Friday, May 14, 2021

Swiss Insurance Company and DOJ Enter DPA Requiring $77 Million+ Payment and Cooperation (5/14/21)

DOJ Tax issued this press release:  Switzerland’s Largest Insurance Company and Three Subsidiaries Admit to Conspiring with U.S. Taxpayers to Hide Assets and Income in Offshore Accounts (5/13/21), here.  Relevant excerpts are:

Swiss Life Holding AG, Swiss Life (Liechtenstein) AG, Swiss Life (Singapore) Pte. Ltd., and Swiss Life (Luxembourg) S.A. Enter into Deferred Prosecution Agreement for Criminal Misconduct; Agree to Collectively Pay More than $77 Million

The Department of Justice today filed a criminal information charging Swiss Life Holding AG (Swiss Life Holding), Swiss Life (Liechtenstein) AG (Swiss Life Liechtenstein), Swiss Life (Singapore) Pte. Ltd. (Swiss Life Singapore), and Swiss Life (Luxembourg) S.A. (Swiss Life Luxembourg), collectively, the “Swiss Life Entities,” with conspiring with U.S. taxpayers and others to conceal from the IRS more than $1.452 billion in offshore insurance policies, including more than 1,600 insurance wrapper policies, and related policy investment accounts in banks around the world and the income generated in these accounts.

The Justice Department also announced a deferred prosecution agreement with the Swiss Life Entities (“the Agreement”) under which they agreed to accept responsibility for their criminal conduct by stipulating to the accuracy of the Statement of Facts attached to the Agreement. The Agreement requires the Swiss Life Entities to refrain from all future criminal conduct, enhance remedial measures, and continue to cooperate fully with further investigations into hidden insurance policies and related policy investment accounts. Further, as part of today’s resolution, the Swiss Life Entities agreed to pay approximately $77.3 million to the U.S. Treasury, which includes restitution, forfeiture of all gross fees, and a penalty component. If the Swiss Life Entities abide by all of the terms of the Agreement, the government will defer prosecution on the information for three years and then seek to dismiss the charge.

* * * *

According to documents filed today in Manhattan federal court:

Swiss Life Holding is the ultimate parent company of the Swiss Life group of companies (Swiss Life), a Switzerland-based provider of comprehensive life insurance and pension products for individuals and corporations, as well as asset management and financial planning services. From 2005 to 2014, Swiss Life through affiliated insurance carriers in Liechtenstein (Swiss Life Liechtenstein), Luxembourg (Swiss Life Luxembourg), and Singapore (Swiss Life Singapore), (collectively, the PPLI Carriers) maintained approximately 1,608 Private Placement Life Insurance (PPLI) policies. The PPLI Carriers’ issuance and administration of those policies (colloquially known as “insurance wrappers”) and the related investment accounts were often done in a manner to assist U.S. taxpayers in evading U.S. taxes and reporting requirements and concealing the ownership of offshore assets.

Moreover, beginning as early as the summer of 2008, the PPLI Carriers were aware that UBS and other Swiss banks were terminating or reevaluating their business relationships with U.S. clients in response to increasing offshore tax enforcement efforts by U.S. authorities. Certain management and sales personnel within the Swiss Life PPLI Business Unit viewed these developments as a business opportunity to expand the PPLI Business by onboarding U.S. clients who were fleeing UBS and other Swiss banks. Such clients with undeclared assets were typically referred within Swiss Life as “non-comprehensive advice seeking,” which was frequently abbreviated to “NCAS.” Because Swiss Life would be identified as the owner of the policy investment accounts, rather than the U.S. policyholder and/or ultimate beneficial owner of the assets, the insurance wrapper policies could be and were used by unscrupulous U.S. taxpayers to hide undeclared assets and income and to evade taxes. In turn, Swiss Life grew its PPLI business and earned fees on those policies. Members of management of the PPLI Business Unit knew about and authorized the onboarding of U.S. clients without regard to whether they were declared or undeclared.

Swiss Life engaged in other misconduct with respect to U.S.-related policies:

Interesting Complaint in FBAR Collection Suit (5/14/21)

In an original willful FBAR collection complaint filed in United States v.Beyder (D. N.J. Dkt. 3:21-cv-10864 5/6/21 ), here, the following interesting allegations are made:

17. Larisa Beyder has refused to provide bank statements for the BSI ‘999 account. 

18. Larisa Beyder’s father was indicted in 2010 and later pled guilty for a criminal offense related to a failure to file FBARs. Larisa Beyder was the Third-Party Custodian for her father while he awaited sentencing. Larisa Beyder had her BSI ‘999 account at this time. 

* * * *

30. Eduard Beyder has refused to provide bank statements for the BSI ‘453 account.

31. Eduard Beyder’s father-in-law was indicted in 2010 and later pled guilty for a criminal offense related to a failure to file FBARs. Eduard Beyder had the BSI ‘453 account at this time. 

* * * *

33. On May 9, 2019, a delegate of the Secretary of the Treasury assessed civil penalties against Larisa Beyder under 31 U.S.C. § 5321(a)(5) in the amounts of: $258,851 for 2006; $258,851 for 2007; $248,070 for 2008; $248,070 for 2009; $200,566 for 2010; and $152,344 for 2011, for a total assessed amount of $1,366,752. 

* * * *

37. As of April 12, 2021, Larisa Beyder is indebted to the United States with respect to the penalties described in Paragraph 33, above, in the amount of $1,549,185.31, plus statutory additions that continue to accrue thereafter as provided by law. 

38. On May 14, 2019, a delegate of the Secretary of the Treasury assessed civil penalties against Eduard Beyder under 31 U.S.C. § 5321(a)(5) in the amount of $100,000 per year for each of the 2007 through 2011 calendar years, for a total assessed amount of $500,000. 

* * * * 

42. As of April 12, 2021, Eduard Beyder is indebted to the United States with respect to the penalties described in Paragraph 38, above, in the amount of $566,835.62, plus statutory additions that continue to accrue thereafter as provided by law.

JAT Comments:

Thursday, May 13, 2021

Musings on Routine Petition to Quash Summons Denial (5/13/21)

In Sturman v. United States (N.D. Cal. Case No. 20-cv-07787-JSC Dkt. Entry 26 Order dated 5/12/21), CL here and TN pdf here, the Court sustained the summons.  This is fairly routine, so I will not pursue the details in this blog entry.

What caught my eye is that the Petitioner on the Petition to Quash Summons, CL here, is David A. Sturman.  That name rung a bell.  A prominent tax crimes case is United States v. Sturman, 951 F.2d 1466, 1476 (6th Cir. 1991), here, which I have discussed in several blogs (see here).  I could not quickly figure out whether it is the same David A. Sturman.  If anybody knows, please comment or email me at jack@tjtaxlaw.com.

Side note:  Tax Analysts / Tax Notes, under sponsorship of Deloitte, provides original tax documents including court opinions.  Deloitte and Tax Analysts Open Tax Analysts Library to Public Without Subscription ( Federal Tax Crimes Blog 1/11/21), here.  The court opinions are provided in OCR text format and in pdf format (Tax Court pdf with Tax Notes stamp).  For example, in this Sturman case, the OCR is here and the pdf is here.  The OCR seems to have everything except the case number which is on the first page of the pdf copy.  That's a bit weird.  Similarly, I have noted that, when TN offers a Tax Court case, the OCR does not have the citation (TC or TCM but the pdf does).  See, for example, the OCR here and the pdf here for a recent case, BRC Operating Co. LLC v. Commissioner, T.C. Memo. 2021-59.  For the actual citation, you have to link to the TN pdf which has the TCM citation as the first item on the Court's TCM Slip Op. (with TN stamp)  That too is weird.  I am not sure what Tax Notes' and Deloitte's respective strategies are for excluding that key information from the OCR copy, for it seems to be a deliberate omission that a robot OCR routine would not leave out.

Other note:  I check the links when I post and they work OK, but I have noticed that some of the TN links for the pdf will not work after a time.  I am not sure why that is the case.  For future posts, I will stick to Court or CourtListener links.  

Racehorse Haynes and Criminal Trial Stories (5/13/21)

I was sharing a Racehorse Haynes anecdote with a friend and thought it might be worth posting as a light note on the Federal Tax Crimes Blog.  Racehorse Haynes was a legendary Texas criminal defense lawyer.  He has his own Wikipedia page, here. The anecdote I shared with a friend is from an ABA article on him in 2009.  Mark Curriden, Richard 'Racehorse' Haynes (ABAJournal 3/2/09), here.  The article has some good stories about Racehorse.

The anecdote I shared with my friend is this pungent advice to new criminal lawyers (wrapping up the article of anecdotes):

Haynes loves discussing his cases to teach young lawyers about trial practice. In 1978, he told attendees at an ABA meeting in New York City that attorneys too often limit their strategic defense options in court. When evidence inevitably surfaces that contradicts the defense’s position, lawyers need to have a backup plan.

“Say you sue me because you say my dog bit you,” he told the audience. “Well, now this is my defense: My dog doesn’t bite. And second, in the alternative, my dog was tied up that night. And third, I don’t believe you really got bit.”

His final defense, he said, would be: “I don’t have a dog.”

Another one that my friend like was:

Haynes has lived by the advice of his mentor, legendary Texas trial lawyer Percy Foreman: “If you can prove the victim abused a dog or a horse, you can convince the jury that the guy deserved to be killed.”

“For some reason,” Haynes continues, “cats don’t apply.”

I am not sure how you fit those anecdotes into a criminal tax practice.  Perhaps it might go something like this in a tax evasion case centering on a filed tax return with intentional omissions of taxable income:

Wednesday, May 12, 2021

CA9 Holds that Suspension of Limitations Act (“WSLA”) Applies to Fraud and Property Offense Crimes Without Nexus to War or Authorized Use of Armed Forces (5/13/21)

In United States v. Nishiie,  2021 U.S. App. LEXIS 14017 (9th Cir. 5/12/21), here, in a nontax criminal case, the Court held that the Wartime Suspension of Limitations Act (“WSLA”), 18 U.S.C. § 3287, here, applies to suspend the criminal statute of limitations for fraud and property offense crimes “whether or not a nexus exists between these offenses and either war or ‘authorized use of the Armed Forces.’“ (Quote is from the Ninth Circuit’s Summary.)

 After reaching that conclusion, the Court said (Slip Op. 29-32, emphasis supplied):

            We recognize the WSLA “creates an exception to a longstanding congressional ‘policy of repose’ that is fundamental to our society and our criminal law.” Bridges, 346 U.S. at 215–16. The WSLA suspends already-running statutes of limitation when its conditions are met. As we detail, the WSLA unambiguously tolls the statute of limitations during any period of war or authorization of the use of the Armed Forces. We are acutely aware—and somewhat concerned—that this interpretation, while legally correct, may effectively toll the statute of limitations for offenses under the WSLA for 20, 30, even 40 plus years. In large part that results from the expansion of war powers far beyond what they were when the WSLA was codified in 1948. Any policy concern for subjecting defendants to [*30] decades-long liability is subordinated to the WSLA’s unambiguous language.

            “We sit as judges, not as legislators . . .” California v. Ramos, 463 U.S. 992, 1014 (1983). “It is hardly this Court’s place to pick and choose among competing policy arguments . . . selecting whatever outcome seems to us most congenial, efficient, or fair. Our license to interpret statutes does not include the power to engage in . . . judicial policymaking.” Pereida v. Wilkinson, 141 S. Ct. 754, 766–67 (2021). Inducing perpetual limbo for potential criminal defendants under the WSLA is presumably not what Congress had contemplated. Nor did the 1940s era Congress likely anticipate the transformation of warfare. Our interpretation may seem like a gratuitous reading in light of modern criminal justice reform. “But our public policy is fixed by Congress, not the courts.” Bridges, 346 U.S. at 231 (Reed, J., dissenting). Readily apparent from the WSLA’s amendment history is that Congress is fully capable of changing course and cabining the reach of any statute of limitations if it decides public policy warrants such a change. See Ramos v. Wolf, 975 F.3d 872, 900 (9th Cir. 2020) (R. Nelson, J., concurring) (“Our sole responsibility as Article III judges is narrow—‘to say what the law is.’”) (quoting Marbury v. Madison, 5 U.S. (1 Cranch) 137, 177, 2 L.Ed. 60 (1803)); id. (“By constitutional design, the branch that is qualified to establish . . . policy and check any excesses in the implementation of that policy is Congress.”) (citing City & Cnty. of San Francisco v. U.S. Citizenship & Immigr. Servs., 944 F.3d 773, 809 (9th Cir. 2019) (Bybee, J., concurring)).

Tuesday, May 11, 2021

Mens Rea in Tax Crimes and Acceptance of Responsibility (5/11/21)

In United States v. Roskovski, 2021 U.S. Dist. LEXIS 84379 (W.D. Pa. May 3, 2021), here, the Court denied (again) Roskovski’s attempt to withdraw his guilty plea for violations of 18 U.S.C. § 1014 (False Statements in a Loan Application) and 26 U.S.C. § 7206(1) (Filing a False Tax Return).  The Counts involved in the plea were Courts 36 and 42; apparently, a lot of counts were dropped in return for the guilty plea to the two counts.  Roskovski claimed that he did not understand the plea as it relates the required mens rea that the Government must prove at trial for the two counts.  Roskovski claimed innocence because “he lacked the necessary intent.”  Among his claims were:

As to the charge of filing a false income tax return, Mr. Roskovski was under the mistaken impression that the mere underreporting of income was sufficient to establish his guilt at trial. [ ] Mr. Roskovski misunderstood from his discussions with prior counsel that preponderance of evidence was not the standard on the intent element to be applied if he were to go to trial. [ ]

As to the charge of making a false statement in connection with a loan application, Mr. Roskovski mistakenly believed that falsity, without the required element of intent proved beyond a reasonable doubt, was also sufficient to establish his guilt at trial. [ ] Mr. Roskovski misunderstood from his discussions with prior counsel the correct burden to be applied at trial, and, as a result, he believed that the mere inclination that he should have known of the falsity was sufficient to prove his guilt at trial. [ ] Mr. Roskovski had a genuine misunderstanding as to the standard for intent for both charges for which he pleaded guilty.

With regard to each, Roskovski alleged "the complex interplay between the burdens of proof required at the conviction versus the sentencing phases in federal fraud cases is a difficult field even for experienced federal legal practitioners, much less laymen."

The Court did not accept the claims and denied the Motion to Withdraw.  The Court thought that Roskovski could just not accept the potential sentencing in the case, particularly after  the Presentence Investigation Report was filed where the potential sentence was forced on his consciousness.

I don’t think there is anything particularly noteworthy about the case except that it raises the mens rea required, particularly for tax crimes with the Cheek definition of willfulness – intentional violation of a known legal duty.  The prosecution must prove that level of mens rea beyond a reasonable doubt.  Roskovski claimed, in effect, that he had not been adequately counseled about the proof required for the mens rea element of the crimes to which he pled and therefore that his plea should not stand because he could not admit the crime with the mens rea element properly understood.

Senate Finance Subcommittee Hearing Today on Tax Gap from Noncompliance and Offshore Tax Evasion (5/11/21)

Today, the Senate Finance Committee’s Subcommittee on Subcommittee on Taxation and IRS Oversight holds a hearing billed as: Closing the Tax Gap: Lost Revenue from Noncompliance and the Role of Offshore Tax Evasion, here.  The link is to the video when the hearing starts.  The hearing is scheduled to start at 2:30 pm EDT.  

The witness list is:

Barry Johnson
Acting Chief, Research And Analytics Officer, Internal Revenue Service
United States Department of the Treasury
Washington , DC

Doug O’Donnell
Deputy Commissioner, Services & Enforcement, Internal Revenue Service
United States Department of the Treasury
Washington, , DC

The Honorable J. Russell George
Treasury Inspector General For Tax Administration
United States Department of the Treasury
Washington , DC

Nina E. Olson
Executive Director
Center for Taxpayer Rights
Washington , DC

Charles O. Rossotti
Former Commissioner (1997-2002)
Internal Revenue Service
Washington, DC

I assume that there will be written submissions by the witnesses and, if so, I will identify and link them.

  • George's submission here.

Monday, May 10, 2021

Follow by Email Feedburner Email Notice Service Being Discontinued (5/10/21)

Some readers of the Federal Tax Crimes Blog have signed up for and have been receiving email notifications of new blog entries via a service called Feedburner through the “Follow by Email” widget that formerly was in the right hand column on this blog.  The Feedburner service is being discontinued in July 2021.  I am therefore eliminating that widget so that Follow by Email will not longer be available for new subscribers to that service and,  I gather, the Follow by Email service will stop working in July 2021 for persons who were already registered.

There are other services that, I understand, can provide that functionality, but I just have not spent the time to try to figure out how they work and how to implement them on the blog site.  If and when I figure that out, I will try to get a replacement Follow by Email.

I have downloaded the email addresses of those who were registered as of today.  So, if I get a substitute service for this functionality, I will email those persons with notice so that they can register.  I will also post a blog entry notifying of the replacement service (if I set up one).

Saturday, May 8, 2021

Fifth Circuit Holds that the Defraud/Klein Conspiracy Does Not Have Pending Proceeding Element; Update on Cert Petition in Related Case (5/8/21)

In United States v. Herman, 2021 U.S. App. LEXIS 13557 (5th Cir. May 6, 2021), CA5 here & TN here, the Court affirmed the convictions of husband and wife, restaurant owners and operators for the defraud/Klein conspiracy and willfully filing false tax returns. 

The noteworthy holding in the opinion is that the Klein conspiracy in § 371 does not import the holding in Marinello v. United States, 584 U.S. ___, 138 S. Ct. 1101 (2018), that the tax obstruction crime (§ 7212(a)) requires a nexus to an administrative proceeding.  (See Slip Op. 25-29.) 

As the Fifth Circuit panel notes, its holding is consistent with the two other circuits’ holdings, the only circuit court cases addressing the issue.

One of the other circuit court cases was United States v. Flynn, 969 F.3d 873 (8th Cir. 2020), cert. docketed, 20-1129 (Feb. 17, 2021).  I previously wrote on the petition for cert in Flynn.  See Defendant Petitions for Cert on Relationship of Defraud Conspiracy and Marinello Interpretation of Tax Obstruction (2/22/21), here.  I thought readers might want an update on the status of the pending petition for cert in Flynn.

The Supreme Court docket entries in Flynn, here, indicate that the following key entries:

  • The petition was filed 2/11/12, 
  • The Government’s response is due 5/19/21 (after some extensions) 
  • An amicus brief in support of the petition was filed by the New York Council of Defense Lawyers on 5/2/21.  

Friday, May 7, 2021

11th Circuit En Banc Holds that a Juror's Listening to God Does Not Alone Warranted Removal of the Juror (5/7/21)

I previously blogged on the 11th Circuit’s panel opinion  United States v. Brown, 947 F.3d 655 (11th Cir.), vacated, reh’g en banc granted, 976 F.3d 1233 (11th Cir. 2020), here.  See Eleventh Circuit Affirms Conviction of Another Congressman (Federal Tax Crimes Blog 1/14/20; 1/16/20), here.  In relevant part, in the case with some tax counts, the panel opinion upheld the trial judge’s removal of a juror after the jury started deliberations because the juror expressed that

 "A Higher Being told me Corrine Brown was Not Guilty on all charges". He later went on to say he "trusted the Holy Ghost".

 In an en banc opinion yesterday, United States v. Brown (11th Cir. 5/6/21), here, the 11th Circuit has reversed and remanded for a new trial.  The en banc majority opinion by Judge William Pryor opens with a good summary:

This appeal requires us to decide whether a district judge abused his discretion by removing a juror who expressed, after the start of deliberations, that the Holy Spirit told him that the defendant, Corrine Brown, was not guilty on all charges. The juror also repeatedly assured the district judge that he was following the jury  instructions and basing his decision on the evidence admitted at trial, and the district judge found him to be sincere and credible. But the district judge concluded that the juror’s statements about receiving divine guidance were categorically disqualifying. Because the record establishes a substantial possibility that the juror was rendering proper jury service, the district judge abused his discretion by dismissing the juror. The removal violated Brown’s right under the Sixth Amendment to a unanimous jury verdict. We vacate Brown’s convictions and sentence and remand for a new trial.

There are concurring and dissenting opinions, with all opinions aggregating 98 pages.

 I offer key (but lengthy) excerpts from the majority opinion (beginning on p. 22) are (substantially "cleaned up" for readability:

Because our jury system works only when both the judge and the jury respect the limits of their authority, a district judge may excuse a juror after deliberations have begun only on a finding of “good cause.” See Fed. R. Crim. P. 23(b)(3). It is well settled that good cause exists to dismiss a juror when that juror refuses to apply the law or to follow the court’s instructions. Such a juror abdicates his constitutional responsibility, and violates his solemn oath. But to remove a juror because he is unpersuaded by the Government’s case is to deny the defendant his right to a unanimous verdict. Distinguishing between these two jurors is often difficult, as the line between them can be vanishingly thin,

To guard against the danger that a dissenting juror might be excused under the mistaken view that the juror is engaging in impermissible nullification, we apply a tough legal standard for the dismissal of jurors during deliberations. Along with four of our sister circuits, we have held that, in these kinds of circumstances, a juror should be excused only when no substantial possibility exists that she is basing her decision on the sufficiency of the evidence. We have explained that this standard is basically a beyond reasonable doubt standard.

 So, for a district judge to find that this standard of proof is satisfied, he must determine with utmost certainty that a juror has refused to base his verdict on the law as instructed and the evidence admitted at trial. Although a district judge applies the same high standard of proof to dismiss a deliberating juror that a jury applies to convict a defendant, our review of their decisions is starkly different—and with good reason. When we evaluate a challenge to the sufficiency of the evidence supporting a conviction, we must view the evidence in the light most favorable to the government, drawing all reasonable inferences in favor of the jury’s verdict. And we consider only a legal question: whether any rational trier of fact could have found that the evidence established guilt beyond a reasonable doubt. We leave a jury free to choose between or among the reasonable conclusions to be drawn from the evidence. This limited review does not [*25] intrude on the jury’s role to resolve conflicts in the testimony, to weigh the evidence, and to draw reasonable inferences from basic facts to ultimate facts. After all, jurors are the sole judges of the facts. 

Wednesday, May 5, 2021

Court Authorizes Service of John Do Summons to Payward Ventures d/b/a Kraken, a Cryptocurrencies Service Provider (5/4/21)

DOJ Tax has issued this press release:  Court Authorizes Service of John Doe Summons Seeking Identities of U.S. Taxpayers Who Have Used Cryptocurrency (5/5/21), here.  The key parts of the press release are:

            A federal court in the Northern District of California entered an order today authorizing the IRS to serve a John Doe summons on Payward Ventures Inc., and Subsidiaries d/b/a Kraken (Kraken) seeking information about U.S. taxpayers who conducted at least the equivalent of $20,000 in transactions in cryptocurrency during the years 2016 to 2020. The IRS is seeking the records of Americans who engaged in business with or through Kraken, a digital currency exchanger headquartered in San Francisco, California.

  * * * *

            Cryptocurrency, as generally defined, is a digital representation of value. Because transactions in cryptocurrencies can be difficult to trace and have an inherently pseudoanonymous aspect, taxpayers may be using them to hide taxable income from the IRS. On April 1, 2021, a federal court in the District of Massachusetts granted an order authorizing the IRS to serve a similar John Doe summons on Circle, a digital currency exchange headquartered in Boston.

            Today’s order from the Northern District of California grants the IRS permission to serve what is known as a “John Doe” summons on Kraken. The United States’ petition does not allege that Kraken has engaged in any wrongdoing in connection with its digital currency exchange business. Rather, according to the court’s order, the summons seeks information related to the IRS’s “investigation of an ascertainable group or class of persons” that the IRS has reasonable basis to believe “may have failed to comply with internal revenue laws.” According to the copy of the summons filed with the petition, the IRS directed Kraken to produce records identifying the U.S. taxpayers described above, along with other documents relating to their cryptocurrency transactions.

            The IRS has issued guidance regarding the tax consequences on the use of virtual currencies in IRS Notice 2014-21,which provides that virtual currencies that can be converted into traditional currency are property for tax purposes, and a taxpayer can have a gain or loss on the sale or exchange of a virtual currency, depending on the taxpayer’s cost to purchase the virtual currency (that is, the taxpayer’s tax basis).

The press release linked above has links to pdfs of most the documents in the case as of this date.  I find that a better free source for most of the documents is on the CourtListener web site, here for the case, In the Matter of the Tax Liabilities of John Does (N.D. Cal. Dkt No. 3:21-cv-02201).  (The pdfs linked on the press release seem not to allow copying and pasting, but the ones on CourtListener do; in addition, future documents will likely be available on the CourtListener site.)

8th Circuit Holds that Marinello Nexus to Administrative Proceeding Need Not Separately Pled in Indictment (5/5/21)

In United States v. Prelogar, ___ F.3d ___, 2021 U.S. App. LEXIS 12899 (8th Cir. 4/30/21), here, the Eighth Circuit addressed whether indictment must contain the Marinello nuance of the tax obstruction crime (§ 7212(a)) to require a nexus between a particular administrative proceeding and the defendant’s conduct must be included in the indictment.  See Marinello v. United States, 584 U.S. ___,138 S.Ct. 1101 (2018).  The Eighth Circuit held that the nexus need not be pleaded in the indictment, so that proof at trial will suffice for conviction.

The Court’s reasoning (Slip Op. 6-7):

            While Marinello identified what the government must “show” to “secure a conviction” under section 7212(a), see 138 S.Ct. at 1109, neither Marinello nor Beckham addressed whether the nexus and knowledge requirements must be charged in the indictment, nor did those decisions invite scrutiny of the elements charged. Marinello greatly relied on Aguilar, which proclaimed a “nexus” requirement for a similar omnibus clause under 18 U.S.C. § 1503(a) that prohibits endeavoring to obstruct the due administration of justice. 515 U.S. at 600. Like Marinello, the Aguilar opinion is silent on whether the nexus requirement must be included in the charging document. While our court has not decided this question subsequent to Aguilar, federal courts that have addressed the issue have found the nexus requirement is not required to be alleged in the indictment because it is “implicit.” See, e.g., United States v. Collis, 128 F.3d 313, 317–18 (6th Cir. 1997); see also United States v. Sussman, 709 F.3d 155, 177 (3d Cir. 2013) (citing to Collis, 128 F.3d at 318 for principle that the nexus requirement is not a fourth element and instead can be addressed in jury instructions).

            This interpretation is consistent with other Supreme Court decisions that have clarified statutory elements in conjunction the government’s proof obligations. For example, in Rehaif v. United States, 588 U.S. ___, 139 S.Ct. 2191, 2200 (2019), the Supreme Court concluded that the government must prove, among other things, that a defendant had knowledge of his status as a prohibited person in felon-in-possession cases. After Rehaif, we found no error where the indictment charged a violation of 18 U.S.C. § 922(g)(5)(A) but failed to allege the defendant had knowledge of his status because the indictment tracked the statutory language. United States v. Jawher, 950 F.3d 576, 579 n.2 (8th Cir. 2020). Similarly, in Flores-Figueroa v. United States, 556 U.S. 646, 657 (2009), the Supreme Court held that in aggravated identity theft cases the government must prove the defendant had knowledge that the means of identification he unlawfully transferred, possessed, or used belonged to another person. We later upheld as sufficient an indictment that charged aggravated identity theft because, although the indictment did not plead knowledge as explained in Flores-Figueroa, it tracked the language of 18 U.S.C. § 1028A(a)(1). United States v. Dvorak, 617 F.3d 1017, 1026–27 (8th Cir. 2010).

            Count Two charged Prelogar with “corruptly endeavor[ing] to obstruct and impede the due administration” of the tax laws, by committing certain specified acts, in violation of § 7212(a). The indictment “tracks the language of the statute” and “fairly informs the defendant of the charges against him.” See Sewell, 513 F.3d at 821–22. We conclude that Marinello clarifies what must be proven to sustain a conviction under § 7212(a) but does not require that nexus and knowledge be charged in the indictment. The district court did not err in denying Prelogar’s motion to dismiss Count Two.

Wednesday, April 28, 2021

Commissioner Rettig Tax Gap Comments Relevant to Federal Tax Crimes (4/28/21)

The IRS has a new web page titled “Impacting the Tax Gap” here.  The page is a summary of Commissioner Rettig’s comments which are set forth in a linked pdf here.  Commissioner Rettig’s comments are excellent.  Highly recommended.

I will cut and paste the comments I think most relevant to readers of this Federal Tax Crimes Blog (footnotes omitted; I stated the categories of the report but only include the text under the category relevant to criminal matters so some comments will not be included; I do not state the page numbers but searching the pdf can get the pages):

Research on high wealth noncompliance

            Several RAAS researchers recently participated in a study published by the National Bureau of Economic Research (NBER) entitled “Tax Evasion at the Top of the Income Distribution: Theory and Evidence.” This study examined tax evasion at the highest income levels and estimated that the top 1 percent of Americans hide more than 20 percent of their income from the IRS. With more, specialized, and targeted enforcement resources, the IRS could significantly reduce the income tax gap for the top 1% and collect another $175 billion of taxes annually. 

            As to why sophisticated tax evasion seems so concentrated at the top, the study suggests that (i) concealment of tax evasion from auditors is costly, requiring substantial financial sophistication, (ii) high-income people can save huge amounts of tax with little risk by adopting sophisticated strategies, which makes it worth the cost, and (iii) audit rates are relatively high at the very top of the income distribution, so if the audits are not thorough enough to correct sophisticated evasion, then high audit coverage rates themselves incentivize the concealment of tax evasion.

            A key difficulty in identifying tax evasion by the wealthy is the complexity of the forms of tax evasion at the top, which can involve legal and financial intermediaries, sometimes in countries with a great deal of secrecy. Income flows from assets outside of 3rd party reporting requirements or obscured through multiple layers of ownership make it difficult to associate the income with specific individuals. The study estimated that accounting for offshore and undercounted pass-through evasion alone could identify an additional $110 billion in undetected income which would have resulted in an additional $33 billion of taxes annually.

Saturday, April 24, 2021

Eleventh Circuit Joins the Consensus that Reckless Conduct Is Subject to the FBAR Civil Willful Penalty (4/24/21)

In United States v. Rum, 2021 U.S. App. LEXIS 12160 (11th Cir. 4/23/21), CA11 here; TN here, the Eleventh Circuit in a per curiam opinion affirmed the district court’s grant of summary judgment for the Government in an FBAR willful civil penalty collection suit.  I wrote on the district court’s grant of summary judgment previously.  District Court Confuses Analysis in Approving Magistrate's R&R Imposing FBAR Willful Penalty (Federal Tax Crimes Blog 9/26/19), here.  

The Eleventh Circuit opinions lists Rum’s arguments:

(A) that the district court applied an incorrect standard of willfulness (by holding that willfulness as used in 31 U.S.C. § 5321(a)(5)(C) includes a reckless disregard of a known or obvious risk); (B) that the district court erred in concluding that there were no genuine issues of material fact as to whether his conduct rose to required level of willfulness/recklessness; (C) that the district court erred in refusing to recognize that 31 C.F.R. § 1010.820(g)(2) limits the amount of a willful violation to $100,000; (D) that the district court erred when it held that the IRS's factfinding procedures were sufficient and therefore applied the arbitrary and capricious rather than a de novo standard of review with respect to the amount of the penalty; (E) that, even assuming the arbitrary and capricious standard applies, the district court erred in failing to conclude that the IRS factfinding procedures were arbitrary and capricious; and finally, (F) that the district court erred in rejecting Rum's challenge to the additions to the base amount (interest and late fees).

I address here only (A) and (D)-(E).

Standard for FBAR Civil Penalty Willfulness

The  Court adopted (Slip Op. 12-16) the consensus holdings that “willfully” as the element of the civil penalty includes recklessness.  I don’t think I need to say more about the holding here because it just rehashes what courts have held before.  The importance of the holding is that it adds to a number of similar holdings, so that it seems that there is no real counterweight to the holding.  It states the consensus.

Rum’s APA Claims

Friday, April 23, 2021

More on Willful Blindness (4/23/21)

I have written before on the willful blindness instruction and more broadly the willful blindness concept in the context of federal crimes requiring as an element of the crime that the actor have some knowledge of the criminal conduct.  For most IRC (Title 26) tax crimes, the statutory knowledge element is “willfully,” which, as interpreted in cases culminating in , is specific intent to violate a known legal duty, often referred to as the Cheek standard (Cheek v. United States, 498 U.S. 192, 201 (1991)).  Other crimes, as interpreted, may have a statutory “willfully” element or some other knowing element that does not require the Cheek specific intent level.  The question I have asked specifically with respect to the Cheek statutory willfully element is whether the willful blindness concept functions (or should function) as (i) an alternative element permitting the trier to convict when the Cheek specific intent cannot be found but acts of willful blindness can be found or (ii) as permitting the trier to consider acts of willful blindness as circumstantial evidence permitting it in the context of all evidence in the case to make the Cheek specific intent finding.  I have argued the latter because only Congress can enact the elements of a crime and the statute requires willful conduct which, as definitively interpreted in Cheek, means specific intent to violate a known legal duty.  Congress has not enacted text that, on its face, would permit conviction when the trier cannot find that the defendant acted willfully in the Cheek sense of specific intent to violate a known legal duty.  If  that argument is correct, a judge should be careful  to instruct the jury so that it knows that conviction is not appropriate if the jury cannot find specific intent to violate a known legal duty.

In United States v. Jeanty, 2021 U.S. App. LEXIS 11879 (11th Cir. 4/22/21) (unpublished), CA11 here, TN here, Jeanty was convicted of “one count of conspiring to steal money from the United States, in violation of 18 U.S.C. §§ 371 and 641 [apparently an offense conspiracy], and one count of stealing property from the United States, in violation of 18 U.S.C. §§ 641 and 642.”  The crimes related to an identity theft tax refund conspiracy.  Since the offense conspiracy has the same mens rea element as the crime that is object of the conspiracy, the mens rea element will be found in § 641.  Section 641 has a mens rea element that is not the strict Cheek requirement but a lesser knowing requirement.  The opinion assumes that a knowing element is required.  So, I ask the same question for a crime where Congress says in the statutory text that a knowing element is required (albeit not the Cheek specific intent level).  Does the willful blindness concept serve as an alternative to the knowing element or simply as circumstantial evidence of the knowingly element?

The district court in Jeanty gave the following willful blindness instruction (apparently using another unrelated knowing element crime to illustrate the concept for the jury):

If a Defendant's knowledge of a fact is an essential part of a crime, it is enough that the Defendant was aware of a high probability that the fact existed — unless the Defendant actually believed the fact did not exist.

“Deliberate avoidance of positive knowledge” — which is the equivalent of knowledge — occurs, for example, if a defendant possesses a package and believes it contains a controlled substance but deliberately avoids learning that it contains the controlled substance so he or she can deny knowledge of the package's contents.

So, you may find that a defendant knew about the possession of a controlled substance if you determine beyond a reasonable doubt that the defendant (1) actually knew about the controlled substance, or (2) had every reason to know but deliberately closed his eyes.

But I must emphasize that negligence, carelessness, or foolishness isn't enough to prove that the Defendant knew about the possession of the controlled substance.

I bold-face the parts of the instruction that raise the issue here.  As presented, the instruction permits conviction on finding willful blindness without a finding of knowing.  That is troubling for the same reason I noted for the Cheek specific intent standard.  Only Congress can state the elements of the crime and it has stated the element for the crimes charged in Jeanty as knowing.  As stated, knowing is not the same as not knowing but acting with willful blindness.  Of course, the district court fuzzed that issue by saying “’Deliberate avoidance of positive knowledge’ * * * is the equivalent of knowledge.”  My point is that willful blindness is not the equivalent of knowledge; it may indicate knowledge in context of all the facts, but it is not the equivalent of knowledge.

Of course, courts by interpretation may engraft weird concepts onto statutory elements that the actual text does not suggest.  My favorite example of courts, the Supreme Court specifically, doing that is Hammerschmidt v. United States, 265 U.S. 182 (1924) where the Court approved a definition of defraud for the defraud conspiracy in 18 USC 371 that departed from and expanded the definition of fraud used in other criminal statutes and in the common law – so that thereafter fraud for the defraud conspiracy means both fraud in its normal sense (“to cheat the Government out of property”) but also to “to interfere with or obstruct one of its lawful governmental functions by deceit, craft or trickery, or at least by means that are dishonest” even if there were no object to cheat the Government out of money.  (The defraud conspiracy is often referred to as a Klein conspiracy.)  By Supreme Court long-standing fiat, that expansion beyond the normal meaning of fraud is now “the law,” even though it has no logical nexus to fraud as Congress used the word for statutory criminal elements and the common law used the term.  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 Hammerschmidt v. United States, 265 U.S. 182, 188 (1924).  The Coplan court reasoned (p. 61):

There is nothing in the Government's brief recognizable as statutory interpretation—no discussion of plain meaning, legislative history, or interpretive canons. Indeed, in all 325 pages of its brief, the Government does not even quote the text of § 371. The Government thus appears implicitly to concede that the Klein conspiracy is a common law crime, created by the courts rather than by Congress. That fact alone warrants considerable judicial skepticism. See United States v. Lanier, 520 U.S. 259, 267 n.6, 117 S. Ct. 1219, 137 L. Ed. 2d 432 (1997) ("Federal crimes are defined by Congress, not the courts . . . ."); see also Rogers v. Tennessee, 532 U.S. 451, 476, 121 S. Ct. 1693, 149 L. Ed. 2d 697 (2001) (Scalia, J., dissenting) ("[T]he notion of a common-law crime is utterly anathema today . . . .").

While the Second Circuit’s concern did not carry the day in Coplan because of the Supreme Court precedent it questioned, the concern still exists.  That same concern should apply to the expansion of the willful blindness concept to permit conviction as an alternative to the knowledge requirement in a criminal statute (whether the knowledge is the Cheek specific intent or a more generally knowledge element).

Note:  The willful blindness concept goes by different names, such as conscious avoidance (in Second Circuit), willful ignorance, and deliberate ignorance.

Tuesday, April 20, 2021

CFC Grants Summary Judgment Based on Bank Account Record Ownership Even Though Others May Have Been Beneficial Owners (4/20/21)

In Landa v. United States, 2021 U.S. Claims LEXIS 635 (Fed. Cl. Apr. 19, 2021), here, the Court entered summary judgment for the Government on the FBAR civil willful penalty.  The facts are not good for the plaintiff, Leon Landa, hence the summary judgment.  

The funds in issue came from his grandfather, who a citizen and resident of Ukraine who deposited funds in a Swiss bank in WW II before moving first to Israel and then the U.S.  The grandfather “apparently intended [the] money “for the family” to be preserved and used for emergencies ‘in case another situation like World War II . . . happen[ed].’”  Over time, at the various Swiss banks involved at for the year involved in the FBAR penalty [UBS, Credit Suisse and BSI], the record ownership of the accounts appeared solely in the name of Leon Landa, the plaintiff in the case and person who drew the FBAR civil willful penalty.  At some times, other family members were listed as having power of attorney at a couple of the banks.  But, at the key relevant times, Leon Landa only appeared as record owner of the accounts.  Regarding the UBS account, the Court found (p. 5) that in 2009 (as we all know) UBS under pressure closed accounts for U.S. taxpayers and a UBS represented "advised [Leon Landa] to open an account at a bank that “doesn’t do any operation in the United States.” Regarding a key account, the BSI account opened in 2009 apparently in response to the UBS advice, the Court found (p.5 & 6, cleaned up and footnote omitted):

The plaintiff applied to open the BSI account, identifying only himself as the account holder on the application, and he included his address and passport number. The account was opened as a numbered account. Mr. Landa signed a “Declaration of US Person,” which allowed him the choice between providing BSI with a form W-9, used by third parties to gather information on U.S. taxpayers to submit to the IRS, or, in the alternative, not authorizing the disclosure of his name. Mr. Landa signed his name under paragraph (b), which provided: “I do not authorise disclosure of my name. I am aware that the Bank will not invest in US securities on my account.” The plaintiff also signed a document titled “Declaration of identity of beneficial owner,” identifying “Landa Leon” as the contracting partner. Mr. Landa did not take a copy of any paperwork from BSI with him back to the United States. 

Mr. Landa directed BSI to hold mail at the bank so he would not receive mail about the account in the United States. On March 25, 2011, the plaintiff signed a held-mail receipt directing BSI to destroy 142 pages of correspondence dated between September 15, 2009, and March 23, 2011. 

Then, the Court found the following related to the IRS investigation (p. 7, cleaned up):

Thursday, April 15, 2021

Houston Tax Attorney Indicted for Conspiracy and for Aiding and Assisting (4/15/21; 4/16/21)

I have previously written about the unnamed enabler named in the Smith nonprosecution agreement as Individual B.  See One Big Fish Indicted and Lesser Big Fish Achieves NPA for Cooperation (Federal Tax Crimes Blog 10/16/20), here.  Individual B was subsequently identified as Carlos Kepke in the Brockman discovery as an enabler for Brockman.  Individual B, the Houston Attorney in the Smith NPA, Is Unmasked (Federal Tax Crimes Blog 12/1/20; 12/2/20), here.  Today, DOJ announced that Kepke has been indicted for conspiracy (18 USC 371) and for three years of aiding and assisting (§ 7206(2)) relating to his assistance of Smith.  See press release titled Tax Attorney Indicted for Facilitating Tax Fraud: Helped Private Equity CEO Defraud IRS of Taxes on $225 Million in Capital Gains (4/15/21), here.

Kepke is from Houston.  I have known him since I practiced in a short stint in the 1970s with a law firm in which he was partner and I a senior associate.  He was the person I suspected as Individual B which I inferred from what I learned about his practice when I was with that law firm.

Added 4/16/21 3:30pm:

Kepke's indictment is here.  I have limited points to make because the press release covers most of the interesting ones in the indictment.  I think that the prosecutors could have substantially flowered up the indictment with a lot more juicy facts, but after all a lot of fluff after putting the defendant on notice is often superfluous.

JAT comments:

1.  The conspiracy charged is the defraud conspiracy rather than the offense conspiracy.  I suppose that, on these facts, they could have charged offense conspiracy to violate either or both of § 7201 (evasion) or § 7206(1) (tax perjury) but that would have required additional elements of proof at trial.  Similarly, they could have charged evasion against Kepke directly.  But the charges are perhaps the minimum DOJ Tax felt necessary under all the facts, particularly since the maximum incarceration period on the counts charged is 14 years (5 for conspiracy and 3 each for the 3 counts of aiding and assisting).  Another factor though is that the amount of tax involved over all the years (and not just the charged years) can be included in the Sentencing Guidelines offense level calculation which would likely mean that, if the total tax Smith evaded were the $56.278 million, my rough and ready SG calculation assuming acceptance of responsibility is 70-87 months.  Of course, Kepke won't get that much, considering his age and health.  (Note, on 4/17/18, I corrected the SG calculation because I erroneously based the original calculation (now deleted) on the income rather than the tax.)

2.  It is not clear why Kepke's activity in the same pattern for Brockman were not included.  Perhaps the statute of limitations for that activity had closed.  Or, perhaps, Brockman was left out because they had what they needed on the Smith activity, particularly with Smith's cooperation to testify against Kepke.  But then, I think a creative prosecutor might be able to include Brockman tax in the calculation for SG purposes.  And perhaps Kepke's other clients (I suspect that there were some) with the same pattern.  Of course, larding additional tax loss on will not likely affect that actual sentence Kepke.

3,  A thought experiment.  With the substantial whistleblower awards in § 7623(b), those having some information about Kepke's practice could have profited handsomely if they could put some of the pieces together and delivered them to the Whistleblower Office without violating the attorney-client privilege.  With the crime-fraud exception, that might be easier even for some of the players in the adventure.  So, could Kepke have been a whistleblower?  In this regard, § 7623(b)(3) provides:

(3)Reduction in or denial of award
If the Whistleblower Office determines that the claim for an award under paragraph (1) or (2) is brought by an individual who planned and initiated the actions that led to the underpayment of tax or actions described in subsection (a)(2), then the Whistleblower Office may appropriately reduce such award. If such individual is convicted of criminal conduct arising from the role described in the preceding sentence, the Whistleblower Office shall deny any award.

So, logically it seems to me that if Kepke were the source of the information leading to either Brockman or Smith, he would have worked the whistleblower claim through an intermediary appearing as principal on the claim.  Just a thought experiment, and there are several different variations of that thought experiment.

Wednesday, April 14, 2021

CA6 Rejects Taxpayers Argument for Bankruptcy Discharge Based on Exception to Discharge for Intent to Evade Tax (4/14/21; 4/15/21)

In United States v. Helton (6th Cir. 4/14/21) (unpublished), CA6 here; TN here, the taxpayer, a lawyer, sought to avoid the exception for bankruptcy discharge in 11 USC 523(a)(1)(C) for a debt “with respect to which the debtor . . . willfully attempted in any manner to evade or defeat such tax.”  The relevant part of the opinion is:

Helton's principal argument, rather, is that § 523(a)(1)(C) requires proof that the debtor acted with “specific intent to evade the tax.” Hawkins v. Franchise Tax Bd., 769 F.3d 662, 670 (9th Cir. 2014). Thus, in Helton's view, the government was required to prove not only that Helton chose to allocate his funds toward Mercedes-Benz sedans and dinners out each night and luxury gifts, rather than towards his taxes; instead, the government was required also to prove that he purchased or paid for those things specifically to avoid paying his taxes. Regardless of whether that is the law in the Ninth Circuit, it is not the law in this one, as shown above. See, e.g., Gardner, 360 F.3d at 561; accord In re Feshbach, 974 F.3d 1320, 1331 (11th Cir. 2020); United States v. Coney, 689 F.3d 365, 374 (5th Cir. 2012); In re Fegeley, 118 F.3d 979, 984 (3d Cir. 1997). We therefore reject his argument.

I have not tried to track down whether there was Ninth Circuit authority for the distinction as articulated by the Court for Helton’s argument.  In the context of the way the Court explained the distinction, it does not appear to me to be a material distinction.

Added 4/15/21 3:15pm:  Les Book of the Procedurally Taxing Blog reminded me that Lavar Taylor, here, had posted two blog entries on the Ninth Circuit's view of § 523(a)(1)(C):

  • What Constitutes An Attempt To Evade Or Defeat Taxes For Purposes Of Section 523(a)(1)(C) Of The Bankruptcy Code: The Ninth Circuit Parts Company With Other Circuits (Part 1) (Procedurally Taxing Blog 9/18/14), here.
  • What Constitutes An Attempt To Evade Or Defeat Taxes For Purposes Of Section 523(a)(1)(C) Of The Bankruptcy Code: The Ninth Circuit Parts Company With Other Circuits (Part 2) (Procedurally Taxing Blog 9/19/14), here.