" at the 14th Annual University Of San Diego School Of Law Procopio International Tax Institute, here.  Yesterday, while reviewing one of the slide presentations, I noted an IRS emphasis of "internal data mining."  Most practitioners have known for many years that the IRS had computer algorithms to analyze and match data (either data internal to a tax return or from associated tax filings such as W-2s).  But, the data mining concept is beyond that type of "mining."  I had only a general sense of what data mining might be.  I wanted to know more about data mining generally and in the IRS specifically.

Wikipedia, here, introduces data mining as follows (footnotes omitted):
Data mining is the process of discovering patterns in large data sets involving methods at the intersection of machine learning, statistics, and database systems. Data mining is an interdisciplinary subfield of computer science with an overall goal to extract information (with intelligent methods) from a data set and transform the information into a comprehensible structure for further use. Data mining is the analysis step of the "knowledge discovery in databases" process, or KDD. Aside from the raw analysis step, it also involves database and data management aspects, data pre-processing, model and inference considerations, interestingness metrics, complexity considerations, post-processing of discovered structures, visualization, and online updating. 
The term "data mining" is in fact a misnomer, because the goal is the extraction of patterns and knowledge from large amounts of data, not the extraction (mining) of data itself. It also is a buzzword and is frequently applied to any form of large-scale data or information processing (collection, extraction, warehousing, analysis, and statistics) as well as any application of computer decision support system, including artificial intelligence (e.g., machine learning) and business intelligence. The book Data mining: Practical machine learning tools and techniques with Java (which covers mostly machine learning material) was originally to be named just Practical machine learning, and the term data mining was only added for marketing reasons. Often the more general terms (large scale) data analysis and analytics – or, when referring to actual methods, artificial intelligence and machine learning – are more appropriate. 
The actual data mining task is the semi-automatic or automatic analysis of large quantities of data to extract previously unknown, interesting patterns such as groups of data records (cluster analysis), unusual records (anomaly detection), and dependencies (association rule mining, sequential pattern mining). This usually involves using database techniques such as spatial indices. These patterns can then be seen as a kind of summary of the input data, and may be used in further analysis or, for example, in machine learning and predictive analytics. For example, the data mining step might identify multiple groups in the data, which can then be used to obtain more accurate prediction results by a decision support system. Neither the data collection, data preparation, nor result interpretation and reporting is part of the data mining step, but do belong to the overall KDD process as additional steps. 
The related terms data dredging, data fishing, and data snooping refer to the use of data mining methods to sample parts of a larger population data set that are (or may be) too small for reliable statistical inferences to be made about the validity of any patterns discovered. These methods can, however, be used in creating new hypotheses to test against the larger data populations.
I can't say I fully understand the concept.  I have worked with large databases for litigation and other projects and, earlier in my career, built some of my own databases (e.g., a practice management database and litigation databases) using DBaseIII and Microsoft Access.  But, the data mining concept goes way beyond any database with which I am personally familiar.

I inquired and found out that the IRS and IRS CI specifically is using Palantir tools for data mining.  (I have some links on Palantir toward the end of this blog.)  At a recent institute, the Deputy Chief of CI announced that IRS CI will sometime in the near future IRS will hire data scientists to develop data mining solutions to make its agents more efficient.

So, I did some internet searches.  I include below some of the links and excerpts results of those google searches.  I am not able to offer anything more definitive than below, but I will be on the lookout for further information that readers might find helpful on data mining.

Tuesday, October 23, 2018

IRS CI Agent Sentenced for Crimes, Including Tax Crimes (10/23/18)

According to a DOJ press release, here, a former IRS CI Agent has been sentenced to 51 months incarceration "for filing false tax returns, obstruction of justice, and stealing government money."  Key excerpts:
According to the evidence introduced at trial, Alena Aleykina, 45, who is also a Certified Public Accountant and holds a master’s degree in business administration, filed six false tax returns – three personal tax returns for years 2009, 2010, and 2011, and three in the names of trusts she created for years 2010 and 2011.  On her personal tax returns, Aleykina fraudulently claimed the head of household filing status, listed false dependents, and claimed deductions for education expenses to which she was not entitled.  Aleykina also obtained a fraudulent legal separation decree from the California Superior Court for Yolo County so that she and her husband could claim rental real estate loss deductions to which they were not entitled.  Further, on a trust tax return, she falsely claimed to be paying wages to her mother and her sister to care for her son and father. 
Additionally, Aleykina stole government funds and obstructed justice during the investigation.  She stole from the IRS’s Tuition Assistance Program, a program created to allow IRS employees to take job-related classes from local colleges and educational institutions. Aleykina falsely claimed to be taking English classes from a trust registered to her sister. As a result of these fake classes, Aleykina recieved $4,000 in tuition reimbursement from the Tuition Assistance Program.  When criminal investigators approached Aleykina to retrieve her government laptop, Aleykina lied to the agents about the location of the laptop and deleted dozens of files from the computer after the agents left.  The total loss to the government from Aleykina’s conduct is more than $50,000.
Aleykina was previously convicted in June after a two-week federal jury trial in the Eastern District of California of filing false tax returns, destroying records in a federal investigation, and theft of government money.
JAT Comments:  None.

Tuesday, October 16, 2018

Attorney Fraud Resulting in Tax Court Decision; Can It Be Corrected? How? (10/16/18; 10/17/18)

This article caught my attention today:  Bruce Vielmetti, Former Foley & Lardner partner suspended for falsifying documents in IRS audit of Carmex family (Journal Sentinel 10/16/18), here.  The opening paragraph says:
A former Foley & Lardner partner was suspended two years Tuesday by the state Supreme Court for lying to the IRS during an audit of two wealthy estates connected to a major area business.  
So, I went to the Wisconsin Supreme Court opinion which is here.  I offer the the pertinent portions relevant to the issue I address here as to whether and how the IRS can correct a tax under-assessed because of a Tax Court decision induced by fraud.
¶6 While working at the Foley firm, Attorney Wiensch provided estate planning services to a husband and wife who were owners of a privately owned business corporation. Attorney Wiensch prepared a trust under the terms of which the husband and wife were the trust donors and their children were the trustees and beneficiaries. Attorney Wiensch drafted an  Installment Sale Agreement, pursuant to which the husband sold most of his stock in the company to the trust in exchange for a promissory note in an amount in excess of $50 million based on the appraised value of the stock sold. The purpose of the stock sale was to transfer wealth to the clients' children, via the trust, free of gift and estate taxes and to ensure that any future appreciation of the stock held by the trust would not become part of the husband's estate. 
¶7 Transactions structured like the stock sale are reviewed by the Internal Revenue Service (IRS) to determine if the promissory note is a bona fide debt, or if the transaction should be treated as a taxable gift, or if transferred assets should be included in the seller's gross estate for purposes of determining the estate tax liability. Strategies used by estate planning professionals to minimize the risk of an IRS challenge to transactions such as the stock sale have included the use of personal guarantees by trust beneficiaries of a certain percentage of the sale price, often ten percent, or of a defined value formula clause that automatically adjusts valuation of the transferred assets based on a final determination by the IRS or a court. 
¶8 The husband died first, and pursuant to his estate plan, ownership of his remaining shares in the company passed to his wife as the surviving spouse. Attorney Wiensch was retained to represent the husband's estate. Attorney Wiensch prepared the estate tax return for the husband's estate and filed it with the IRS. The IRS audited the husband's estate tax return, as well as other gift tax returns filed on behalf of the clients for years prior to the husband's death.  
¶9 An IRS estate tax attorney served as the examiner for the IRS in conducting the audit. The IRS attorney corresponded with Attorney Wiensch in an effort to obtain information material to the audit. In September 2012, in response to requests from the IRS attorney, Attorney Wiensch sent the IRS copies of an Installment Sale Agreement, a Collateral Pledge Agreement, and a Guaranty of Specific Transaction. Attorney Wiensch represented to the IRS that the Installment Sale Agreement memorialized the terms of the stock sale and that the Collateral Pledge and Guaranty related to the stock sale. The copy of the Installment Sale Agreement Attorney Wiensch sent to the IRS in September 2012 contained a defined value formula clause. Attorney Wiensch altered and misdated the Installment Sale Agreement he sent to the IRS in September 2012. He did not prepare this document contemporaneously with the stock sale. The Installment Sale Agreement the husband actually executed on an earlier date did not contain the defined value formula clause.

Tuesday, October 9, 2018

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

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

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

Here are some quotes from the article:
Dreeben argued that the United States needs only “to prove a conspiracy to defraud the United States.” But “we do not need to prove a criminal violation of the underlying statute,” he told the judge. In other words, the prosecution is claiming that a conspiracy to do “x” can be criminal even if “x” is not itself a criminal act. This may sound strange, but it’s not a mistake. Pressed by Judge Dabney Friedrich, the deputy solicitor general restated it: “There’s a legion of cases,” Dreeben said, that “have specifically said you don’t need to have an underlying illegality in a conspiracy to defraud.” 
He’s right. Conspiracy law is notoriously elastic. Even so, a prosecutor would rather have conspirators dead to rights on a clear, willful violation of a law than have to establish that colluding to do something not proved to be a crime is nonetheless a crime in and of itself. The latter sort of scenario is why you might need a deputy solicitor general on your team. 
The specific acts Concord is alleged to have engaged in—paying Russians to write social media posts about American politics—aren’t necessarily illegal. Such activities may violate the spirit of U.S. election law and the Foreign Agents Registration Act, but they don’t necessarily fit the elements of any crime on the books. That’s where the conspiracy charge comes in handy. Concord’s lawyers say their client has been charged “for a contrived crime not specifically defined in any statute, without notice and under a standard known only to the special counsel.” 
Yes, and so what? responds the special counsel’s office. Quoting case law, Mueller’s team asserts, “The [conspiracy to] defraud clause does not depend on allegations of other offenses.” And because of that, “even otherwise ‘lawful activity may furnish the basis for a conviction under [Section] 371’ ”—that is, the section of federal law dealing with criminal conspiracies. 
* * * * 
How did we get to a place where agreeing with someone to do something otherwise legal can be prosecuted as a criminal conspiracy? And is Concord Management likely to have any luck challenging the constitutionality of such a law?

Swiss Dispute Sharing Data with U.S. (10/9/18)

Swiss-US tax data transfer method 'violates law' (SWI swissinfo 10/7/18), here.  The article is short.  I nevertheless excerpt the following:
The Swiss Supreme Court has already issued a ruling that bans the indiscriminate disclosure of people’s names without forewarning the individuals involved. This applies even when Switzerland has a treaty to automatically exchange tax information with other countries, as it does with 30 nations including the US. 
* * * * 
These treaties were signed following a US criminal probe into the way Swiss banks helped tax evaders. The investigation and threats of legal sanctions brought about the demise of Swiss banking secrecy.  
Data Protection Commissioner, Adrian Lobsiger, believes the Finance Ministry is failing to observe the court’s ruling on protecting the rights of individuals caught up in the transfer of data. His office told the SonntagsZeitung newspaper that it had issued a complaint to the Federal Administrative Court on Friday. 
* * * * 
The tax administration says it is too costly to black out all the names on thousands of pages of documents being handed to the US, the article states. It also states that Finance Minister Ueli Maurer has the backing of the cabinet on this issue, arguing that failure to comply with US demands for data could result in damaging repercussions. 
A spokesman for the Finance Ministry told the SonntagsZeitung that the department has authority to send data to countries that have a functioning constitutional system. Swiss citizens therefore have the opportunity to dispute proceedings in other countries, which result from their names being handed over, by arguing that the evidence is inadmissible.

France Take UBS to Court on Cross-Border Evasion for French Taxpayers (10/9/18)

The much anticipated French trial of UBS for its cross-border tax evasion scheme for the French has started.  Cross-border evasion is basically the same as U.S. offshore evasion through Swiss banks.  Here are some articles and excerpts:

Inti Landauro and Emmanuel Jarry, Swiss bank UBS on trial in France over alleged tax fraud (Reuters 10/8/18), here.  Excerpts:
Swiss bank UBS Group AG (UBSG.S), its French unit and six executives faced charges of aggravated tax fraud and money laundering on Monday, the first day of a trial into allegations they helped wealthy clients avoid taxes in France. 
After seven years of investigation and aborted settlement negotiations, UBS will also answer allegations that it illegally solicited clients in France. It risks being fined up to 5 billion euros ($5.76 billion) plus potential damages to the French taxman for the missing revenue. 
* * * * 
UBS’s lawyer Jean Veil said the French state was asking for 1.6 billion euros in damages, which he told the court was excessive. 
“They are asking crazy amounts,” he told the court. 
* * * * 
UBS’s trial in France follows a similar judicial process in the United States, where the bank in 2009 accepted to pay $780 million in a settlement. In Germany, UBS agreed to a 300 million euro fine in 2014. 
During the French investigation, UBS turned down a settlement offer of 1.1 billion euros made by the authorities. The amount corresponded to what the Swiss bank had already paid as a court bond, according to judicial sources.
Gaspard Sebag  and Patrick Winters, UBS Accused of Bond Movie Tactics in Paris Tax-Dodging Trial (Bloomberg 10/7/18; 10/8/18), here.  Excerpts:
Eric Dezeuze, a lawyer for UBS France SA, revealed the amount on day one of a trial where the Swiss lender is accused of deploying tactics “worthy of James Bond” to help customers launder money they hadn’t declared to French authorities. He said the French state’s lawyer cited the amount in recent written submissions. 
* * * * 
Zurich-based UBS dispatched bankers across the border to seek out new clients even though they lacked the paperwork -- a banking license or European passport -- to offer such services in France, the lead investigator wrote in the indictment ahead of the trial which got underway on Monday afternoon. 
When they came over from Switzerland to France UBS bankers allegedly took several steps, described in the prosecution’s opinion on the case as akin to 007 techniques and listed in a “security risk governance” manual, to avoid detection by authorities. They used encrypted computers, had business cards without the lender’s logo and were told to switch hotels regularly, according to prosecutors. The bank has consistently denied any wrongdoing. 

Monday, October 8, 2018

All the President's Joint Defense Agreements (10/8/18)

I have previously written on joint defense agreements ("JDAs") (in reverse chronological order):

  • On Trump, Manafort and Joint Defense Agreements (Federal Tax Crimes Blog 9/14/18; 9/15/18), here.
  • More on Joint Defense Agreements (Federal Tax Crimes Blog 5/15/18), here.
  • On Joint Defense Agreements (Federal Tax Crimes Blog 11/23/17), here.

A very good discussion of JDAs in the special counsel's investigation appeared today, addressed to the general public:  Darren Samuelsohn, Trump team’s contact with Mueller targets could taint findings (Politico 10/8/18), here.  The author discusses the Trump legal team's use of JDAs and whether the use may have goals beyond those normally contemplated by JDAs.  I urge readers who are interested in the intersection of politics and the criminal law to read the article because I believe it is quite good.  (Full disclosure, I am quoted in the article.)

JAT Comments:

1.  In my experience, a participant in a JDA withdraws at least by the time the participant agrees to cooperate and tell all.  Of course, that participant will not be able to disclose items that the participant learned earlier from others in the JDA which are within the scope of the JDA.  And, if the participant disclosed information to the other participants that is confidential to himself within the scope of the JDA, the participant can still disclose that information to the prosecutors pursuant to the cooperation agreement.  The only prohibition on the cooperating participant is that he cannot disclose confidential information that the other participants in the JDA disclosed to him within the scope of the JDA.  So, to use the stark example discussed in the article, if Trump or Trump's lawyers disclosed to Manafort or Manfort's lawyers Trump's admission to a crime within the scope of the JDA, Manafort could not disclose that admission to the prosecutors and, if Manafort did disclose the admission in violation of the JDA, the prosecutors would not be able to use the admission, directly or indirectly, in criminally prosecuting Trump.  Other information that Manafort or his lawyers know that was not disclosed by Trump or his lawyers pursuant to the JDA can be disclosed to the prosecutor and can be used to prosecute Trump.

2.  The problem comes in separating what the witness, here Manafort, knows independent of the confidential information he received pursuant to the JDA.  If the prosecutor wants to prosecute Trump for a crime and uses information from a person in a JDA (here that would be Manafort), the prosecutor will have to prove that the prosecution is not based on any Trump confidential information that Manafort learned from Trump or his lawyers under the JDA.  Unless the parties in the criminal action can agree, that would require a Kastigar-like hearing where the prosecutor would have to prove that the case does not rely on that "tainted" information, directly or indirectly.  That can, in many cases, be an impossible burden and would require suppression of any possibly tainted evidence or even, if so intertwined with the prosecution, dismissal of the case.

3.  For this reason, JDAs can sometimes limit the benefit that prosecutors can get from cooperation from participants in a JDA and make prosecutors less willing to strike a deal with the participant if it appears that the evidence the participant has is tainted or potentially tainted.  This requires delicate negotiations in reaching a cooperation agreement (usually by plea).  Accordingly, in complex multi-target investigations, the marginal or less important actors may want to either not join a JDA or limit and carefully document what is received under the JDA so that that participant can maintain maximum flexibility in cooperation/plea negotiations.

Sunday, October 7, 2018

San Diego Law School / Procopio Institute Program Oct 31st-Nov. 2d, 2018 (10/7/18; 10/8/18)

Tax crimes enthusiasts may be interested in this program offering :  14th Annual University Of San Diego School Of Law Procopio International Tax Institute, Oct 31st - Nov 2nd, 2018, here. The location is University of San Diego, Joan B. Kroc Institute for Peace and Justice, Alcalá Park, San Diego, California.

Blog readers qualify for a special $150 discount at the following link with the following Discount Code:  TAXCR18USD.

https://www.cvent.com/events/usd-school-of-law-procopio-international-tax-institute-2018-international-update/registration-21bc588c4c204b779562cf4673adec53.aspx



Select sessions that may of particular interest to tax crimes enthusiasts:

Remaining Offshore Compliance Options and International Tax Topics
Speakers
Daniel N. Price, Esq., Attorney - Office of Chief Counsel (SB/SE Division - IRS)
Lic. Jacqueline Arellanes, Central Administrator of International Tax - SAT

FATCA Criminal Indictments of Overseas Advisors (Attys/CPAs/FinAd)
Speakers
Victor So Song, Esq., Founding Partner - Victor Song Consulting (former IRS CI Chief)
Steven Toscher, Esq. Esq., Partner - Hochman Salkin Rettig Toscher & Perez, P.C.
Patrick W. Martin, Esq. - Procopio

United States vs. Colliot: Defending Title 31 FBAR Penalties: Pre and Post Assessments, IRS and DOJ Policies and Strategy Post Colliot
Speakers
Ms. Caroline D. Ciraolo, Esq. Partner - Kostelanetz & Fink (Former AAG DOJ Tax)
Sandra Brown, Esq., Partner - Hochman Salkin Rettig Toscher & Perez
Patrick W. Martin, Esq. - Procopio

New OECD Guidance to Disclose Information to Tax Authorities - Exchange of Information and Recent cases affecting Professional Duties of Confidentiality
Speakers
Lic. Juvenal Lobato, Parner - Lobato Diaz Abogados
Lic. Nadja Ruiz Euler, Partner - Ernst & Young

U.S. Passport Revocations for "Seriously Delinquent Taxpayers" - IRS § 7345 & Role of DOJ, IRS, U.S. District Court and U.S. Tax Court.
Speakers
Ms. Kristen Bailey, Esq., Director of Collection Policy, Small Business Self-Employed Division - IRS
Patrick W. Martin, Esq. - Procopio

I understand that other speakers or participants may be added and will update as I become aware of them.