The newspapers are reporting that the U.S. and UBS have reached some agreement. The Wall Street Journal's article is here. The announcement was made in a teleconference in the pending John Doe summons case.
I don't plan to piecemeal my discussion of the settlement as rumors, good and bad, float around the internet and other places. When something reasonably concrete comes out, I may provide whatever comments I think my readers would be interested in having.
Jack Townsend offers this blog on Federal Tax Crimes principally for tax professionals and tax students. It is not directed to lay readers -- such as persons who are potentially subject to U.S. civil and criminal tax or related consequences. LAY READERS SHOULD READ THE PAGE IN THE RIGHT HAND COLUMN TITLE "INTENDED AUDIENCE FOR BLOG; CAUTIONARY NOTE TO LAY READERS." Thank you.
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Friday, July 31, 2009
Wednesday, July 29, 2009
July 2009 IRS Posting on Offshore Account Voluntary Disclosure (7/29/09)
The IRS has posted a new page on the voluntary initiative. The main voluntary disclosure web page is here. The new web page is here and is titled Contact IRS About Voluntary Disclosure.
The new page provides IRS contact information for those wishing to enter the program. It also offers a template letter to use in advising the IRS of their entry into the program. (The template letter is rather inconspicuous, but look closely at the letter beginning "Tax Professionals or individuals;" it is in Word format for easy completion)
Also, for those persons already in the program but who have not yet had their interviews, I am advised by CI agents working two of my client matters that the letter can be completed in lieu of the interview, although there might be later need for further information and/or interview.
The new page provides IRS contact information for those wishing to enter the program. It also offers a template letter to use in advising the IRS of their entry into the program. (The template letter is rather inconspicuous, but look closely at the letter beginning "Tax Professionals or individuals;" it is in Word format for easy completion)
Also, for those persons already in the program but who have not yet had their interviews, I am advised by CI agents working two of my client matters that the letter can be completed in lieu of the interview, although there might be later need for further information and/or interview.
Get in Line Brother #14 - Another Plea in UBS
Another UBS client, one Jeff Chernick, pled guilty. These guilty pleas may become ho-hum after a while, so in the future I will post these items when they have some interesting twist or feature I want to discuss. These are the items I find interesting in the Chernick plea (taken from the Plea Agreement and the related Statement of Facts).
1. For context, the defendant's corporation represented Hong Kong and Chinese toy manufacturers for a number of years. Such arrangements with foreign payors offer an opportunity to have compensation flow off the U.S. radar screen. It did so here.
2. Beginning in about 1981, the defendant established foreign accounts for the purpose of concealing income from the IRS. The accounts appear to have been principally in the name of offshore entities that the defendant owned and controlled. One of these entities is identified as the owner of a UBS account. The defendant is identified as the owner of that entity in an "internal UBS Form A, Verification of the Beneficial Owner's Identity, dated April 19, 2002." There is no indication of the source for this particular "internal UBS Form." If indeed it is an internal UBS form, presumably neither the taxpayer nor the U.S. would have access to it through the normal course of events. Question: how did it surface? Good question. There is another indication in the plea agreement discussed below that the U.S. learned of this document through disclosures UBS made pursuant to the UBS deferred prosecution agreement.
3. Money came into these accounts. The defendant would take out significant amounts for various personal expenses (typically just under $300,000 per year). Notwithstanding that, by 2005, the account balance at one of the accounts (there were more than one) was $8,000,000. (This is an odd way to state it and leaves open the issue of how much there was in the other accounts.)
4. A Swiss bank executive serving as a manager for cross-border business assisted the defendant. That executive left UBS because he was concerned about UBS joining the U.S. qualified intermediary program. In 2003, that executive convinced the defendant to invest a portion of his assets in another Swiss bank that was smaller, had no presence in the U.S. and was not in the U.S. qualified intermediary program. The executive told defendant that this smaller Swiss bank could not be pressured to disclose his identity and account information to U.S. authorities.
5. From about 1998 through 2008, defendant had several meetings with that executive, other UBS executives and a Swiss lawyer in the United States to discuss the accounts at UBS and the other Swiss Bank. When traveling to the United States for these meetings the executive and Swiss lawyer would "dress as tourists to avoid detection." The executive "would falsely report to United States customs that he was coming to visit his brother." The account statements to be discussed at these meetings were mailed to a U.S. address rather than hand-carried in order to prevent their seizure by customs agents if carried with the Swiss persons. Further, the account statements would have the identifying information cut from them "so that they could not be tied to the defendant and his accounts."
6. In approximately 2004, defendant on Swiss attorney's advice entered a sham loan transaction in which defendant borrowed his own money from an offshore account to fund the purchase of property. Although knowing the transaction was a sham, defendant "instructed his United States tax return preparer to deduct the 'loan interest' he paid on his income tax returns." (Note that this admission alone admits guilt as to the crimes of tax evasion and tax perjury for the years in which the interest was claimed as a deduction.)
7. In 2008, as the U.S. ramped up the pressure on UBS, the defendant consulted with the Swiss attorney about his concerns that UBS would disclose his identity and account information to U.S. authorities and the possibility of repatriating the money to the U.S. The Swiss attorney then told the defendant that UBS was not disclosing his accounts to the IRS . The Swiss attorney represented that he had received this information from a Swiss official who must be paid $45,000 for it, and, with defendant's authorization, the Swiss attorney withdrew $45,000 to pay that amount. (Note that the defendant participated in the payment of a bribe to a Swiss official, but the agreement is otherwise silent as to that; I suppose it is equally consistent with the public documents that the Swiss attorney pocketed the amount he advised defendant was to be paid to the Swiss official.)
8. For the years 2002 - 2007, the defendant did not file FBARs and did not report the earnings from the foreign accounts on his U.S. tax return (Form 1040). Specific details are given for the 2007 1040. For all years, defendant knowingly and willfully failed to report the income from the foreign accounts. Note that these admissions admit guilt of tax evasion and/or tax perjury for each of these years and perhaps also guilt of failure to file the FBARs, although the language is not as crisp on that.
9. For this pattern of behavior (not all details recounted above), defendant pleads to a single count of tax perjury, § 7206(1), for 2007. His factual admissions do admit guilt of the behavior for all of the years from 2002 - 2007 (all of which are probably still open under the 6-year criminal statute of limitations, presuming that he filed the 2002 return on extension after 7/27/03). Yet he pleads to a single count. This is important, because the single count plea caps the sentence -- incarceration period -- at 3 years (subject to 15% good time credit).
10. The Guidelines advisory sentence range will be determined by including all of the relevant conduct. Relevant conduct is all conduct from the same pattern of behavior involved in the count of the conviction (here tax perjury for 2007). Here, the defendant has been conducting this pattern of behavior since 1981. This means that, for calculating the critical base offense level as the starting point for the sentencing calculations, all tax evaded since 1981 could be included in the "tax loss" calculation. Properly calculating relevant conduct, therefore, the Guidelines range would certainly exceed the 3-year maximum sentence for the single count of conviction pursuant to the plea and would mean that that defendant's Guideline sentence would be 3 years. Notwithstanding that truism, the Plea Agreement says:
Quite frankly, I am stunned that the Department of Justice would enter an agreement that states something that is patently false. It is true that the Plea Agreement does state that this stipulation as to the relevant conduct tax loss is not binding on the probation office or the court, but it is still a falsehood -- let's call it a lie (which is a word DOJ Tax uses when taxpayers or their enablers engage in similar behavior) -- to state, as it clearly does, that the tax loss so constricted is
12. The FBAR civil penalties for the open years (2001-2007) are resolved by paying a 50% penalty for a single year "the one year with the highest balance in the account as of June 30 for calendar years 2001 through 2007." It is unclear what this means since he had multiple accounts but the agreement is as to what appears to be a single account. Even if all accounts are included, the limitation to one year is sweet indeed. Note that in trying to coax all other as yet undiscovered and possibly never to be discovered taxpayers absent voluntary disclosure into the voluntary disclosure program, the Government in its FAQs tries coax then into a single year 20% penalty by threatening a 50% penalty for each year. How is this a credible threat when it imposes only a single 50% penalty in a criminal case involving a pattern of behavior that is far more egregious that most cases? Couldn’t one reasonably conclude that if the worst befell, the worst case is really 50% for a single year, which is not that much more draconian than the 20% that the IRS insists on for voluntary disclosure? Is the signal that the real cost / benefit analysis for the voluntary disclosure program more skewed against joining the program than the IRS noises about?
13. The following provision of the plea agreement is curious:
1. For context, the defendant's corporation represented Hong Kong and Chinese toy manufacturers for a number of years. Such arrangements with foreign payors offer an opportunity to have compensation flow off the U.S. radar screen. It did so here.
2. Beginning in about 1981, the defendant established foreign accounts for the purpose of concealing income from the IRS. The accounts appear to have been principally in the name of offshore entities that the defendant owned and controlled. One of these entities is identified as the owner of a UBS account. The defendant is identified as the owner of that entity in an "internal UBS Form A, Verification of the Beneficial Owner's Identity, dated April 19, 2002." There is no indication of the source for this particular "internal UBS Form." If indeed it is an internal UBS form, presumably neither the taxpayer nor the U.S. would have access to it through the normal course of events. Question: how did it surface? Good question. There is another indication in the plea agreement discussed below that the U.S. learned of this document through disclosures UBS made pursuant to the UBS deferred prosecution agreement.
3. Money came into these accounts. The defendant would take out significant amounts for various personal expenses (typically just under $300,000 per year). Notwithstanding that, by 2005, the account balance at one of the accounts (there were more than one) was $8,000,000. (This is an odd way to state it and leaves open the issue of how much there was in the other accounts.)
4. A Swiss bank executive serving as a manager for cross-border business assisted the defendant. That executive left UBS because he was concerned about UBS joining the U.S. qualified intermediary program. In 2003, that executive convinced the defendant to invest a portion of his assets in another Swiss bank that was smaller, had no presence in the U.S. and was not in the U.S. qualified intermediary program. The executive told defendant that this smaller Swiss bank could not be pressured to disclose his identity and account information to U.S. authorities.
5. From about 1998 through 2008, defendant had several meetings with that executive, other UBS executives and a Swiss lawyer in the United States to discuss the accounts at UBS and the other Swiss Bank. When traveling to the United States for these meetings the executive and Swiss lawyer would "dress as tourists to avoid detection." The executive "would falsely report to United States customs that he was coming to visit his brother." The account statements to be discussed at these meetings were mailed to a U.S. address rather than hand-carried in order to prevent their seizure by customs agents if carried with the Swiss persons. Further, the account statements would have the identifying information cut from them "so that they could not be tied to the defendant and his accounts."
6. In approximately 2004, defendant on Swiss attorney's advice entered a sham loan transaction in which defendant borrowed his own money from an offshore account to fund the purchase of property. Although knowing the transaction was a sham, defendant "instructed his United States tax return preparer to deduct the 'loan interest' he paid on his income tax returns." (Note that this admission alone admits guilt as to the crimes of tax evasion and tax perjury for the years in which the interest was claimed as a deduction.)
7. In 2008, as the U.S. ramped up the pressure on UBS, the defendant consulted with the Swiss attorney about his concerns that UBS would disclose his identity and account information to U.S. authorities and the possibility of repatriating the money to the U.S. The Swiss attorney then told the defendant that UBS was not disclosing his accounts to the IRS . The Swiss attorney represented that he had received this information from a Swiss official who must be paid $45,000 for it, and, with defendant's authorization, the Swiss attorney withdrew $45,000 to pay that amount. (Note that the defendant participated in the payment of a bribe to a Swiss official, but the agreement is otherwise silent as to that; I suppose it is equally consistent with the public documents that the Swiss attorney pocketed the amount he advised defendant was to be paid to the Swiss official.)
8. For the years 2002 - 2007, the defendant did not file FBARs and did not report the earnings from the foreign accounts on his U.S. tax return (Form 1040). Specific details are given for the 2007 1040. For all years, defendant knowingly and willfully failed to report the income from the foreign accounts. Note that these admissions admit guilt of tax evasion and/or tax perjury for each of these years and perhaps also guilt of failure to file the FBARs, although the language is not as crisp on that.
9. For this pattern of behavior (not all details recounted above), defendant pleads to a single count of tax perjury, § 7206(1), for 2007. His factual admissions do admit guilt of the behavior for all of the years from 2002 - 2007 (all of which are probably still open under the 6-year criminal statute of limitations, presuming that he filed the 2002 return on extension after 7/27/03). Yet he pleads to a single count. This is important, because the single count plea caps the sentence -- incarceration period -- at 3 years (subject to 15% good time credit).
10. The Guidelines advisory sentence range will be determined by including all of the relevant conduct. Relevant conduct is all conduct from the same pattern of behavior involved in the count of the conviction (here tax perjury for 2007). Here, the defendant has been conducting this pattern of behavior since 1981. This means that, for calculating the critical base offense level as the starting point for the sentencing calculations, all tax evaded since 1981 could be included in the "tax loss" calculation. Properly calculating relevant conduct, therefore, the Guidelines range would certainly exceed the 3-year maximum sentence for the single count of conviction pursuant to the plea and would mean that that defendant's Guideline sentence would be 3 years. Notwithstanding that truism, the Plea Agreement says:
a. Tax Loss: The relevant amount of actual, probable, or intended tax loss under Section 2T1.1 of the Sentencing Guidelines resulting from the offense committed in this case and all relevant conduct is the tax loss associated with accounts at UBS that were disclosed to the Government pursuant to the Deferred Prosecution Agreement with UBS, and of which the defendant was the beneficial owner for tax years 2001 through 2007.Focus on what this agreement does. First, it signals that the U.S. discovered this defendant pursuant to UBS disclosures under the DPA. Second, it “limits” the tax loss calculation to considering only tax loss in the years 2001-2007 and then only the tax loss attributable to the UBS accounts. As noted above, the relevant conduct for sentencing purposes includes all such behavior for all years (here since 1981).
Quite frankly, I am stunned that the Department of Justice would enter an agreement that states something that is patently false. It is true that the Plea Agreement does state that this stipulation as to the relevant conduct tax loss is not binding on the probation office or the court, but it is still a falsehood -- let's call it a lie (which is a word DOJ Tax uses when taxpayers or their enablers engage in similar behavior) -- to state, as it clearly does, that the tax loss so constricted is
The relevant amount of actual, probable, or intended tax loss under Section 2T1.1 of the Sentencing Guidelines resulting from the offense committed in this case and all relevant conduct . . . .11. The U.S. agrees to recommend a sentence at the low end of the Guideline range as determined by the court. As noted above, there is no low end of the Guideline range, properly calculated, that is less than the 3 year sentence, so on a properly calculated range, this defendant has an indicated Guidelines sentence of 3 years for the count of conviction. Of course, under Booker, the judge can vary downwards, but the facts admitted in the plea agreement do not seem to me to argue in favor of a downward variance. Undoubtedly, more relevant facts will come out in the sentencing process, so the sentencing judge may find some of those persuasive.
12. The FBAR civil penalties for the open years (2001-2007) are resolved by paying a 50% penalty for a single year "the one year with the highest balance in the account as of June 30 for calendar years 2001 through 2007." It is unclear what this means since he had multiple accounts but the agreement is as to what appears to be a single account. Even if all accounts are included, the limitation to one year is sweet indeed. Note that in trying to coax all other as yet undiscovered and possibly never to be discovered taxpayers absent voluntary disclosure into the voluntary disclosure program, the Government in its FAQs tries coax then into a single year 20% penalty by threatening a 50% penalty for each year. How is this a credible threat when it imposes only a single 50% penalty in a criminal case involving a pattern of behavior that is far more egregious that most cases? Couldn’t one reasonably conclude that if the worst befell, the worst case is really 50% for a single year, which is not that much more draconian than the 20% that the IRS insists on for voluntary disclosure? Is the signal that the real cost / benefit analysis for the voluntary disclosure program more skewed against joining the program than the IRS noises about?
13. The following provision of the plea agreement is curious:
D. The defendant further agrees that any evidence, including statements and documents, provided to the United States by the defendant pursuant to a Proffer Agreement, without any limitations, can be utilized by the United States in its civil examination, determination, assessment, and collection of income taxes related to his income tax returns and any related corporate/entity tax returns, or any other civil proceeding. The United States does not deem this, in any way, to be a waiver of the defendant's attorney-client privilege with respect to any attorney.This raises the issue of whether the information provided pursuant to the Proffer Agreement is grand jury information. If it is, this portion of the agreement contemplates behavior that appears to violate FRCrP Rule 6(e) without an express Rule 6(e) order which cannot be obtained for a civil tax audit. I have previously blogged on this general issue here.
Friday, July 24, 2009
Other Players in “Abusive” Tax Shelters
Most of the public angst over abusive tax shelters have been targeted at the promoter promoters, including the law firms rendering more likely than not legal opinions (“MLTN opinions”) used to promote the shelters. I write this column to talk about the other key players – the taxpayers and the taxpayer tax advisors, including some of the most prominent law firms in the country.
My take-off point for this discussion is a letter by Professor Marvin Chirelstein dated July 13, 2009 published in 124 Tax Notes 183 (July 13, 2009). Professor Chirelstein rails against “the astonishing role that law firms have played in justifying -- that is, helping to promote -- so many of these egregious and transparent tax shelter schemes.” He refers to the law firms whose partners issued the MLTN opinions used by the tax shelter promoters to sell the tax shelters. (I refer to these law firms as the “promoter law firms.”) For purposes of this response only , I accept Professor Chirelstein's premise that the MLTN opinions he refers to were blatantly false. That does not mean that I agree with that premise, but I only want to explore here the consequences if the premise were correct.
I wonder, though, why Professor Chirelstein limits his indictment to the promoter law firms. Indeed, Professor Chirelstein acknowledges that he assists those at the center of the shelters -- the taxpayers without whom the shelters would not have existed to recover against the promoter and promoter law firms. The taxpayers were generally sophisticated taxpayers who had all the objective indicia that the shelters were too good to be true. The too good to be true test is not a tax specific test, but a test that functioning people perform in all of life’s contexts. Accepting the Chirelstein premise as to a blatantly false MLTN opinions, the taxpayers had on their intuition enough indicia of problems with the opinions. Certainly as to the critical representations the taxpayers made as to their own profit motive independent of tax benefits, the taxpayers themselves made those representations, and the taxpayers knew that representation was not truthful (again assuming the premise). It is no answer that the representations were usually scripted by the promoters; they were still the taxpayers’ representations and the taxpayers knew that they were making the representation. Indeed, beyond knowing that the shelter was too good to be true, those taxpayers had their own independent tax advisors -- including partners in name brand law firms -- from whom they received independent advice and paid for that independent advice.
Let's play out the variations that surely occurred between the taxpayer and his independent advisor regarding these shelters:
Would it make any difference if the taxpayer went to his own tax lawyer with a limited request -- I ask that you not advise me as to the merits of the shelter but instead only advise me as to my criminal and civil risks of getting into the shelter? I know what my potential benefit is ($20 million in this example), but want to understand my downside potential (which I would like to be only the promotion cost of $10 million plus the tax involved ($30 million). In this regard, I asked for and the promoters refused to give me a guaranteed return of the fees in the event I have to pay the tax. Could the taxpayer's lawyer give such penalty advice without some predicate assessment of the merits of the shelter which, as posited by Professor Chirelstein, would be blatantly illegal. I doubt it.
Bottom line, I question whether these taxpayers should be recovering damages from anybody. They made their bed and are not men enough to lie in it. They seek comfort from Professor Chirelstein who surely must know that without the taxpayers and the taxpayers' own independent advisors (including prominent law firms), the abusive shelters of which he complains would have gone nowhere. Why should one thief under Professor Chirelstein's analysis recover from another? Is Professor Chirelstein not enabling these culpable taxpayers by assisting them in their recovery for their own culpability?
Indeed, if Professor Chirelstein is correct that the shelters were blatantly and it logically follows that the taxpayers knew they were (whether on their own or with the assistance of their tax advisors), why does the Government not line them up for criminal prosecution. If the Government really wants to stop abusive shelters of the type Professor Chirelstein posits, there should be many taxpayers and taxpayer advisors (including from prominent law firms) who played and enabled, respectively, playing the blatantly illegal game.
I conclude by cautioning that I am not calling anyone a thief here; I merely accept for this discussion Professor Chirelstein's premise that the shelters were blatantly illegal and taking that where it I think it logically goes. I think Professor Chirelstein’s premise is faulty. Perhaps that is why the Government has not lined up the taxpayers and their advisors for criminal prosecution.
My take-off point for this discussion is a letter by Professor Marvin Chirelstein dated July 13, 2009 published in 124 Tax Notes 183 (July 13, 2009). Professor Chirelstein rails against “the astonishing role that law firms have played in justifying -- that is, helping to promote -- so many of these egregious and transparent tax shelter schemes.” He refers to the law firms whose partners issued the MLTN opinions used by the tax shelter promoters to sell the tax shelters. (I refer to these law firms as the “promoter law firms.”) For purposes of this response only , I accept Professor Chirelstein's premise that the MLTN opinions he refers to were blatantly false. That does not mean that I agree with that premise, but I only want to explore here the consequences if the premise were correct.
I wonder, though, why Professor Chirelstein limits his indictment to the promoter law firms. Indeed, Professor Chirelstein acknowledges that he assists those at the center of the shelters -- the taxpayers without whom the shelters would not have existed to recover against the promoter and promoter law firms. The taxpayers were generally sophisticated taxpayers who had all the objective indicia that the shelters were too good to be true. The too good to be true test is not a tax specific test, but a test that functioning people perform in all of life’s contexts. Accepting the Chirelstein premise as to a blatantly false MLTN opinions, the taxpayers had on their intuition enough indicia of problems with the opinions. Certainly as to the critical representations the taxpayers made as to their own profit motive independent of tax benefits, the taxpayers themselves made those representations, and the taxpayers knew that representation was not truthful (again assuming the premise). It is no answer that the representations were usually scripted by the promoters; they were still the taxpayers’ representations and the taxpayers knew that they were making the representation. Indeed, beyond knowing that the shelter was too good to be true, those taxpayers had their own independent tax advisors -- including partners in name brand law firms -- from whom they received independent advice and paid for that independent advice.
Let's play out the variations that surely occurred between the taxpayer and his independent advisor regarding these shelters:
Taxpayer: This seems too good to be true. By simply paying promotion costs of $20 million dollars, I can avoid $60 million in tax -- $40 million net in my pocket. Since it does seem too good to be true, I need to make sure that it is legal. I don't want to go to jail, and I don't want the ultimate real costs of this gambit to take away my profit (or worse) from entering the transaction.In either of these scenarios, the taxpayer did not rely upon the promoter law firm MLTN opinion and the taxpayer got exactly what he bargained for -- a known faulty opinion that he imagined gave him risk free access to the audit lottery. The taxpayer is certainly equally culpable as the promoter and the promoter law firm. The taxpayer paid the promoter and the promoter law firm to give him the potential for risk free access to the audit lottery.
Taxpayer's Lawyer's Alternative Responses:
Alternative #1
Taxpayer's Lawyer: I have spent -- and charged you handsomely for -- for several hours of my time to review the proposed promoter law firm shelter opinion. The shelter is blatantly illegal. I really could have spent less time, because it was so patently illegal, but I knew you wanted me to do some work and I knew you could afford my usual exorbitant rates. This shelter is nothing more than an illegal play of the audit lottery. If you are caught, you lose. Don't get in it. However, if despite my advice, you do play in it, the MLTN opinion from the promoter law firm is patently wrong, and I can give you no assurance that you will not face potential criminal and large civil penalties. You certainly cannot rely upon my advice as reasonable cause or justification for playing the audit lottery, whether in a civil or criminal context.
Analysis of Alternative #1. Under Professor Chirelstein's key premise (blatant illegality), this would appear to be the only advice that the taxpayer's lawyer could give. Of course, under Professor Chirelstein's analysis, if the taxpayer gets in the shelter anyway, he certainly is not relying on the promoter law firm's MLTN opinion except as he imagines it offers him some civil or criminal penalty protection despite his own lawyer's advice to the contrary.
Alternative #2
Taxpayer's Lawyer: I have spent -- and charged you handsomely for -- for several hours of my time to review the proposed promoter law firm shelter opinion. The shelter is blatantly illegal. I really could have spent less time, because it was so patently illegal, but I knew you wanted me to do some work and I knew you could afford my usual exorbitant rates. This shelter is nothing more than an illegal play of the audit lottery. If you are caught, you lose. Don't get in it. The shelter is illegal. Still, if you were to win the audit lottery, you stand to gain so much by it (the taxes hereby evaded), that you might find it acceptable on a cost / benefit analysis. Critical to this cost benefit analysis is that you assert to the IRS something that you and I know is untrue – that you really “relied” upon the MLTN opinion from the promoter law firm that you know is garbage. I do have to caution that, based on what you know, that assertion would be a criminal act in itself, but the IRS may have limited ability to determine whether you relied upon the MLTN opinion. There is some possibility that an IRS agent might believe that you really did rely upon that opinion; if so (despite the fact that you did not rely upon the opinion), you avoid both criminal potential and potentially draconian civil penalties. So, get in it and play the lottery if that is your desire. I can't tell you that I recommend that course of conduct for, to quote President Nixon in a not wholly dissimilar context, "that would be wrong;" but you are a big boy and can make your own choices.
Analysis of Alternative #2. Under Professor Chirelstein's key premise (blatant illegality), this advice (or any variation of it) is wrong. The Taxpayer's lawyer is simply signaling the taxpayer that the audit lottery may be right for him depending upon his tolerance for risk.
Would it make any difference if the taxpayer went to his own tax lawyer with a limited request -- I ask that you not advise me as to the merits of the shelter but instead only advise me as to my criminal and civil risks of getting into the shelter? I know what my potential benefit is ($20 million in this example), but want to understand my downside potential (which I would like to be only the promotion cost of $10 million plus the tax involved ($30 million). In this regard, I asked for and the promoters refused to give me a guaranteed return of the fees in the event I have to pay the tax. Could the taxpayer's lawyer give such penalty advice without some predicate assessment of the merits of the shelter which, as posited by Professor Chirelstein, would be blatantly illegal. I doubt it.
Bottom line, I question whether these taxpayers should be recovering damages from anybody. They made their bed and are not men enough to lie in it. They seek comfort from Professor Chirelstein who surely must know that without the taxpayers and the taxpayers' own independent advisors (including prominent law firms), the abusive shelters of which he complains would have gone nowhere. Why should one thief under Professor Chirelstein's analysis recover from another? Is Professor Chirelstein not enabling these culpable taxpayers by assisting them in their recovery for their own culpability?
Indeed, if Professor Chirelstein is correct that the shelters were blatantly and it logically follows that the taxpayers knew they were (whether on their own or with the assistance of their tax advisors), why does the Government not line them up for criminal prosecution. If the Government really wants to stop abusive shelters of the type Professor Chirelstein posits, there should be many taxpayers and taxpayer advisors (including from prominent law firms) who played and enabled, respectively, playing the blatantly illegal game.
I conclude by cautioning that I am not calling anyone a thief here; I merely accept for this discussion Professor Chirelstein's premise that the shelters were blatantly illegal and taking that where it I think it logically goes. I think Professor Chirelstein’s premise is faulty. Perhaps that is why the Government has not lined up the taxpayers and their advisors for criminal prosecution.
Friday, July 17, 2009
A Guilty Plea Too Soon!
I am in the process of reviewing David Rivkin's sentencing memorandum. I will have a subsequent post on Rivkin's memo and the Government's memo when I receive it but for now make only an initial comment as to the setting.
Many, perhaps most, readers will not recognize the name David Rivkin. Rivkin was one of the original 19 defendants on the superseding indictment in United States v. Stein arising from KPMG's tax shelter activity. The indictments included both KPMG personnel (15, including Rivkin and David Greenberg, although he was an outlier) and the outside implementers (attorney (1) and the principals (3) with the financial firm helping devise the strategies and implement the trading for them). (For previous posts on Stein, see here.) The superseding indictment charged all defendants with one count of conspiracy and 40 counts of tax evasion. Additional counts were charged to separate defendants. Focusing on the common conspiracy and 40 counts of tax evasion, under Pinkerton and Guidelines relevant conduct concepts, all defendants on these common counts were at risk of maximum Guidelines base offense levels which would place their sentencing levels in the 25+ year range with expected upward adjustments. Relatively early in the drawn out proceedings in the case, the Government made offers to some of the defendants that included a 2 5-year felony count plea (conspiracy and one count of evasion) with the assertion (untrue in retrospect) that it just won't get any better than that. All of those to whom this offer was made declined, except Rivkin. Therein lies the drama.
Many, perhaps most, readers will not recognize the name David Rivkin. Rivkin was one of the original 19 defendants on the superseding indictment in United States v. Stein arising from KPMG's tax shelter activity. The indictments included both KPMG personnel (15, including Rivkin and David Greenberg, although he was an outlier) and the outside implementers (attorney (1) and the principals (3) with the financial firm helping devise the strategies and implement the trading for them). (For previous posts on Stein, see here.) The superseding indictment charged all defendants with one count of conspiracy and 40 counts of tax evasion. Additional counts were charged to separate defendants. Focusing on the common conspiracy and 40 counts of tax evasion, under Pinkerton and Guidelines relevant conduct concepts, all defendants on these common counts were at risk of maximum Guidelines base offense levels which would place their sentencing levels in the 25+ year range with expected upward adjustments. Relatively early in the drawn out proceedings in the case, the Government made offers to some of the defendants that included a 2 5-year felony count plea (conspiracy and one count of evasion) with the assertion (untrue in retrospect) that it just won't get any better than that. All of those to whom this offer was made declined, except Rivkin. Therein lies the drama.
Wednesday, July 15, 2009
IRS Guys in the Trenches on the UBS Mess
My experience -- dated experience, I might add -- with DOJ Tax was that, as attorneys litigating in the federal district court, we relied heavily upon IRS agents and IRS attorneys assigned to assist us do our job. These agents and attorneys did critical work to make us better at what we were supposed to do, but rarely surfaced outside the confines of the case. Most tax cases gather no press because, well, the topics are boring to the average reader of news publications.
The Wall Street Journal has an interesting article here on an IRS agent and an IRS attorney who are in the thick of things in the UBS mess. Nothing earthshaking here in terms of adding to the criminal tax defense lawyer's bag of tricks or knowledge, but the article does provide an interesting sidelight on the personalities involved in this whole mess.
The Wall Street Journal has an interesting article here on an IRS agent and an IRS attorney who are in the thick of things in the UBS mess. Nothing earthshaking here in terms of adding to the criminal tax defense lawyer's bag of tricks or knowledge, but the article does provide an interesting sidelight on the personalities involved in this whole mess.
Incarceration - Making the Best of It
The Wall Street Journal Law Blog here has an interesting discussion with a prison consultant who advised Bernie Madoff on his life in prison. Criminal tax lawyers -- including tax crimes defense lawyers -- have to cover this topic with clients from time to time (hopefully not too often). In my Federal Tax Crimes book, I include a snippet from a prior WSJ Law blog here about Bill Lerach reporting to prison. That blog too is worth a read, but I note particularly the following from the article:
Alan Ellis, a Bay Area lawyer who specializes in “post-conviction work” advises clients to treat prison time as a sabbatical. “You can take those two years and add five years to your life physically, mentally, and spiritually,” he says.I will have to say that my limited anecdotal experience is that clients usually do not buy into this concept on the front end, but that some clients quickly determine to make the best use of their time. Of course, Madoff has more than two years to work with, but many tax crimes defendants have about that amount of time.
Tuesday, July 14, 2009
Get in Line Brother # 13 - Quickly for UBS Account Holders
The Wall Street Journal has an informative, albeit tentative, article here today on the status of the UBS - U.S. spat over foreign accounts. The newspapers and internet are still buzzing about the possibility of a settlement. The general expectation from those sources is that a settlement would require UBS to cough up a lot more names, although perhaps not near the 52,000 names that has been bandied about. I won't speculate about the possibility of a settlement or even the possibility that the U.S. will get many or any more names.
A takeway point from the WSJ article is that some practitioners believe that a UBS disclosure of names of persons not yet in the Voluntary Disclosure program will close off their opportunity to join the program. I quote the article:
So, the message is the steady drumbeat -- Get in Line Brother, but do so Quickly.
A takeway point from the WSJ article is that some practitioners believe that a UBS disclosure of names of persons not yet in the Voluntary Disclosure program will close off their opportunity to join the program. I quote the article:
If UBS discloses names and information as part of a settlement, the IRS will “generally not accept a voluntary disclosure from anyone on that list,” says Mr. Michel. Further, he adds, a settlement in this case “could come any day and be accompanied by disclosure.” So, unless the IRS gives everyone until Sept. 23, the expiration date for a settlement initiative now in place, the window for voluntary disclosures may be closing fast for many.The Mr. Michel quoted is a prominent attorney in this area of the law (see bio here).
So, the message is the steady drumbeat -- Get in Line Brother, but do so Quickly.
Sunday, July 12, 2009
UBS-US Settlement - Internet Buzz
The internet is buzzing again about a potential settlement in the UBS-US spat about U.S. person identities. See the WSJ article here. I know nothing about this new development (or variation of an old development). I will report more as I hear more.
Friday, July 10, 2009
Help from Readers - Quantifying the Evaded Tax (7/10/09)
I received an inquiry from a reader about a variation of the theme discussed in the Stadtmauer post here. Stadtmauer held that, for sentencing guideline calculations, tax loss from claiming a current deduction for an item that could properly be claimed in later years was the time value of money and not the entire tax loss in the year from claiming the entire deduction. The reader raised the issue of whether a similar analysis could apply to the predicate guilt or innocence phase in determining whether there is a "tax deficiency" which is an element of the crime of tax evasion. The reader and I would like some input from other readers of this blog.
Tax due and owing is an element of the crime of tax evasion. Courts (including the Supreme Court in Boulware and Sansone) have stated this element as requiring a deficiency. (I believe that the courts using the term deficiency did not mean to adopt the technical definition of deficiency in § 6211, but simply used deficiency as a short hand for tax due and owing element of the crime; I will use the term deficiency in this more generic sense.)
Stepping back from a technical analysis, what should the crime of tax evasion require for the deficiency element? To use a very simple example, suppose a taxpayer willfully claims a deduction in year 1 for a tax reduction of $100 that he is entitled to take in year 2 with a tax reduction of $100. Has that taxpayer evaded tax? If so, is the quantum of tax evaded the entire $100 wrongfully claimed in year 1 even though in real economic terms the tax evaded is zero and the larger "deficiency" is only the result of the artificial but necessary concept of an annual accounting system?
The actual context that the reader raised is illustrated as follows: Suppose a taxpayer willfully evaded $25,000 of alternative minimum tax (AMT) in year 1 but he is entitled to a dollar-for-dollar "minimum tax credit" (under Section 53) of $25,000 in year 2 (which carries forward indefinitely) which can be offset against his regular income tax liability. In a sense, the design of the AMT is to have the year 1 AMT payment serve as a prepayment of the year 2 tax. Same questions: Has a taxpayer who willfully failed to report the AMT obligation and thus did not pay it in year 1 evaded tax? If we conceptualize the AMT consistent with its actual design and effect, the AMT is simply a prepayment or deposit (if you will) toward a future tax liability designed to assure over the years that the taxpayer pays a minimum level of tax on his or her real economic income. What has been evaded is not the tax but the interim use of the money which is not evasion of tax but simply a borrowing from the Government without paying interest. Certainly any taxpayer “evading” payment of the AMT knows that he or she is not evading any tax liability, but solely borrowing from the Government without interest. If so, is the quantum of tax evaded the entire $ $25,000 of AMT even though in real economic terms the tax evaded is zero and the larger deficiency is only the result of the artificial but necessary concept of an annual accounting system?
Tax due and owing is an element of the crime of tax evasion. Courts (including the Supreme Court in Boulware and Sansone) have stated this element as requiring a deficiency. (I believe that the courts using the term deficiency did not mean to adopt the technical definition of deficiency in § 6211, but simply used deficiency as a short hand for tax due and owing element of the crime; I will use the term deficiency in this more generic sense.)
Stepping back from a technical analysis, what should the crime of tax evasion require for the deficiency element? To use a very simple example, suppose a taxpayer willfully claims a deduction in year 1 for a tax reduction of $100 that he is entitled to take in year 2 with a tax reduction of $100. Has that taxpayer evaded tax? If so, is the quantum of tax evaded the entire $100 wrongfully claimed in year 1 even though in real economic terms the tax evaded is zero and the larger "deficiency" is only the result of the artificial but necessary concept of an annual accounting system?
The actual context that the reader raised is illustrated as follows: Suppose a taxpayer willfully evaded $25,000 of alternative minimum tax (AMT) in year 1 but he is entitled to a dollar-for-dollar "minimum tax credit" (under Section 53) of $25,000 in year 2 (which carries forward indefinitely) which can be offset against his regular income tax liability. In a sense, the design of the AMT is to have the year 1 AMT payment serve as a prepayment of the year 2 tax. Same questions: Has a taxpayer who willfully failed to report the AMT obligation and thus did not pay it in year 1 evaded tax? If we conceptualize the AMT consistent with its actual design and effect, the AMT is simply a prepayment or deposit (if you will) toward a future tax liability designed to assure over the years that the taxpayer pays a minimum level of tax on his or her real economic income. What has been evaded is not the tax but the interim use of the money which is not evasion of tax but simply a borrowing from the Government without paying interest. Certainly any taxpayer “evading” payment of the AMT knows that he or she is not evading any tax liability, but solely borrowing from the Government without interest. If so, is the quantum of tax evaded the entire $ $25,000 of AMT even though in real economic terms the tax evaded is zero and the larger deficiency is only the result of the artificial but necessary concept of an annual accounting system?
Update on the Daugerdas indictment -- Guilty Plea by Defendant Greisman (BDO)
Robert S. Greisman, former DBO Seidman former partner, pleads guilty. See the USAO SDNY press release here. The plea is to three counts - (i) the (ubiquitous) defraud / Klein conspiracy (18 USC § 371), (ii) tax evasion (§ 7201), and (iii) tax obstruction (§ 7212). The parts of the press release that addresses the big issue - the lie - previously discussed in the blogs here are:
Wednesday, July 8, 2009
The UBS-U.S. Spat Over U.S. Taxpayer Information Continues
I do not use this blog as a daily rag of news events, but this one seems so significant that I am posting it. According to a New York Times article here, the Swiss Government threatens unilateral action to block any order of the U.S. district court in Florida with respect to the pending John Doe summons proceeding. The commotion continues. It seems that the Swiss Government is digging in to defend its franchise -- the right of its financial institutions to assist foreigners, including U.S. persons, to hide the cash from violation of the laws of their respective countries and to earn boatloads of money in doing so. I just wonder why other countries tolerate this type of behavior striking at the heart of the integrity of their internal processes? And, from the Swiss perspective, I would hope that the Swiss imagination of its reason for being is more, or better, than assisting foreign persons playing fast and loose with their own laws. Can the Swiss not make a living and contribution to the world community in other ways that do not require that they behave this way?
What's the difference between being raided by pirates and being raided by Switzerland? The easy answer before this latest dust-up was that you at least know when you are raided by pirates (their clothes, snarls, and eye patches give them away), but not by Switzerland (green eye-shades and stealth business trips are less noticeable). But, as they say, now we know. And they know we know. And, now the Swiss Government wants to participate in the type of conduct that, in criminal law terms, would be considered obstruction. Amazing!
What's the difference between being raided by pirates and being raided by Switzerland? The easy answer before this latest dust-up was that you at least know when you are raided by pirates (their clothes, snarls, and eye patches give them away), but not by Switzerland (green eye-shades and stealth business trips are less noticeable). But, as they say, now we know. And they know we know. And, now the Swiss Government wants to participate in the type of conduct that, in criminal law terms, would be considered obstruction. Amazing!
Monday, July 6, 2009
Houston Business & Tax Journal Symposium on Tax Evasion and White Collar Crime (7/6/09)
Houston Business and Tax Journal
Volume 9 Part 2
Caveat: I previously provided links on this page but HB&TJ moved the publications to HeinOnLine (a subscription service). I have posted my article and Appendix below to my SSRN page.
Volume 9 Part 2
Caveat: I previously provided links on this page but HB&TJ moved the publications to HeinOnLine (a subscription service). I have posted my article and Appendix below to my SSRN page.
The University of Houston Business and Tax Law Journal has published papers from a symposium on Tax Evasion as White Collar Crime.
Geraldine Szott Moohr, Introduction: Tax Evasion as White Collar Crime, 9 HOUS. BUS. & TAX L.J. 208 (2009). Professor Moohr offers a good introduction to the series. Readers might use her article as a good introduction to the other articles in order to determine where to focus their reading.
Stuart P. Green, What Is Wrong with Tax Evasion? 9 HOUS. BUS. & TAX L.J. 221 (2009) Professor . Professor Green is the author of a prominent book on White Collar Crime -- STUART P. GREEN, LYING, CHEATING AND STEALING: A MORAL THEORY OF WHITE COLLAR CRIME (2007). Professor Green treats tax evasion in his book and again in the article.
Robert E. Davis & Danny S. Ashby, Federal Criminal Tax Enforcement in 2009: The Role of Criminal Tax Enforcement in the Federal “Voluntary” Self-Assessment and Payment Tax System, 9 HOUS. BUS. & TAX L.J. 237 (2009).
John A. Townsend, Tax Obstruction Crimes: Is Making the IRS’s Job Harder Enough?, 9 HOUS. BUS. & TAX L.J. 260 (2009) Article available here; Appendix to article available here. Jack's bio is here.
Geraldine Szott Moohr, Introduction: Tax Evasion as White Collar Crime, 9 HOUS. BUS. & TAX L.J. 208 (2009). Professor Moohr offers a good introduction to the series. Readers might use her article as a good introduction to the other articles in order to determine where to focus their reading.
Stuart P. Green, What Is Wrong with Tax Evasion? 9 HOUS. BUS. & TAX L.J. 221 (2009) Professor . Professor Green is the author of a prominent book on White Collar Crime -- STUART P. GREEN, LYING, CHEATING AND STEALING: A MORAL THEORY OF WHITE COLLAR CRIME (2007). Professor Green treats tax evasion in his book and again in the article.
Robert E. Davis & Danny S. Ashby, Federal Criminal Tax Enforcement in 2009: The Role of Criminal Tax Enforcement in the Federal “Voluntary” Self-Assessment and Payment Tax System, 9 HOUS. BUS. & TAX L.J. 237 (2009).
John A. Townsend, Tax Obstruction Crimes: Is Making the IRS’s Job Harder Enough?, 9 HOUS. BUS. & TAX L.J. 260 (2009) Article available here; Appendix to article available here. Jack's bio is here.