Thursday, March 21, 2019

TRAC Report on Sentencing Discretion and Disparity (3/21/19)

Transactional Records Access Clearinghouse ("TRAC"), a great resource for information about the federal government (see here), has this offering, here, from yesterday, titled Seeing Justice Done: The Impact of the Judge on Sentencing.  Key excerpt:
The recent sentencing of Paul Manafort by federal judges in two different district courts has renewed interest in the sentencing practices of individual judges. Countless studies over the years have documented a basic fact: while decisions should be determined by the law and the facts, in reality there is a third very important force at work. This ingredient is the identity of the judge assigned to a given case. Again and again, court records show that the particular predilections of individual judges influence the legal decisions that they reach, including those involving sentences.
The posting has further analysis for sentencing and some good lengths.

I do want to emphasize that "particular predilections of individual judges" do affect the range of legal decisions judges reach.  Judges do not simply call balls and strikes within a well-defined strike zone (as Justice Roberts famously claimed).  Judges often, with little review, define the strike zones in ways to permit them to call balls and strikes as they wish.

I do not mean this as an indictment of the judiciary.  I think it is inevitable that giving the judge the leeway to do justice rather than simply call balls and strikes within well previously defined strike zones will also give judges some ability to do great mischief.

As to sentencing in particular, the Sentencing Guidelines were intended to narrow the range of a judge's discretion and bring some nationwide uniformity in sentencing.  The TRAC posting says:
The existence of judge-to-judge differences in sentences of course is not synonymous with finding unwarranted disparity in sentencing practices. A key requirement for achieving justice is that the judges in a court system have sufficient discretion to consider the totality of circumstances in deciding that a sentence in a specific case is just. No set of rules, including the Federal Sentencing Guidelines, can substitute for this necessary flexibility. 
But a fair court system always seeks to provide equal justice under the law, working to ensure that  sentencing patterns of judges not be widely different when they are handling similar kinds of cases.
After Booker, though, we are essentially back in the pre-Guidelines world where a judge can do what he or she wants so long the Guidelines calculation is correct and the judge states rather minimal reasons for variance from the Guidelines sufficient to avoid abuse of discretion review on appeal (if appealed).  I think that there should be some strengthening of the role of the Guidelines because, simply, justice should not depend upon which judge imposes the sentence.

And, of course that does not address the predilections that affect the outcome of the other decisions a judge makes in a case.

Wednesday, March 20, 2019

Eighth Circuit Affirms Tax Obstruction Conviction without Proper Marinello Jury Instructions (3/20/19)

In United States v. Beckham, ___ F.3d ___, 2019 U.S. App. LEXIS 6964 (8th Cir. 2019), here, the Court affirmed Beckham's conviction for tax obstruction, § 7212(a).  Beckham had been charged also with three counts of aiding and assisting, § 7206(2), but was acquitted of those counts.  So the only count of conviction was tax obstruction.

The facts in chronological order are:
  • Beckham allegedly induced a taxpayer (Horseman) to participate in a tax loss scheme to offset the taxpayer's taxes.  Basically, the scheme was to generate false deductions by appearing to have a large investment in a business entity producing losses and to claim those losses as nonpassive losses despite not materially participating in the business.  The IRS began an audit.  Beckham filed power of attorney to represent the taxapyer, representing that he was a licensed  CPA but in fact he was not licensed because of a mail fraud conviction.
  • The agent asked Beckham for documents supporting the taxpayer's material participation in the business.  Beckham responded with the taxpayer's day planner showing hundred of hours work in the business. 
  • The agent then discovered that Beckham was not a licensed CPA as he had represented.  Beckham said that he was in the process of getting his license renewed.
  • The agent then discovered that the taxpayer had not made the claimed large investment in the business generating the losses that he claimed on the returns.
  • Suspecting fraud, the agent referred the taxpayer to IRS CI.  IRS CI then added Beckham as a target.  Beckham was then indicted for tax obstruction and aiding and assisting.
  • The Supreme Court granted certiorari in the Marinello case to resolve a circuit conflict as to whether tax obstruction required that, in committing alleged obstructive acts, the defendant know of nexus to a pending IRS investigation.
  • The case went to trial before the Supreme Court's decision in Marinello.  So, the jury instructions were framed without that decision.  But, at the Government's request, the trial court decided to use a special verdict form asking the jury whether the defendant had committed a corrupt act after becoming aware of the audit.  Here is the description of the instruction conference:
At the instruction conference, Beckham objected to Jury Instruction 9—the instruction on the § 7212(a) offense—because it did not require the jury to find that he knew about the IRS audit at the time that he committed a corrupt act. He also argued that the special verdict form—which directed the jurors, if they found Beckham guilty of that offense, to indicate whether Beckham committed "at least one corrupt act after becoming aware of the existence of an Internal Revenue Service audit or proceeding[,]" see Proposed Jury Instructions 25, Dist. Ct. Dkt. 96, and, if so, to identify which corrupt act they unanimously agreed Beckham committed after learning of the proceeding—did not cure the faulty instruction. Beckham did not, however, specifically object to the language of the special verdict form. The district court overruled his objection.
  • The instructions thus did not include the key element later required by Marinello.
  • The jury convicted of tax obstruction.  "On the special verdict form, the jury indicated that it found Beckham committed at least one corrupt act after learning of the audit and that it unanimously agreed Beckham committed the acts alleged in paragraph 10 of the Superseding Indictment—submitting Horseman's day planner to the IRS—after learning of the audit."
  • The Supreme Court then decided Marinello, holding, as described by the Court.  
Six months after Beckham's trial, the Supreme Court decided Marinello v. United States, 138 S. Ct. 1101, 200 L. Ed. 2d 356 (2018). The Court held that, for a § 7212(a) offense, "the Government must show . . . that there is a 'nexus' between the defendant's conduct and a particular administrative proceeding[.]" Marinello, 138 S. Ct. at 1109. Further, that proceeding must be "reasonably foreseeable by the defendant" at the time he acted. Id. at 1110. Because "[i]t is not enough for the Government to claim that the defendant knew the IRS may catch on to his unlawful scheme eventually[,]" if the proceeding is currently pending, the defendant must be aware of that proceeding. Id.
Based on Marinello, the Government conceded that the jury instruction omitting the element of nexus to a known audit was error, but "that the district court cured the instructional error through the use of a special verdict form and that, even if the special verdict form did not cure the error, the error was harmless."

Tuesday, March 19, 2019

Bank Hapaolim Increases Its Reserve for U.S. DOJ Tax Investigation (3/19/19)

Israel's Bank Hapoalim Q4 net profit sinks on U.S. tax probe provision (Reuters 3/18/19), here.  Excerpt:
The bank said earlier this month it would set aside an additional $246 million in the quarter to cover a possible future settlement regarding an investigation of the bank’s business with U.S. clients. This provision will bring its total provisions to $611 million.
The excerpt does not state specifically that the $611 million relates to the  investigation, but that is the inference.  (See also the relative numbers reported Bank Hapoalim 2018 results: profits dip on US probe provision (Retail Banker International 3/18/19), here.)

Thursday, March 14, 2019

DOJ Tax and Mizrahi-Tefahot Bank Ltd. (Israel) Reach DPA (3/13/19)

DOJ Tax announced here the DPA with Mizrahi-Tefahot Bank Ltd., (Mizrahi-Tefahot) and its subsidiaries.  I have not been able to find the underlying documents, but from the Press Release, I think the following are the key items:
  • "In the DPA and related court documents, Mizrahi-Tefahot admitted that from 2002 until 2012 the actions of its bankers, relationship managers, and other employees defrauded the United States and specifically the Internal Revenue Service (IRS) with respect to taxes by conspiring with U.S. taxpayer-customers and others. Mizrahi-Tefahot employees’ acts of opening and maintaining bank accounts in Israel and elsewhere around the world and violating Mizrahi-Tefahot’s Qualified Intermediary Agreement (QI Agreement) with the IRS enabled U.S. taxpayers to hide income and assets from the IRS."  [This apparently is the defraud / Klein conspiracy.]
  • Mizrahi admits the standard range of conduct by foreign banks playing in this field.
  • "The DPA also requires Mizrahi-Tefahot and its subsidiaries affirmatively to disclose certain material information it may later uncover regarding U.S.-related accounts, as well as to disclose certain information consistent with the Department’s Swiss Bank Program with respect to accounts closed between Jan. 1, 2009, and October 2017."  [For that reason, I have included Mizrahi in the Category 1 for the DOJ Swiss Bank Program; Mizrahi is not technically within the program but did have a Swiss subsidiary.]
  • Mizrahi will pay $195 million total, consisting of "1) restitution in the amount of $53 million, representing the approximate unpaid pecuniary loss to the United States as a result of the criminal conduct; 2) disgorgement in the amount of $24 million, representing the approximate gross fees paid to the bank by U.S. taxpayers with undeclared accounts at the bank from 2002 through 2012; and 3) a fine of $118 million."
DOJ Tax had previously offered $342 Million to settle:  Mizrahi-Tefahot Bank Rejects DOJ $342 Million Settlement Offer for NPA (Federal Tax Crimes Blog 8/10/18), here.

US DOJ Swiss Bank Program
Total Costs
   U.S. / Swiss Bank Initiative Category 1 (Criminal Inv.) *
   U.S. / Swiss Bank Initiative Category 2
   U.S. / Swiss Bank Initiative Category 3
   U.S. / Swiss Bank Initiative Category 4
Swiss Bank Program Results
* Number and Number Resolved may not be same as DOJ and IRS numbers because of how related entities were counted; the Total Costs Column should be consistent.
Recoveries from Swiss Financial and Related Institutions (per above)
Recoveries from NonSwiss Offshore Financial and Related Institutions
Recoveries from All Offshore Financial and Related Institutions

Wednesday, March 13, 2019

On the Manafort Sentences and Tax Crimes Sentencing (3/13/19)

I have hesitated to write on the Manafort sentencing principally because, although Manafort was convicted of tax crimes and FBAR crime that may related somewhat to tax crimes, the gravamen of the cases against him involved nontax offenses that most would consider more serious than the tax offenses.  His sentences in both cases reflected the more serious offenses.  So, I am not sure what I could  offer readers interested in criminal tax sentencing. 

I think both judges likely acted within the scope of their considerable discretion to sentence outside the advisory Sentencing Guidelines range. 

I post below some of the better discussions of which I am  aware:

  • Douglas A. Berman, Rounding up some of many thoughts about Paul Manafort's (first) federal sentence (Sentencing Law and Policy Blog 3/10/19), here.  (This posting has further links.)
  • Douglas A. Berman, Paul Manafort given (only?) 47 months in prison at first federal sentencing ((Sentencing Law and Policy Blog 3/7/19), here.

Now, on Tax Crimes sentencing specifically, I recommend Robert Horwitz's blog entry analyzing tax sentencing statistics:

  • Robert S. Horwitz, Sentencing in Criminal Tax Cases: It’s Not What You Think ( Blog 2/26/19), here.

Thursday, March 7, 2019

Court Affirms Defraud Conspiracy Conviction; Rejects Lesser Included Offense Argument (3/7/19)

In United States v. Bradley, ___ F.3d ___, 2019 U.S. App. LEXIS 6258 (6th Cir. 2019), here, the court affirmed Bradley's defraud conspiracy conviction.  Bradley made three arguments on appeal: (i) constructive amendment or variance to the indictment; (ii) improper argument by the prosecutor that misstated the Government's burden to prove guilt beyond a reasonable doubt; and (iii) failure to give a lesser included offense instruction.

I will not discuss the first two issues, but those with the time might want to look particularly at the improper argument issue where the Court found the arguments improper but not prejudicial.  The Court's discussion (including quotes from the argument) is on Slip Op. 12-16.

Now, looking at the lesser included offense issue, Bradley was convicted of the defraud conspiracy which, under the conspiracy statute (18 USC 371) is a felony.  Remember that the conspiracy statute has two types of conspiracy -- the offense conspiracy to commit a specific offense otherwise criminalize and the defraud conspiracy (also called Klein conspiracy) to impair or impede the functions of the IRS through fraud or deceit.  Bradley was charged with the felony defraud conspiracy.  He wanted an instruction on the offense conspiracy to commit a misdemeanor offense (§§ 7203 and 7204).  The felony statute says that a conspiracy to commit a misdemeanor is a misdemeanor rather than a felony.

The Sixth Circuit stated its lesser included offense requirements as requiring:
(1) a proper request is made; (2) the elements of the lesser offense are identical to part of the elements of the greater offense; (3) the evidence would support a conviction on the lesser offense; and (4) the proof on the element or elements differentiating the two crimes is sufficiently disputed so that a jury could consistently acquit on the greater offense and convict on the lesser.
The Court analyzed the 2d requirement (Slip. Op. 17, cleaned up):
The second criterion of the lesser-included offense analysis requires us to determine whether the elements of the lesser offense are identical to part of the elements of the greater offense. Bradley was charged and convicted for conspiring to defraud the United States—the proposed greater offense. The elements of conspiracy to defraud the United States that the district court charged to the jury are: (1) that two or more persons conspired, or agreed, to defraud the United States, or one of its agencies or departments, by dishonest means, (2) that the defendant knowingly and voluntarily joined the conspiracy, and (3) that a member of the conspiracy did one of the overt acts described in the indictment for the purpose of advancing or helping the conspiracy. The elements of the proposed lesser offense of conspiracy to fail to file W-2s would presumably be: (1) an agreement to fail to file W-2s; (2) one or more overt acts in furtherance of that illegal purpose; and (3) the intent to fail to file W-2s. Similarly, the elements of the lesser offense of conspiracy to fail to issue Form 1099s would be (1) an agreement to fail to issue Form 1099s; (2) one or more overt acts in furtherance of that illegal purpose; and (3) the intent to fail to issue Form 1099s.
Ultimately, though, the Court did not resolve the issue on the merits because Bradley had forfeited the argument because he had not properly presented or preserved the issue.

I think that this is a good reminder that when the Government charges a felony conspiracy (I don't recall it charging a misdemeanor conspiracy), counsel should think creatively about a lesser included offense charge that will permit a jury a way to compromise if the binary choice of guilty or not guilty is not palatable to the jury.  Of course, if the jury with only a binary choice would tilt toward not guilty, a defendant would not want the lesser included offense charge.  But, if the jury would tilt toward guilt, the defendant would want the charge to mitigate the damage.  And, reading the jury's mind on that can be vexing.

District Court Rejects Argument that Marinello Applies to Defraud / Klein Conspiracy (3/7/19)

In United States v. Parlato, 2019 U.S. Dist. LEXIS 33035 (W.D. NY 2019), here, the Court rejected Parato's argument that the Supreme Court's decision in Marinello v. United States, ___ U.S. ___, 138 S. Ct. 1101 (2018), limiting tax obstruction (§ 7212(a)) could similarly limit the defraud / Klein conspiracy.  The opinion is short so I do not further attempt to summarize it.  The underlying Magistrate report and recommendation is here.

Prior blog entries on this issue include the following (reverse chronological order):

  • Two Cases Involving Marinello (Federal Tax Crimes Blog 1/15/19), here.
  • What Are the Implications for Marinello on the Defraud / Klein Conspiracy? (Federal Tax Crimes Blog 3/24/18), here.
  • More on the Marinello Transcript of Oral Argument (Federal Tax Crimes Blog 12/9/17), here.
  • First Comments on the Marinello Oral Argument Transcript (Federal Tax Crimes Blog 12/6/17), here.

District Court Approves FBAR Willful Penalties Under Post 2004 Law; Rejects Colliot and Wadhan (3/7/19)

In United States v. Garrity, 2019 U.S. Dist. LEXIS 32404 (D. Conn. 2019), here, the Court rejected the argument that the FBAR willful penalty was subject to the pre-2004 statutory amendment maximum amount of $100,000 because the IRS had not changed the regulations.  In effect, the Court rejected the district court holdings in Colliot and Wadhan as have courts since those cases.  The Garrity opinion cites the decided cases in footnote 2 on page 2.

Other Comments:

1.  Judge Shea rejects the argument that the FBAR willful penalty was an excessive fine violating the Eighth Amendment (Slip Op. 11-20).  Judge Shea offers a very thoughtful and persuasive analysis, one of the better that I have seen.

2.  The only other parts of the opinion that particularly attracted my attention were the following:
Slip Op. p. 7 n. 4 
   n4 Thus, one of the premises of the decision in Colliot, on which the Defendants rely, is incorrect.  There, the court emphasized that Treasury was bound by the 1987 regulation because it had been promulgated through notice and comment and could only be repealed through notice and comment. Colliot, 2018 WL 2271381, at *2–3 (W.D. Tex. May 16, 2018). As noted above, the August 1986 notice of proposed rulemaking in the Federal Register makes no reference to  the civil penalty provision for account holders, which was not authorized by Congress until two months later. The penalty provision was added to the final rule without notice and comment procedures. The civil penalty provision in the 1987 regulation was at most an interpretive rule based on a now-obsolete version of the statute. 
Slip Op. 10-11: 
Ultimately, the Defendants' reliance on these regulatory actions (or inactions) is misplaced. As noted above, the civil FBAR penalty provision in the 1987 regulation was an interpretive rule that lacked the "force and effect of law." See Perez, 135 S. Ct. at 1203-04. It did not create or expand account holders' rights, and it merely parroted a statute that has now been amended. No amount of "reaffirming" references of the sort Defendants point to can make it an operative limit on the Secretary's current authority. If the Secretary wanted to categorically limit his discretion to impose FBAR penalties above $100,000 after Congress conferred such authority on him by statute, he could do so, if at all, only through notice and comment rulemaking under the Administrative Procedure Act, clearly indicating his intent to surrender by regulation some of the authority Congress has bestowed on him. See id. ("Rules issued through the notice-and-comment process are often referred to as legislative rules because they have the force and effect of law."); 5 U.S.C. § 553(b) (requiring notice of proposed rulemaking to include "either the terms or substance of the proposed rule or a description of the subjects and issues involved."). It is undisputed that he has not taken such a step.

Tenth Circuit Affirms Summons Enforcement Against Medical Marijuana Business Regarding Section 280E (3/7/19)

Section 280E, here, denies a deduction for expenses of a trade or business which "consists of trafficking in controlled substances (within the meaning of schedule I and II of the Controlled Substances Act) which is prohibited by Federal law or the law of any State in which such trade or business is conducted."  I wrote recently about the denial of such expenses in Feinberg v. Commissioner, 2019 U.S. App. LEXIS 5618 (10th Cir. 2019), here.  See Taxpayers Fail to Prove Expenses of Medical Marijuana Business Deductible; Burden of Proof Does Not Violate Fifth Amendment Privilege (Federal Tax Crimes Blog 3/2/19), here.

The Tenth Circuit has another significant opinion related to Section 280E.  In High Desert Relief v. United States, 2019 U.S. App. LEXIS 6609 (10th Cir. 2019), here, the Court addressed the issue in a contentious summons enforcement proceeding where HDR tried to thread the needle to duck the consequences of Section 280E.  The Court provides a good summary in the opening paragraphs:
This case arises out of the efforts of the Internal Revenue Service (“IRS”) to investigate the tax liability of High Desert Relief, Inc. (“HDR”), a medical marijuana dispensary in New Mexico. The IRS began an investigation into whether HDR had improperly paid its taxes, and specifically whether it had improperly taken deductions for business expenses that arose from a “trade or business” that “consists of trafficking in controlled substances.” 26 U.S.C. § 280E. Because HDR refused to furnish the IRS with requested audit information, the IRS issued four summonses to third parties in an attempt to obtain the relevant materials by other means. 
HDR filed separate petitions to quash these third-party summonses in federal district court in the District of New Mexico, and the government filed corresponding counterclaims seeking enforcement of the summonses. HDR argued that the summonses were issued for an improper purpose—specifically, that the IRS, in seeking to determine the applicability of 26 U.S.C. § 280E, was mounting a de facto criminal investigation pursuant to the Controlled Substances Act (“CSA”), 21 U.S.C. § 801, et seq.  
HDR also asserted that enforcement of § 280E was improper because an “official [federal] policy of non-enforcement” of the CSA against medical marijuana dispensaries had rendered that statute’s proscription on marijuana trafficking a “dead letter” incapable of engendering adverse tax consequences for HDR. Aplt.’s Opening Br. at 30. The petitions were resolved in proceedings before two different district court judges. Both judges ruled in favor of the United States on the petitions to quash, and separately granted the United States’ motions to enforce the summonses. HDR challenges these rulings on appeal. 
Exercising jurisdiction under 28 U.S.C. § 1291, we affirm.
As readers know, the IRS's summons power to investigate tax matters is very broad.  United States v. Powell, 379 U.S. 48 (1964).  So, most contests in summons cases are resolved in favor of the IRS.  (One recent victory for the taxpayers was in J.B. v. United States, --- F.3d ----, 2019 WL 923717 at *1 (9th Cir. 2019), here, dealing with the IRS's failure to satisfy the notice requirement for third party contacts.  See Leslie Book, Ninth Circuit Rejects IRS’s Approach to Notifying Taxpayers of Third Party Contacts (Procedurally Taxing Blog 3/4/19), here; in HDR, the Tenth Circuit rejects (Slip Op. pp. 46-47) HDR's similar argument that the IRS did not give the required notice.)

Key points in getting to the bottom line:

Saturday, March 2, 2019

Taxpayers Fail to Prove Expenses of Medical Marijuana Business Deductible; Burden of Proof Does Not Violate Fifth Amendment Privilege (3/2/19)

In Feinberg v. Commissioner, 2019 U.S. App. LEXIS 5618 (10th Cir. 2019), here, the taxpayers were shareholders in an LLC selling medical marijuana.  Their sales were legal under state law, but illegal under federal law.  The issue was whether they bore the burden of proving that they were entitled to deductions related to the business.  Section 280E provides:
No deduction or credit shall be allowed for any amount paid or incurred during the taxable year in carrying on any trade or business if such trade or business (or the activities which comprise such trade or business) consists of trafficking in controlled substances (within the meaning of schedule I and II of the Controlled Substances Act) which is prohibited by Federal law or the law of any State in which such trade or business is conducted.
The Court held that the taxpayers bore the burden of establish their entitlement to the deductions over the taxpayers objection that the assignment of the burden violated their Fifth Amendment privilege.  (There were some other procedures discussed such as substantiation burden shifted to the IRS because new matter, but this is the point I want to address.)

Here is the key part of the opinion (cleaned up and footnotes omitted)
The Taxpayers fail to explain how requiring them to bear the burden of proving the IRS erred in applying § 280E to calculate their civil tax liability is a form of compulsion equivalent to a statute that imposes criminal liability for failing to provide information subjecting the party to liability under another criminal statute. Here, the Taxpayers must choose between providing evidence that they are not engaged in the trafficking of a controlled substance or forgoing the tax deductions available by the grace of Congress. In the cases cited by the Taxpayers, the petitioners were faced with a choice of whether to be prosecuted criminally because they did not provide the information, or to be prosecuted criminally because they did. The circumstances are easily distinguishable. 
Nor can we adopt the Taxpayers' position without running afoul of Supreme Court precedent squarely rejecting the notion that a possible failure of proof on an issue where the defendant had the burden of proof is a form of compulsion which requires that the burden be shifted from the defendant's shoulders to that of the government. Such a concept would convert the Fifth Amendment privilege from the shield against compulsory self-incrimination which it was intended to be into a sword whereby a claimant asserting the privilege would be freed from adducing proof in support of a burden which would otherwise have been his. The Fifth Amendment privilege has never been thought to be in itself a substitute for evidence that would assist in meeting a burden of production.
To be sure, "by invoking the privilege and refusing to produce the materials that might support their deductions the Taxpayers no doubt made their task of proving the IRS erred in denying their deductions that much harder. But "a party who asserts the privilege against self-incrimination must bear the consequences of the lack of evidence. Rylander [United States v. Rylander, 460 U.S. 752 (1983)] teaches that the Taxpayers' possible failure of proof on an issue on which they bear the burden is not compulsion for purposes of the Fifth Amendment. Therefore, we reject the Taxpayers' contention that bearing the burden of proving the IRS erred in rejecting THC's business deduction under § 280E violated the Taxpayers' Fifth Amendment privilege.
The Court held that, since the taxpayers bore the burden of proof without the cover of the Fifth Amendment, the failure of proof required that they lose.

Tenth Circuit Affirms Tax Crimes Convictions and Sentencing (3/2/19)

In United States v. Stubbs (10th Cir. 2019), here, a nonprecedential decision, the Court affirmed Stubbs' convictions and sentencing for two counts of tax evasion and six counts of failure to file.

The activity giving rise to the tax obligations involved was a rebate program, run by his company National Energy Rebate Fund, Inc.  Basically, the scheme was to sell home-improvement companies the opportunity to market a potential 50% rebate to their customers, but the rebate was well into the future and very difficult to qualify for.  Here is the description:
NRF's profit allegedly came from the "slippage" between the total number of customers eligible for rebates and the much smaller number who successfully completed the requirements. The rebate opportunity carried extremely stringent rules: customers had to register the rebate within 17 days of receiving the form; they had to send forms by registered mail only; they had to claim the rebate within the 30 days after the 47th month from the purchase; and the rebate offer would be invalid if anyone other than NRF, such as the company from which they got the rebate forms, reminded them about the deadlines. NRF set aside only a small portion of the revenues it received to pay rebates. And although the rebate program ostensibly was administered by an independent third party, that administration company actually was connected to Stubbs. Apparently, some customers received rebates, but numerous customers who failed to strictly satisfy each and every condition were denied rebates. NRF and its activities were the subject of civil lawsuits brought by Wisconsin and Colorado on behalf of their citizens, which resulted in multi-million-dollar default judgments against Stubbs.
Stubbs failed to file returns at the S-corporation level and at the individual level.  He also failed to pay the tax that would have been due.

Indictments were obtained for tax evasion and failure to file.  Convictions were obtained.  Stubbs fled to Costa Rica, was arrested and returned to U.S.  He was sentenced to 88 months.  He appealed.  He lost..

The issues resolved against Stubbs on appeal were:

1.  The evidence was sufficient to convict for tax evasion.

2.  The district court did not plainly err in admitting evidence of prior acts.

3.  In its sentencing calculation, the district court did not err in applying the criminal activity and sophisticated means enhancements.

This is a nonprecedential case so there is nothing of major significance in the opinion.  The following, however, did catch my eye.

Wednesday, February 27, 2019

Default Judgment Entered Against Convicted Defendant Who Agreed to Penalty (2/27/19)

In  United States v. Sarshar, 2019 U.S. Dist. LEXIS 27845 (C.D.Cal.2019), the court rendered default judgment against Masud Sarshar in the Government's FBAR collection suit to recover a willful FBAR penalty of $18,242,537.65 plus interest.  (I don't provide a link because it is a straight default judgment after the defendant had already agreed to the penalty at sentencing (see below).)

Sarshar had previously pled for conspiracy and tax obstruction and was sentenced to 24 months in prison.  See my prior blogs (reverse chronological order):

  • Taxpayer with Israeli Bank Accounts Sentenced to 24 Months (Federal Tax Crimes Blog 3/13/17; 3/18/17), here.
  • Another Plea to Offshore Account Tax Crimes (Federal Tax Crimes Blog 8/1/16), here.

The sentencing blog entry notes from the DOJ Press Release:
 In addition to the term of prison imposed, Sarshar was ordered to serve three years of supervised release and to pay more than $8.3 million in restitution to the IRS, plus interest and penalties. Sarshar also agreed to pay an FBAR penalty of more than $18.2 million for failing to report his Israeli bank accounts.
Since Sarshar had already agreed to the FBAR penalty, the suit was just a formality required by the 2 year period to file the suit.

11th Circuit Holds Relevant Conduct Loss for Guideline Calculation Can Be Less Than Loss Within Scope of Criminal Conspiracy (2/27/19)

In United States v. Anor, 2019 U.S. App. LEXIS 4858 (11th Cir. 2019), here, Anor was a relatively low level employee in a tax preparation office which prepared and filed hundreds of false and fraudulent tax returns.  She pled guilty to conspiracy to conspiracy to commit wire fraud, in violation of 18 U.S.C. §§ 1343 and 1349.  In calculating the loss for Sentencing Guidelines purposes, the district court included all the losses related to conspiracy -- being all the losses involved.  The Court of Appeals reversed because the Guidelines' discussion of relevant conduct would be less than the losses within the scope of the criminal conspiracy.  Here is the discussion:
However, "[t]he limits of sentencing accountability are not coextensive with the scope of criminal liability." United States v. Hunter, 323 F.3d 1314, 1319 (11th Cir. 2003). Under the guidelines, liability for the reasonably foreseeable acts of others is limited by the scope of the criminal activity the defendant agreed to jointly undertake. See U.S.S.G. § 1B1.3, cmt. n.2. Therefore, "to determine a defendant's liability for the acts of others, the district court must first make individualized findings concerning the scope of criminal activity undertaken by a particular defendant." Hunter, 323 F.3d at 1319 (quotation marks omitted). "In determining the scope of the criminal activity, the district court may consider any explicit agreement or implicit agreement fairly inferred from the conduct of the defendant and others." United States v. Petrie, 302 F.3d 1280, 1290 (11th Cir. 2002). Once that individualized finding is made, the court can proceed to determine reasonable foreseeability. Hunter, 323 F.3d at 1319. 
Our decision in Hunter illustrates the limits of sentencing accountability for low-level defendants who are convicted of participating in a broader conspiracy. The defendants in Hunter were participants in a counterfeit corporate check-cashing ring that operated in South Florida. Id. at 1316. The ring was composed of three "levels" of participants—two individuals at the top who were responsible for printing the counterfeit checks; three individuals who were responsible for recruiting and occasionally driving the check-cashers (called "runners") to cash the checks; and, at the bottom, nineteen runners. Id. At sentencing, the district court held the three defendants, who were runners, responsible for the total loss of the entire conspiracy, stating that the losses associated with the broader conspiracy were reasonably foreseeable to them. Id. at 1318. 
On appeal, we held that reasonable foreseeability alone was not enough and that the district court erred by failing to "first determine the scope of the criminal activity [the defendants] agreed to jointly undertake." Id. at 1320 (quotation marks omitted). We explained that "the Guidelines establish that the fact that the defendant knows about the larger operation, and has agreed to perform a particular act, does not amount to acquiescence in the acts of the criminal enterprise as a whole." Id. Thus, the fact that the defendants cashed multiple checks, which made them responsible for those checks, did not "automatically" or "necessarily" support a finding that they knew the scale of the conspiracy, "let alone that [they] agreed to the full extent of that criminal activity." Id. at 1320-21. Similarly, the mere fact that one of the defendants identified other runners working for a mid-level operative was "not enough to make her accountable for their conduct" without some other evidence "from which an agreement can be inferred." Id. at 1320. Cautioning that the defendants' "involvement and agreement in the conspiracy may be limited to the checks each actually cashed," we vacated the application of a loss enhancement and remanded for the court to make individualized findings as to the scope of criminal activity each defendant agreed to undertake. Id. at 1322. 
Hunter further elaborated on the types of evidence showing agreement in a larger criminal scheme. See id. at 1321-22. One "relevant factor in determining whether an activity is jointly undertaken is whether the defendant assisted in designing and executing the scheme." Id. at 1321; cf. United States v. McCrimmon, 362 F.3d 725, 732-33 (11th Cir. 2004) (holding a defendant responsible for the entire amount of loss where the defendant, though he did not "design" the scheme, actively recruited investors to further the scheme and had a role equivalent to a higher-level operative). Another is "evidence of sharing or mutuality from which an agreement in the larger criminal scheme can be inferred." Hunter, 323 F.3d at 1322. For example, in United States v. Hall, we affirmed a court's determination that the defendant's relevant conduct included fraud losses caused by others in a telemarketing-type conspiracy where each of the participants knew each other and was aware of the others' activities, and they aided and abetted one another by sharing lead sheets of potential victims and sharing telephones. 996 F.2d 284, 285-86 (11th Cir. 1993).

Thursday, February 21, 2019

Willful Blindness - Is It An Inference of Knowledge or Intent or Is It a Substitute (2/21/19)

I am back on one of my pet peeves -- deliberate ignorance.  (Deliberate ignorance is also called willful blindness or conscious avoidance; in an instruction context it is also called the ostrich instruction.)  I just picked up United States v. Maitre, 898 F.3d 1151 (11th Cir. 2018), here. The Court rejected a claim that the trial court should not have given the deliberate ignorance instruction.  In the course of doing so, the Court said (p.1157):
This Court considers "deliberate ignorance of criminal activity as the equivalent of knowledge."
I just think that is wrong.  If the ultimate element of the crime is actual knowledge or specific intent, a defendant's willful blindness should do no more than permit a jury to infer the required knowledge or intent.  In other words, it is circumstantial evidence of the ultimate element of actual knowledge or specific intent.  A finding that the defendant was willfully blind should not compel a finding that the defendant has actual knowledge or specific intent element of the crime.  Congress has not said that when it requires actual knowledge or specific intent as an element of the crime, anything less will do.

I have written on this before, but just wanted to vent again.

Other blog entries on this:

  • Interesting NonTax Case on Willful Blindness (Federal Tax Crimes Blog 10/3/17), here.
  • The Willful Blindness Concept -- What Does It Do? (Federal Tax Crimes Blog 1/23/17), here.
  • Willful Blindness / Conscious Avoidance and Crimes Requiring Intent to Violate a Known Legal Duty (Federal Tax Crimes Blog 7/21/14), here.
  • More on Conscious Avoidance (Federal Tax Crimes Blog 1/21/13), here.
  • Third Circuit Decision in Stadtmauer - Willful Blindness (Conscious Avoidance) (Federal Tax Crimes Blog 9/10/10), here.

10th Circuit Reverses Tax Money Laundering Conviction For Lack of Sufficiency of Evidence (2/21/19)

In United States v. Christy, ___ F.3d ___, 2019 U.S. App. LEXIS 4594 (10th Cir. 2019), here, the Court opens with this summary:
On May 21, 2014, CNB auditors conducted a surprise audit of the Burlington, Kansas Central National Bank ("CNB" or "Bank") vault. The vault was missing $764,000. When they began to suspect Ms. Christy, she forged documents to purport that she had sent the missing cash to the Federal Reserve Bank of Kansas City ("FRB"). A grand jury indicted her on one count of bank embezzlement, six counts of making false bank entries, six counts of failing to report income on her taxes, and 10 counts of money laundering. After a six-day trial, a jury found Ms. Christy guilty of all charges except four money laundering counts. 
On appeal, Ms. Christy argues that (1) cumulative prosecutorial misconduct violated her due process rights, (2) the evidence was insufficient for her money laundering convictions, and (3) the jury instructions improperly omitted a "materiality" element for the false-bank-entry charges.
Of these three issues identified by the Court, I address on the second -- the money laundering because it is tax money laundering, not commonly encountered.  The prosecutorial misconduct issue is interesting but so long (from p. 9 to p. 39) that I did not delve deeply into it.

I also address an issue discussed by the majority in the first footnote (spanning from p. 2 to p. 3) regarding whether, even with counts of conviction reversed because the Guidelines calculations would be the same.

Tax Money Laundering.

The Court offers this additional procedural background (p. 40):
The jury found Ms. Christy not guilty of the four money laundering counts based on loan payments the Christys made before 2014 (Counts 14-17). The cash payments underlying Ms. Christy's six money laundering convictions (Counts 18-23) were made on two loans in the Christys' names at the Farmers State Bank in Aliceville, Kansas. 
Count 18 charged Ms. Christy with money laundering for making a $1,000 payment on March 17, 2014 on Loan 7521, a home loan that originated in 2011 and called for a minimum monthly payment of $600. With one exception, a payment of $1,848 that was not charged in the indictment, every one of the Christys' payments on Loan 7521 in 2013 and 2014 was $1,000. Counts 19-23 concerned cash payments on Loan 7962, a refinancing agreement for the Christys' home loan. n13 Ms. Christy was convicted based on five cash payments on this loan made between March 17, 2014 and May 12, 2014, ranging from $834.49 to $3,200 and averaging approximately $2,167. 
Ms. Christy filed a motion for acquittal on the money laundering counts at the close of the Government's case, arguing there was insufficient evidence to show that her loan payments were made with embezzled funds. She did not argue that [*45]  there was insufficient evidence of specific intent. She renewed her motion at the end of trial. The district court denied the motion, stating, 
A reasonable jury could infer from the circumstantial evidence presented at trial that the cash used to make these loan payments came from funds that Ms. Christy had embezzled from the vault at CNB and that Ms. Christy conducted the financial transactions with the intent to file a false income tax return in violation of 26 U.S.C. § 7206(1).
The issue was whether the evidence was sufficient to show that Christy had the required "intent to engage in conduct constituting a violation of section 7201 or 7206 of the Internal Revenue Code of 1986."  Section § 1956(a)(1)(A)(ii).  The Government argued that two types of acts were sufficient:

Wednesday, February 20, 2019

UBS Fined $4.2 Billion for Its French Foreign Account Escapades Raiding France of Taxes (2/20/19)

Liz Alderman, French Court Fines UBS $4.2 Billion for Helping Clients Evade Taxes (NYT 2/20/19), here.

The lavish spending caught up with UBS on Wednesday, when French judges ordered it to pay a record 3.7 billion euro fine, about $4.2 billion, for carrying out what prosecutors said was a long-running scheme to help French clients hide huge sums of money from the authorities. 
The penalty, the largest in French history, included €800 million to be paid to the government, which said it had lost revenue as a result of UBS’s helping French citizens evade taxes from 2004 to 2012. 
UBS said in a statement that it “strongly disagrees with the verdict” and that it planned to appeal. “The bank has consistently contested any criminal wrongdoing,” the statement said, adding that the judgment was “not supported by any concrete evidence.” 
The ruling coincides with crackdowns on tax evasion in France and other countries that have put Swiss banks in particular on the defensive. 
UBS paid a $780 million fine in the United States in 2009 to resolve accusations that it had helped rich clients dodge taxes, and pledged to divulge the names of over 4,450 people with Swiss bank accounts. Credit Suisse was fined $2.6 billion by the Justice Department in 2014, and €300 million by France in 2017 in similar cases

Federal Tax Procedure Book Update on Tax Crimes (2/20/19)

Today, I completed revisions to the Tax Crimes section of my Federal Tax Procedure Book so that I could circulate to Jim Malone's Tax Practice and Procedure class to UVA Law School where I will guest teach the subject next week.  I have  circulated it to class members.  Readers of this blog can download it here.  A related spreadsheet is available here.

As always, I would appreciate feedback from readers for improvement.

The next editions of the FTPB will be published in early August 2019.

Wednesday, January 23, 2019

D.C. Circuit Rejects Defendant's Post Conviction Claims of Selective Prosecution, Actual Innocence and Attorney Conflict (1/23/19)

In United States v. Bertram, 2019 U.S. App. LEXIS 1899 (D.C. Cir. 2019), here, the Court entered Judgment with an opinion immediately below the judgment.  Bertram pled guilty to a crime for failure to pay over trust fund tax.  See Sentencing for Failure to Pay Over Trust Fund Taxes (Federal Tax Crimes Blog 5/6/15), here.  Bertram moved to vacate his conviction  under 28 USC 2255. The district court denied the motion.  The Court of Appeals affirmed the district court.

Some interesting points:

1.  The Court rejects Bertram's selective prosecution claim based upon allegations that he was prosecuted because (i) he worked for Republican candidates and conservative organizations, (ii) that similarly situated Democrats were not prosecuted, and (iii) IRS agent audited him because he was among the "President's enemies" (the President would be Obama).

2.  The Court rejects his actual innocence claim (that might not even be cognizable with a knowing and voluntary plea), finding that the record forecloses the claim.

3. The Court rejects his final argument that an attorney representing Bertram before the plea agreement was conflicted.  That attorney was Cono Namorato, here, who is a giant in the criminal tax defense bar.  I found this the most interesting in the case, so I quote it in full:
Finally, Bertram's argument that one of his attorneys-Cono Namorato-had a conflict of interest gets him nowhere. Bertram alleges that Namorato developed a conflict of interest when he was considered for a position as Assistant Attorney General of the Department of Justice's Tax Division-the very Department that was prosecuting Bertram-and failed to alert Bertram to the conflict. Because Namorato served as outside counsel rather than counsel of record, Bertram has to show that Namorato had an "actual conflict" that "adversely affected" Bertram's decision to plead guilty. See United States v. Wright, 745 F.3d 1231, 1233 (D.C. Cir. 2014) (finding no evidence to support defendant's allegation that conflicted counsel had coerced him into pleading guilty). 
Bertram has not plausibly alleged that his decision to enter the guilty plea was adversely affected by Namorato's alleged conflict. As Bertram has admitted, Namorato did not advise him about the plea he ultimately accepted. Attorneys from Jenner & Block, including his counsel of record Jessie Liu, alone counseled him about that plea agreement. And Bertram said on the record that he was satisfied with Liu's performance. App'x 22. 
Bertram argues instead that Namorato failed to investigate several "exculpatory" witnesses. But the "exculpatory" witnesses to whom Bertram points are the same lawyers and IRS agent whose anticipated testimony he invoked in support of his actual innocence claim. Bertram was aware of those witnesses at the time of his plea, and the district court specifically advised Bertram that he had a right to present witnesses in his defense if he went to trial. He chose not to do so. And then his sentencing memorandum, (presumably) written by counsel of record, admitted that Bertram's actions taken pursuant to those same witnesses' advice did not negate the willfulness of his actions, but merely provided "[c]ontext." S.A. 10.  n1
   n1 The district court's holding that non-appearing counsel cannot be constitutionally ineffective was disputable. Other courts of appeals have recognized that, in rare instances, the actions, omissions, or conflicts of a non-appearing or secondary member of a defendant's team can so "taint" the defendant's representation as to constitute ineffective assistance. See Rubin v. Gee, 292 F.3d 396, 405 (4th Cir. 2002) (representation of two conflicted attorneys "ultimately tainted and adversely affected" defendant's representation by three trial lawyers); Stoia v. United States, 22 F.3d 766, 769 (7th Cir. 1994) (counsel need not have appeared in court to give rise to ineffective assistance of counsel claim); United States v. Tatum, 943 F.2d 370, 379 (4th Cir. 1991) (representation "tainted" by conflict of one of defendant's counsel who was relied upon heavily). But that issue is of no moment because Bertram has made no showing of taint, and the ineffective assistance claim fails on the merits. 
Bertram also argues that Namorato failed to investigate a selective prosecution claim or to explain to him the mens rea element of the offense under 26 U.S.C. § 7202. Because those arguments were made for the first time on appeal even though the relevant facts were fully known to Bertram when he was before the district court, we will not entertain them. See Chichakli v.Tillerson, 882 F.3d 229, 234 (D.C. Cir. 2018); United States v. Rice, 727 F. App'x 697, 702 (D.C. Cir. 2018). Bertram's separate argument that his plea was involuntary because of asserted shortfalls in his Rule 11 colloquy will not be addressed either because it is raised for the first time on appeal and is outside the scope of the certificate of appealability. See 28 U.S.C. § 2253(c)(1); Waters v. Lockett, 896 F.3d 559, 571-572 (D.C. Cir. 2018).