Good Summary of IRS Offshore Account Initiative

Some readers may be interested in this post here by Duane Morris, a national law firm, on the status of the IRS' offshore account initiative. I think the material in the post is quite good and recommend it to my readers.

Those of us who practice in this area are currently facing a number of inquiries by UBS account holders (as well as other foreign account holders) who did not get into the program. The iniquiries are most acute for those UBS account holders who have been notified that their account information will be turned over to the IRS. The Duane Morris post discusses this circumstance at the end of the linked page, but I quote the relevant part below. I note that the context is the traditional IRS voluntary disclosure and the requirement that the voluntary disclosure be timely.

How can these restrictions on "timeliness" of a disclosure impact taxpayers with offshore accounts in the current environment? This question may present concerns in the context of the U.S.-Swiss Treaty Request. The request is directed at U.S. account holders, and in some cases account records have already been produced to the SFTA for a determination on whether the account information should be roduced in response to the Treaty Request. Some customers have been notified that their accounts appear to be within the scope of the Treaty Request. If a taxpayer receives this notification, is it too late to make a voluntary disclosure?

The IRS has provided no formal guidance on this issue. However, it appears that a disclosure after the receipt of the notice would be timely. The taxpayer recipient of the notice is not under examination or investigation; the IRS has not yet received any information on the taxpayer from the SFTA, the bank or any criminal enforcement agency; and there is no examination or investigation directly related to the specific taxpayer's noncompliance.8 Voluntary-disclosure coordinators have advised some practitioners that receipt of the notice does not make the disclosure untimely.

Therefore, voluntary disclosure is still available, but not under the same conditions as the OVDP. The primary benefit of "no referral for criminal prosecution" is still present. However, differences exist in the "traditional" disclosure and the now-expired OVDP disclosure:

• The days of "silent" or "stealth" voluntary disclosure appear to be over. Given the protocol for making a disclosure under the OVDP (i.e., direct contact with and disclosure to the IRS) taxpayers will be unable to find comfort in simply filing an amended return and paying the bill—as was frequently the practice before the OVDP was announced.

• The scope of the civil penalties that will be imposed under traditional voluntary disclosure are stiffer than those imposed by the OVDP. Traditional-disclosure taxpayers face civil-fraud penalties of as much as 75 percent of the additional tax liability versus 20 percent under the OVDP. FBAR penalties can also amount to as much as 50 percent of the account value for multiple years, as opposed to 20 percent of the highest value of the account for a single year. Experience shows however that negotiation of these penalties may still be possible.

JAT Comments.
1. I agree that the traditional voluntary disclosure program should still be available generally for foreign account holders.
2. I think also that, provided that there is prompt voluntary disclosure before the SFTA delivers up the names and provided that there are no most unusual wrinkles, the IRS will provide the benefit of the voluntary disclosure program - no criminal prosecution. As noted, of course, the expectation is that the civil penalties imposed (an income tax penalty and an FBAR or in lieu of FBAR) will be higher than available under the special program ending 10/15/09.
3. I speculate that the range of the FBAR or in lieu of FBAR penalty will be from 20% for the highest year (the amount available under the program) and 50% for the highest year (the amount that has been imposed in the criminal cases that have pled to date). In this regard, I wonder whether an IRS attempt to impose a larger penalty, particularly where the income is legal income, not subject to forfeiture, and the amount of income tax evaded is relatively low may have some potential for violating the Constitution's prohibition against excessive fines. See United States v. Bajakajian, 524 U.S. 321 (1998).
4. I wonder whether, unless the IRS makes some public announcement, the days of the quiet disclosure are over. See my earlier discussions of quiet disclosure here. I doubt that it is in the IRS or the country's interests (hopefully they are the same) to shut off (or discourage) quiet disclosures even with respect to foreign bank accounts. Of course, when the CI agent at the service center reviews the amended return reporting foreign bank account income or the delinquent or amended FBAR reporting or correcting reporting for foreign accounts, the process might turn noisy, but I would hope that the IRS would not start criminal prosecutions against those taxpayers who in good faith opened the kimono via amended returns and delinquent or amended FBARs. I just think the IRS (and the country) has more to lose than gain from that tactic. Of course, where the taxpayer has not been totally forthcoming on the amended 1040s or delinquent or amended FBARs or doesn't participate cooperatively in any investigation that may follow, the IRS may decide to launch a full bore criminal investigation and prosecution, but where squeaky clean full and fair quiet disclosures occur, I think it would be counterproductive to do that. But, hay, that's not my call and my skin is not in that game, so these are nothing more than speculations and perhaps idle ones at that.

Convicted UBS Banker May Get Whistleblower Reward

Here's some irony. The New York Times reports today here that Bradley Birkenfeld, a former UBS banker who was convicted as an enabler for U.S. tax cheats, may get a substantial whistleblower reward. (For my other posts on whistleblowers, see here) According to the post, he is seeking at least several billion dollars.

Relevant Conduct in Federal Tax Case Includes State Tax Loss

In United States v. McElroy ___ F.3d ___ (1st Cir. 2009) which I discussed previously here, the Court addressed the issue of whether state tax loss can be included in the tax loss for a federal tax crimes conviction. This issue is not particularly controversial, but students and practitioners in this area must be aware that this is a danger that lurks in criminal tax prosecutions. I include some of the court's discussion (footnote and case citations omitted):

We see no reason why state tax evasion, when proven to be sufficiently similar to the convicted crime, should not be included in the § 2T1.1 calculation of "tax loss." At the outset, we note that the four circuits that have considered this issue have held that state tax offenses may be included with state tax evasion in the total loss calculation. 16 The Fourth, Fifth and Sixth circuits, in particular, interpret U.S.S.G. § 1B1.3(a)(2) as allowing state tax evasion totals to be included with federal tax evasion amounts where there was a "common scheme or plan" and the same "course of conduct" for the state and federal offenses.

The plain language of Application Note 2 [to S.G. § 2T1.1] requires that a sentencing court factor relevant conduct into a total tax loss calculation. Thus, contrary to the defendants' suggestion, no ambiguity exists as to whether relevant conduct is to be considered in calculating § 2T1.1 tax losses.

In determining whether state tax evasion constitutes relevant conduct, we look to the commentary to § 1B1.3. Section 1B1.3 provides specific factors to be considered in determining whether certain conduct was part of a "common scheme or plan" or the "same course of conduct." "For two or more offenses to constitute part of a common scheme or plan, they must be substantially connected to each other by at least one common factor, such as common victims, common accomplices, common purpose, or similar modus operandi." See U.S.S.G. § 1B1.3 cmt. n.9. "Factors that are appropriate to the determination of whether offenses are sufficiently connected or related to each other to be considered as part of the same course of conduct include the degree of similarity of the offenses, the regularity (repetitions) of the offenses, and the time interval between the offenses." Id.

Summary Witness, Exhibits and Nonexhibits

In United States v. McElroy, ___ F.3d ___ (1st Cir. 2009), the Court discusses summary evidence and charts. I am interested in this topic because of my participation in the massive KPMG related criminal trial, billed as the largest tax fraud case in history. The Government prosecuted 19 defendants involved in the creation and marketing of allegedly abusive tax shelters to many taxpayers over several years. For discovery, the prosecutors produced "over 22 million documents regarding the doings of scores of people." United States v. Stein, 541 F.3d 130, 157 (2d Cir. 2008). Before the court dismissed 13 of the defendants, the Government listed for trial 1987 “marked exhibits” with 39,000 pages and 3000+ so-called “compilation exhibits” with 89,000 pages. The prosecutors described the compilation exhibits as “tax returns, closing agreements and revenue agent reports relating to these [tax shelter] transactions." It was not entirely clear that the prosecutors were going to have those unmarked compilation exhibits formally admitted into evidence en masse (logistically, how exactly do you do that if they are not marked?). It was clear, though, that the prosecutors were going to offer a summary witness to testify as to the compilation exhibits but not submit the compilation exhibits to the jury. I think the principal focus of the summary testimony and charts (presumably there would be one or more) would have been to establish the tax due and owing element of the tax evasion charges in the case, as well as the object of the offense conspiracy charge and perhaps even the object of the Klein conspiracy charge. Before the pretrial skirmishing focused on evidentiary problems inherent in what the Government proposed to do, my client and 12 others were dismissed, so I am not sure what happened in the trial (4 eventually went to trial).

A Lesson on the Crime-Fraud Exception to Attorney-Client Privilege

On November 20, the Fourth Circuit entered an unpublished decision in United States v. Under Seal & John Doe, 2009 U.S. App. LEXIS 25523 (4th Cir. 2009). The issue was whether the district court properly applied the crime fraud exception to the attorney client privilege, thus permitting the Government to subpoena an attorney's files. The attorney is referred to in the opinion as Counsel.

Such holdings are fact driven, and these facts quoted succincntly by the Fourth Circuit suggest the conclusion:

In 1997, the president of the Corporation established another entity in the Isle of Man ("the Isle of Man Entity"). Two of the Corporation's three directors, one of which is the Corporation's president, were directors of a corporation also established in the Isle of Man ("the Isle of Man Corporation"), which is the trustee of the Isle of Man Entity. Between 1997 and 2000, the Corporation transferred $ 22,523,478 of its assets to the Isle of Man Entity. In 2000, the Corporation dissolved after filing Articles of Termination and Articles of Dissolution with the proper state authorities.

Prior to the Corporation's dissolution and continuing thereafter, the Internal Revenue Service (IRS) conducted an audit of the Corporation. During the audit, the Corporation's president [*3] told the IRS that the transfers from the Corporation to the Isle of Man Entity were made pursuant to opinion letters from several law firms that these transfers were legal. One such letter, which was written by Counsel, was provided to the IRS. Counsel's letter stated that a qualified United States charitable corporation can legally make a grant to a charitable organization in another country so long as the funds are used for charitable purposes. The IRS audit of the Corporation concluded with a finding of "no issue raised."

[I hope you see from just the quoted cryptic summary that something is rotten.]

Back to the case, a grand jury investigation started, and a grand jury subpoena issued. After some sparring and an earlier appeal and remand, the district court held that the Government had established the applicability of the crime fraud exception. The district court based its holding on the ground that the U.S. charitable corporation's return was incorrect, thus potentially violating § 7206(1), in showing no relationship between the U.S. charitable corporation and the Isle of Man charitable corporation.

Counsel appealed, asserting that the statement on the U.S. corporation's return was technically correct, thus, a la Pirro, avoiding the shoals of § 7206(1), because the question only asked about relationship between the U.S. corporation and an individual. (There was of course an individual or individuals behind the lifeless and breathless, wholly fictional (from a legal perspective) Isle of Man corporation, but let's not get hung up on such technicalities.)

The Fourth Circuit summarized the exception and the showings required to invoke it:

The invocation of the crime-fraud exception requires a prima facie showing that "(1) the client was engaged in or planning a criminal or fraudulent scheme when he sought the advice of counsel to further the scheme, and (2) the documents containing the privileged materials bear a close relationship to the client's existing or future scheme to commit a crime or fraud." In re Grand Jury Proceedings # 5, 401 F.3d at 251 (citations omitted). A party invoking the crime-fraud exception can satisfy the first prong of this test by making a prima facie showing of evidence, which, if accepted by the trier of fact, establishes the elements of an ongoing or prospective violation of the law. Id. The second prong of this test is satisfied with a showing of a close relationship between the withheld communications and the alleged violation. Id. Once a sufficient showing has been made, the attorney-client privilege ceases to protect any of the communications related to the alleged violation. In re Grand Jury Subpoena, 419 F.3d 329, 345 (5th Cir. 2005) (citing In re Sealed Case, 676 F.2d 793, 812 n.74, 219 U.S. App. D.C. 195 (D.C. Cir. 1982)).

The Fourth Circuit then reviewed the district court's application of the exception, gliding past the district court's invocation of the potential for violating § 7206(1) and moving to what it perceived was more solid ground in a potential defraud / Klein conspiracy violation under 18 U.S.C. § 371. The court said:

In its ex parte submission, the Government has provided the court with prima facie evidence that the Corporation, its principals and the Isle of Man Entity had an agreement to defraud the United States Government in contravention of § 371. The Government's submission provides prima facie evidence that the Corporation and the Isle of Man Entity entered an agreement to defraud the United States both by concealing the ultimate disposition of the Corporation's funds through the transfer of assets overseas and by using the Corporation's tax-exempt status to circumvent the collection of taxes on the profits of individuals. Such a purpose falls directly within the confines of § 371. The transfer of $ 22,523,478 to the Isle of Man Entity would be an overt act in furtherance of this purpose.

The Fourth Circuit then closed or tightened the noose by holding that the close relationship to that potential violation had been shown.

Things do not look good for the attorney.

Swiss FTA Begins Sending UBS Depositor Names to IRS

As expected, the Swiss Federal Tax Administration has started the disclosure of information and documents to the IRS. See here.

Reminder on Reciprocal Discovery Rule

In United States v. Hardy, ___ F.3d ___ (6th Cir. 2009), the defendant was convicted of twelve counts of bank fraud and five counts of evasion arising out of an embezzlement from her employer. On appeal, the defendant asserted that the court had improperly denied her the right to use evidence in her defense. The circumstances were that the defendant had the evidence but delayed providing it to the Government under the reciprocal discovery rule in FRCrP 16 which gives the district court some discretion in fashioning the remedy for violation of that rule.

The trial judge imposed the most severe trial sanction -- exclusion of the evidence -- because defense counsel had no adequate explanation for the delay in disclosing. The court of appeals, as had the trial judge, made some stern statements -- e.g., "Defendant and her counsel had access to the copies of the check stubs at least one week prior to trial, but wilfully and purposefully chose not to disclose those documents to the government, in clear violation of Fed. R. Crim. P. 16(c)." The court rejected defendant's argument that, until it had a trial subpoena return for the originals, it did not know that it was going to introduce the copies into evidence and therefore had no obligation to turn over the documents. The court responded:

Disclosure under Rule 16 does not depend on the admissibility of the evidence at trial, particularly because decisions on admissibility of evidence are entirely within the province of the court, not the parties, so the parties would not be able to accurately determine prior to trial whether certain evidence would be admissible without a ruling from the court. If the defendant has control over a document, as Defendant did in this case, and plans to use that document in the defendant's case-in-chief, as Defendant attempted to do in this case, and the defendant has already received discovery from the government, then the defendant is required to disclose the document to the government as soon as the defendant learns of it, subject only to the narrow exceptions in Rule 16, none of which is applicable here. Fed. R. Crim. P. 16. Defendant clearly chose not to comply with Rule 16, and thus suffered the consequences provided for in the Rule.

The Court also had some interesting statements which, taken out of the whole context, might be troublesome. For example, quoting an earlier case, the Court said [a]lthough the right of a defendant to present exculpatory evidence is fundamental, it is not absolute." The Court did go through some interests of justice qualification, but the statement itself is a tough one.

The Court ended its discussion with its assessment that the defendant would have been found guilty anyway (the old harmless error dodge). "The government's case against Defendant was overwhelming and at trial Defendant admitted all of the elements of each offense." Even if that were true, I don't know that it justifies making about what the jury would have done had it had all the evidence relevant to a defense.

There may be two casualties in this case -- the client in the case in chief who was convicted if the evidence might have led to acquittal and the lawyer in the aftermath of the case unless the lawyer can prove that the client participated in the decision to violate the reciprocal discovery rule.

Save-A-Patriot Did Not Save a Doctor

Yesterday, the Fifth Circuit decided a case, United States v. Miller, 588 F.3d 897 (5th Cir. 2009), here, sustaining a medical doctor's conviction for tax evasion, § 7201. The issues decided are not novel, but should reinforce what the practitioner or student probably already knows. The key points are:

1. A misdemeanor failure to file case became a felony evasion case because, in addition to failure to file, there were significant affirmative attempts to evade. The Court of Appeals said in addressing the lower court’s denial of the motion for acquittal:

The evidence at trial sufficiently demonstrates Miller's evasion. It is undisputed that he failed to file tax returns for tax years 2000 and 2001, as charged in the indictment. Further, Miller acted affirmatively when he converted payments made to the clinic to cash, money orders, and cashier's checks. Witnesses testified that Miller's practice of converting payments made to the clinic made it difficult for the IRS to determine his income. These affirmative acts had the "likely effect of mislead[ing]" the IRS, and precluded the agency from effectively assessing his tax liability. Spies, 317 U.S. at 399; Robinson, 974 F.2d at 577. Moreover, Wolff testified that the Medical Manager software on Miller's clinic's computers included double sets of billing records. Viewing the evidence in the light most favorable to the verdict, the affirmative acts of keeping double records and conversion, coupled with the failure to file, support a finding of evasion.

2. The doctor joined a tax protestor / defier movement, called "Save-A-Patriot" to give his evasion some semblance of legitimacy, at least in giving his evasion the opportunity to assert the Cheek defense. He was the sole defense witness, testifying

that in 1995, after being audited by the IRS, he joined Save-A-Patriot. He also studied materials provided by Save-A-Patriot. Based on his study of the materials and of the Internal Revenue Code, he believed that the income tax system was voluntary and that he was not required to pay taxes, though he had filed tax returns in the past.

It's All About Interpretation

This is a bit off topic, but I wanted to say something about it anyway. I just picked up this article, Mitchell N. Berman, Originalism Is Bunk, 84 N.Y.U. L. REV. 1 (2009), that I think is quite good on interpretation. There is first summary here and then the article itself here.

The debate over the scope and approach to interpretation echoes my view of Biblical interpretation (it's all about the text and interpretation, hardly a radical insight). How do you determine originalism -- a feat that for much of the Hebrew Bible is nigh impossible, and very difficult for the Christian Bible and, as I understand it, the Koran? Jim Kugel makes the point that, well, at least for much of the Hebrew Bible, we really can't know what the author of the ancient cryptic text meant; the relevant intent is not the original author(s) but the intent -- or interpretation -- of the community when the text was adopted as canonical. (You can listen to a variation on that theme in Kugel's talk, Can the Torah Make It's Peace with Modern Biblical Scholarship, at JTS here which I highly recommend.) In the case of the Hebrew Bible, the canonization process took a couple of hundred years a couple of thousand years ago, but long after much of the text was written. By that time, the community had interpreted the text in ways that were far from the original author(s) intention. Song of Songs - Song of Solomon in the Christian Bible -- is Kugel's classic proof text where a love, even bawdy, text about very human lovers was re-imagined a text of love between God and humanity. There are many other less dramatic examples. A similar process happened with the Christian Bible; I don't know enough about the Koran, but I do understand that all of these canonical texts can be interpreted in a bad way or a good way and it is up to the community to take the high road. See Robert Wright, The Evolution of God (2009), The process of interpretation that takes the high road permits a progressive re-imagination of the text for the needs of the ongoing community. The community cannot and should not be wed irrevocably to any original intention either of the authors or the community at canonization even when that can be discerned, but should be controlled by the needs of the ongoing community. After all, we have long since reinterpreted and essentially re-written the proscription of eye for an eye. And that process continues as we rethink attitudes in the ancient text that are no longer relevant to and, in some sense, destructive to the ongoing moral imagination of the community. I guess all of this to say is that it is all about interpretation which must interpret any text to meet the needs of the ongoing community, guided but not controlled by the original intent of whatever referrant point you want. I think that is Professor Berman's point, although he states it and develops it far more elegantly than I do.

Is the Criminal Statute of Limitations Suspended under the Wartime Suspension Act? (11/20/09)

There are rumors that the government in a tax shelter case is seeking to suspend the criminal statute of limitations under the "wartime suspension act", 18 USC Section 3287. The text of the statute is:

When the United States is at war or Congress has enacted a specific authorization for the use of the Armed Forces, as described in section 5(b) of the War Powers Resolution (50 U.S.C. 1544(b)), the running of any statute of limitations applicable to any offense (1) involving fraud or attempted fraud against the United States or any agency thereof in any manner, whether by conspiracy or not, or (2) committed in connection with the acquisition, care, handling, custody, control or disposition of any real or personal property of the United States, or (3) committed in connection with the negotiation, procurement, award, performance, payment for, interim financing, cancelation, or other termination or settlement, of any contract, subcontract, or purchase order which is connected with or related to the prosecution of the war or directly connected with or related to the authorized use of the Armed Forces, or with any disposition of termination inventory by any war contractor or Government agency, shall be suspended until 5 years after the termination of hostilities as proclaimed by a Presidential proclamation, with notice to Congress, or by a concurrent resolution of Congress.

Definitions of terms in section 103 of Title 41 shall apply to similar terms used in this section. For purposes of applying such definitions in this section, the term "war" includes a specific authorization for the use of the Armed Forces, as described in section 5(b) of the War Powers Resolution (50 U.S.C. 1544(b)).

I have highlighted the portion upon which the Government is apparently relying.

I had not heard that the Government was doing that and have not researched the issue. The concern, of course, is that the statute of limitations is suspended on tax crimes as well as other crimes involving fraud or attempted fraud against the U.S. If any reader has any thoughts on this, I would appreciate hearing about it either as a comment to the blog or by separate email to jack@tjtaxlaw.com. I will post follow-through information as I learn it.

Update on 1/30/10:  See Erin M. Brown, Note: The Wartime Suspension of Limitations Act, the Wartime Enforcement of Fraud Act, and the War on Terror, 85 Notre Dame L. Rev. 313 (2009), here.  I think that the analysis and sources in the article will give ammunitiion to those who want to argue that plain vanilla tax crimes unrelated to the war effort should not be within the scope of 18 USC Section 3287.

Audit Avoidance as Tax Crimes Issue (11/20/09)

Last night, I had my annual party for my current tax procedure class. We had a nice dinner with appropriate libations. We then settled into the living room and had a skit, in which members of the class played the roles of lawyer and family members in developing an aggressive tax plan for gifting stock in a close held corporation to a daughter with significant discounts. A key part of the plan as developed included how best to structure and present it on the gift tax returns so as to avoid audit of the valuation with the discounts. This type of planning is often called audit avoidance.

I thought readers of this blog might be interested in the materials for the skit as well as how two thoughtful lawyers discuss the issues raised by the skit. The articles are David M. Richardson, Audit Avoidance via Intent Modification -- Is Fred Corneel onto Something ... or Not, 2001 TNT 131-93; and Frederic G. Corneel, Audit Avoidance: A Response to David Richardson, 2001 TNT 131-91. Readers may find those articles in the materials for my class here. (Look for the link to Townsend Tax Procedure Materials (Fall 2008); the articles are at the end of these materials.) I also discuss these articles in my recent article John A. Townsend, Tax Obstruction Crimes: Is Making the IRS’s Job Harder Enough?, 9 HOUS. BUS. & TAX L.J. 260 (2009), here, at pp. 267 - 273. I think the articles by Richardson and Corneel are excellent presentations of the ethical issues in audit avoidance which, in its broad outlines, is a common feature of tax practice. And, although not the focus, their presentations do raise criminal concerns that should be considered by tax practitioners.

Enjoy!

Tax Perjury, § 7206(1), as Aggravated Felony for Immigration Purposes

This morning a petition for certiorari caught my eye in reviewing Tax Notes Today and think it is an issue that Tax Crimes practitioners and students need to be aware of. I checked the Supreme Court's docket here and find that the case will go to conference on November 24, 2009. I don't have a link to the petition itself, but here is the link to the Solicitor General's brief in opposition to the petition. The brief fairly presents the issues and is a good background discussion, although from an advocate's perspective. The Solicitor General states the issues as:

QUESTIONS PRESENTED

In 8 U.S.C. 1101(a)(43)(M), the term “aggravated felony” is defined as including an offense that—

(i) involves fraud or deceit in which the loss to the victim or victims exceeds $10,000; or

(ii) is described in section 7201 of title 26 (relating to tax evasion) in which the revenue loss to the Government exceeds $10,000.

The questions presented are:

1. Whether a conviction for a felony tax offense other than tax evasion in violation of 26 U.S.C. 7201 qualifies as an aggravated felony under 8 U.S.C. 1101(a)(43)(M)(i), where the offense involves fraud or deceit in which the loss to the victim or victims exceeds $10,000.

2. Whether a conviction for filing a false tax return qualifies as an aggravated felony under 8 U.S.C. 1101(a)(43)(M)(i), where petitioner did not dispute a finding in the pre-sentence investigation report that petitioner owed $75,982 in additional taxes during the year in which the false tax return was filed.

JAT Comments:

The first issue is one that most practitioners will face at some point in a career where tax crimes is a significant part of their practice. I cover this point in my book and just cut and past that discussion here (without the footnotes):

The second subpart [of the statute quoted above] thus makes clear that a conviction under § 7201 (tax evasion) is an aggravated felony. The question arises, however, whether other tax crimes that, in general parlance, might be viewed to include fraud or deceit are covered in the first subpart. For example, as we have noted, the Government often charges § 7206(1) (tax perjury) in a case where it could have charged tax evasion, and then the sentencing phase will require proof of a tax loss number that is the number the taxpayer fraudulently sought to avoid reporting or paying. ICE, the government agency charged with administering the immigration laws, takes the position that § 7206(1) may constitute an aggravated felony as defined in the first subpart. There is currently a split in the circuits as to whether tax felonies other than evasion (such as § 7206(1) ) can constitute an aggravated felony.

Finally, a note of caution for practitioners. The attorney should advise or obtain another qualified attorney to advise the defendant of the collateral consequences, including the immigration consequences, of the charges and a plea to the charges if the defendant considers making a plea (as will usually be the case). Certainly, at least as to this immigration collateral consequence, courts have noted that the attorney has a professional duty to make sure the client is advised. So there will be a malpractice issue involved where the attorney fails to do so. In terms of a defendant’s attack on a conviction based in ineffective assistance of counsel, the courts have historically made a distinction between the attorney who failed to advise on immigration consequences and an attorney who gives erroneous advice on the immigration consequences. Failure to advise alone is not ineffective assistance of counsel, but erroneous advice is ineffective assistance of counsel. However, courts have at least suggested that they may be willing to reconsider this historical distinction because, in view of the attorney’s duty to the client, it makes no sense; if the courts do reconsider, I predict that they will hold that failure to advise is ineffective assistance of counsel also. Cover this point with your clients.

I should note that the conflict among the circuits is an interesting conflict for criminal tax practitioners. The court of appeals' decision that held that § 7206(1) is not an aggravated felony is a Third Circuit decision in Lee v. Ashcroft, 368 F.3d 218 (3d Cir. 2004). The majority decision in Lee was written by Judge Lou Oberdorfer, a D.C. District Judge, sitting by designation. Judge Oberdorfer was formerly AAG in charge of the Tax Division, and thus has considerable background in interpreting and applying the tax laws upon which the immigration issue turned. The dissent in Lee was written by Judge, now Supreme Court Justice, Alito. Maybe Justice Alito at least will have some interest in this issue and could influence the decision as to whether to accept certiorari. I have a lot of respect for Judge Oberdorfer and think he has the better position, but we will see.

The second issue is also one worthy of the practitioners' attention. The issue is whether the tax loss amount found by the sentencing judge (sometimes by inference if the defendant fails to object to that part of the Probation Office's PSR) is preclusive in the immigration proceeding. The Government must prove the amount in the immigration proceeding by clear and convincing proof, rather than just a preponderance. By contrast, in the sentencing phase the proof the tax loss is generally thought to be by a preponderance, although there may be some dispute about that generally or specifically if the tax loss dramatically increases the sentence. At any rate, it seems to me that the petitioner has the better part of this issue. I have asserted in a publication that the findings in the sentencing proceedings should be preclusive in the civil tax case following criminal conviction (John A. Townsend, Collateral Estoppel in Civil Cases Following Criminal Convictions, 2005 TNT 4-28) but in both of those proceedings (the criminal sentencing and the civil tax case) the findings are by a preponderance of the evidence with the outcome affected by the burden of proof only where the finder is in equipoise which is rare enough to be negligible. But, in the immigration proceeding, the required finding is by clear and convincing evidence. I am troubled that the use of the PSR in that context where the sentencing judge makes no explicit findings, and certainly would not have in any case required clear and convincing evidence on the state of the law now.

United States and Swiss Confederation Release Criteria for Disclosing Names (11/18/09)

This blog was updated on November 18, 2009

The criteria for the Swiss and UBS to apply in disclosing accounts held by U.S. persons is set forth in a document released yesterday. The criteria document is here; a Swiss Government chart of the Agreement titled "The Annex to the UBS Agreement at a Glance is here. The criteria document is an annex to an agreement makes the IRS request under the double tax treaty and interprets the Swiss obligation under the treaty broader than the Swiss have applied it in the past. That agreement is here. Accordingly, I think it is helpful to first summarize the key points of the agreement that might be relevant to the criteria and then summarize the annex which sets forth the criteria.

The key points of the agreement from my perspective for the present discussion of criteria are:

1. The agreement is the IRS request under the double tax treaty for information and documents from UBS, and the Swiss Confederation is required to process the request under the criteria set forth in the Annex. (Article 1.) However, in a declarations page attached to the agreement, the following is agreed:

Swiss Confederation declares that it will be prepared to review and process additional requests for information by the IRS under Article 26 of the existing Tax Treaty if they are based on a pattern of facts and circumstances that are equivalent to those of the UBS AG case.

I think this means that a similar request can be made with respect to other Swiss banks.

2. The parties agree to signing a new protocol to the existing double tax treaty. (Article 2.) The protocol is here. The following appears to be the key provision (Article 3 amending Article 26 of the double tax treaty):

5. In no case shall the provisions of paragraph 3 be construed to permit a Contracting State to decline to supply information solely because the information is held by a bank, other financial institution, nominee or person acting in an agency or a fiduciary capacity or because it relates to ownership interests in a person. In order to obtain such information, the tax authorities of the requested Contracting State, if necessary to comply with its obligations under this paragraph, shall have the power to enforce the disclosure of information covered by this paragraph, notwithstanding paragraph 3 or any contrary provisions in its domestic laws.

New Federal Task Force for Financial Crimes

Today's news includes reports that the Federal Government will have yet another task force, this time to investigate and prosecute the financial crimes that led to the recent and ongoing economic disaster. Here is the Main Justice report.

The good news for tax crimes afficionados is that there is likely to be a lot of tax crimes in the milieu.

Swiss Release Criteria for Disclosing Names

The reports are coming in that the Swiss have released the criteria for disclosing the approximately 4,450 names related to UBS accounts. I provide links below for some news reports that include reports as to the selection criteria. As I parse these reports, the criteria apply for the period 2001-2008 and are:

1. Accounts in the name of offshore companies controlled by U.S. persons. I presume this includes any type of entities, such as LLCs, trusts, etc.). There seem to be no amount limits to this type of disclosure.

2. Accounts in the names of U.S. persons (any one of the following criteria may result in disclosure)

(a) with more than 1,000,000 Swiss francs (US $ equivalent varies depending upon exchange rate, but for example it is reported that this amount was USD $600,000 in 2001 and USD $900,000 in 2008).

(b) with more than 250,000 Swiss francs if they involve "fraudulent behavior" (such as falsifying documents). It is unclear what showing of fraudulent behavior is required and how the Swiss might know of it, but perhaps the inquiry will be whether there is some indication from the financial institution's files as to fraudulent behavior; in other words, it is not clear whether there is some affirmative requirement to do more than review the files for the indication of the conduct).

(c) with annual earnings of more than 100,000 francs.

The first 400 will be selected by end of the week. I am not sure exactly what selection means. I do know that a number of account owners have already received letters that indicate that their accounts were on the list.

These criteria seem to apply -- at least for now -- only to UBS.

I do plan to update this blog as clarifying information comes to me.

NYT Article

WSJ Article

See also related DOJ Tax Announcement crowing over the release, although not announcing the criteria.

Lenient Sentencing in White Collar Crime / Tax Crime Cases (11/17/09)

I have previously noted in this blog the lenient sentencing in the offshore financial account sentences to date (see here). The concept of lenient sentencing is a relative concept; lenient means relative to the Guidelines Sentence -- i.e., downward departures and variances from the Guidelines. Booker and its progeny seem to have encouraged lenient sentencing. Sentencing judges realize that they have considerable leeway to fashion an appropriate sentence and often find some reason, particularly in white collar crime cases (of which tax crimes are a subset), to depart downwards, sometimes significantly.

In a case decided yesterday, the Eleventh Circuit reminded sentencing judges (at least those in the Eleventh Circuit) that their discretion is not boundless in white collar crime cases. In United States v. Livesay, ___ F.3d ___ (11th Cir. 2009), the defendant was a player in the "massive accounting fraud conspiracy at Healthsouth Corporation." He participated in "an illegal scheme to artificially inflate HealthSouth’s earnings and to falsely report HealthSouth’s financial condition is at the heart of the fraud." Basically, he would manipulate various financial accounts via fraudulent entries to meet senior Healthsouth officials' earnings goals and the results of these manipulations were reported in public documents filed with the SEC.

Livesay pled to three counts: (i) conspiracy to commit wire fraud, securities fraud, and falsifying books and records; (ii) falsely certifying financial information filed with the SEC; and (iii) a forfeiture count related to count one. The Government's bargain in the plea agreement was (i) to recommend the 3 level reduction for acceptance of responsibility; (ii) recommend that he be sentenced at the low end of the Guidelines range; and (iii) recommend a 5K1 departure.

The sentencing pursuant to the plea then commenced a saga involving three appeals in total in which the sentencing judges (on the third time, the original sentencing judge recused himself) were fixed upon a sentence of probation and the Eleventh Circuit saw it differently and sufficiently differently to reverse. I will let you read the short summary of that saga in the opinion.

In any event, the Guidelines calculations all along was a range of 78 to 97 months (note that this is after the acceptance of responsibility reduction but before the 5K1 departure). The sentence on this third appeal was 5 years probation. The Eleventh Circuit reversed because it found the sentence unreasonable. In a prior opinion involving another defendant from the same conspiracy, the Eleventh Circuit had said that sentencing in white collar crime cases serves important deterrence goals and that "[a] sentence of probation for a high-ranking officer in a corporation where over a billion dollars of fraud was perpetrated on an unsuspecting work force and investing public is not reasonable." The Livesay court emphasized the deterrence factor in white collar crimes and has some good language which I do not cherry pick because the opinion is short and pungent and should be read.

I think this reaction of appellate judges to the deterrence factor is a trend that may well play out in sentencing for tax crimes, which I have noted are merely a subset of white collar crime. Indeed, the Guidelines raise deterrence as a principal factor in tax crimes sentencing. The introductory commentary at S.G. 2T1 says:

The criminal tax laws are designed to protect the public interest in preserving the integrity of the nation’s tax system. Criminal tax prosecutions serve to punish the violator and promote respect for the tax laws. Because of the limited number of criminal tax prosecutions relative to the estimated incidence of such violations, deterring others from violating the tax laws is a primary consideration underlying these guidelines. Recognition that the sentence for a criminal tax case will be commensurate with the gravity of the offense should act as a deterrent to would-be violators.

Of course, if the Government does not appeal a downward variance that does not serve the deterrence purpose, then the sentencing judges do have free rein. Presumably, the Government is not appealing the lenient variance sentences in the offshore financial account pleas. But those who have cases in the pipeline (or, for that matter, in the future) should be aware of this appellate trend to view such generous downward variances with skepticism. The trend, if it continues, will not go unnoticed by sentencing judges.

Tax Shelters, Economic Substance and Tax Crimes (11/13/09)

On November 10, the Fifth Circuit decided Enbridge Energy Company, Inc. v. United States, 2009 U.S. App. LEXIS 24713 (5th Cir. 2009). The guts of the holding was that (i) the district court properly denied the tax benefits from a common so-called midco transaction because of lack of economic substance and (ii) the district court properly imposed the accuracy related penalty because the transaction lacked substantial authority and, in any event, the transaction was a tax shelter for which even the presence of substantial authority could avoid the penalty.

The decision is per curiam and unpublished (meaning that it's precedential status is limited), nevertheless I think the opinion is interesting – and perhaps cautionary – because of its tenor and relationship to some of my other blogs on economic substance. I have questioned the use of the economic substance concept in criminal cases, but the government and courts in criminal cases do use it.

Focusing on Enbridge, the Fifth Circuit and the district court viewed the structure employed to avoid tax as lacking economic substance. The question I ask my readers is whether the Enbridge gambit should or at least could have been a criminal case? Wouldn't a few criminal cases with this genre of allegedly abusive tax shelters go a long way toward getting at least the major players (taxpayers and their enablers) out of the hokey tax shelter market?

DC Circuit Discusses Cost / Benefit Analysis for Tax Evasion (11/9/09)

I have re-read an earlier case that I think may be interesting to readers of this blog. The case is Mayer Brown LLP v. IRS, 562 F.3d 1190 (D.C. Cir. 2009), here.

The issue in the case was whether the Mayer Brown ("Mayer Brown") could use FOIA to get information about settlement practices for LILO transactions. (I should note parenthetically that Mayer Brown scored a major, if perhaps temporary, victory on a LILO transaction in Consolidated Edison Company of New York v. United States, 2009 U.S. Claims LEXIS 335 (10/21/09).) The IRS asserted that FOIA exemption 7(E) applied because the information risked circumvention of the law. The statute for the exemption says the exemption applies if " disclosure could reasonably be expected to risk circumvention of the law."

The Court concluded that this is broad language covering not only the risk of future violations but the risk of evading punishment after a violation. In the balance of this email, I quote extensively from the court's analysis because it discusses the types of cost / benefit analysis that taxpayers may enter in deciding whether to commit a tax crime (or just an egregious civil tax violation of law) or continue to cover one up.

B. 

Tax evasion (like many crimes, to varying degrees) involves a cost-benefit analysis on the part of the law-breaker. Information about acceptable settlement ranges quite clearly affects the cost-benefit analysis of potential evaders because it informs their economic calculus. Some potential evaders, upon learning the range of settlement percentages, may decide that the range is low enough to make evasion an appealing gamble. In this way, disclosure of the information can create an incentive for increased evasion. For example, suppose hypothetically the requested information revealed that the IRS's acceptable settlement range goes as low as 35% of the amount due, and a potential evader expects to gain a greater sum through an illegal tax scheme. Equipped with this information, the potential evader might decide the risk of a 35% settlement is low enough to gamble and violate the tax laws. 

Similar reasoning applies to other categories of information at issue. Litigation hazards may include types of illegal tax shelters the IRS does not have the resources to pursue, situations which make witnesses unsympathetic or hard to find, or practical complications for investigating certain types of schemes. A potential evader who is made aware of the IRS's perceived litigation hazards will know how to best structure an evasion so as to avoid the maximum enforcement efforts of the IRS. Knowing how to evade in a way the IRS deems more difficult to detect or prosecute also enters into the cost-benefit analysis of a potential evader; a person with such knowledge may feel emboldened because she believes she can execute a scheme the IRS will be loathe to prosecute.

Recent Related Scholarship

I picked up the following articles from a new blog called JOTTWELL that readers may finding interesting. JOTTWELL contains a summary of the article by the contributing expert / professor in the area. JOTTWELL's goal, announced in its "Welcome" page here is to provide short reviews by experts of recent high quality legal scholarship. I will from time to time provide links to materials that might be interesting to the practitioner or student of tax crimes.

The tax law editors making the reviews are listed here.

The criminal law editors are listed here.

I mention two publications, one from each area of discipline:

Gregory J. O'Meara, The Name is the Same, But the Facts Have been Changed to Protect the Attorneys: Strickland, Judicial Discretion, and Appellate Decision-Making, 42 Val. U.L. Rev. 687 (2008) - JOTTWELL review here.

Craig M. Boise & Andrew Morriss, Change, Dependency, and Regime Plasticity in Offshore Financial Intermediation: The Saga of the Netherlands Antilles (Univ. Ill. Law & Econ. Research Paper No. LE08-020) - JOTTWELL review here.

Another UBS Client is Sentenced

Press reports note that another UBS client was sentenced on 11/6. The highlights from the first I have seen, a Bloomberg report here.

1. Guts of the Guilty Plea (DOJ Tax Press Release here): The guilty plea was a bare bones plea to a single count of filing false income tax return (§ 7206(1), with a maximum possible sentence of 3 years (less good time credit of about 15%). The details which are often seen in plea agreements were left to flesh out in the sentencing process.

2. Key Sentencing Factors as Reported; (i) taxes evaded apparently "less than $26,000 for 2001-2007 (so why'd this guy do it???); (ii) $1.89 million FBAR penalty (this amount may include the civil tax penalty which, in any event on the numbers report would have been around $19,500 (does require accrual of interest)); and (iii) contrition for having done it (subtext for having been caught).

3. Sentence: 2 months of home incarceration; 150 (about 5 months) days home confinement; 215 days probation (about 7 months).

4. Leniency. Prosecutors sought leniency because of substantial assistance. I have not seen the prosecutors' motion, but will post further when and if I see it. The article does report that publicity about his case (presumably his guilty plea) helped spur more than 7,500 taxpayers to join the voluntary disclosure program that ended 10/15/2009. (As I have mentioned before, counsel in all criminal cases should encourage the Government to publicize the indictment, conviction and sentence so that this downward sentencing factor may be in play).

5. Judge's comments about offshore accounts:

“I think the public has become weary about people with all the trappings of success becoming involved in tax evasion,” said U.S. District Judge James Cohn in federal court in Fort Lauderdale, Florida. “Why does one set up offshore banking accounts? I’m sorry, it’s to set up to hide money and deceive the government.”

6. Collateral Consequences. Moran is a yacht broker. The article reports that, according to this lawyer, he will lose his Florida license to sell new yachts. [JAT tacky comment: Perhaps he will take that business offshore, which would not seem to be too difficult for yacht sales.] Tax crimes practitioners and students are aware that there may be collateral consequences of guilty pleas. One of the problems that surfaced in the voluntary disclosure initiative was whether such collateral consequences might attend entering the program; even though there will be no conviction, the required cooperation may require a taxpayer to admit facts from which a crime may be inferred (even if perhaps not a direct admission).

JAT additional comment: the lenient sentencing relative to other tax crimes continues. See my question to readers here.

Unthinking Criminality - Where is the Line? (11/7/09)

Thanks to the Tax Prof Blog, I picked up this article written by prolific tax lawyer and author, Robert W. Wood. The Article is "Ten Ways to Audit Proof Your Return" (published online by Forbes)

The strategies offered by Mr. Wood are variations on a theme I discuss in a recent article, John A. Townsend, Tax Obstruction Crimes: Is Making the IRS's Job Harder Enough, 9 Hous. Bus. & Tax. L.J. 255 (2009). Some of these strategies I present in more detail in the online appendix to the article.

The issue is whehter a tax obstruction crime exists when a taxpayer performs an otherwise legal act (illustrated by the strategies in Mr. Woods' article and in my article and appendix) with the intent to impair or impede the IRS's administration of the tax laws? Are Mr. Woods' and my examples which are specifically intended to lower the audit profile examples of conduct that should be subject to criminal punishment? Can readers discern a line between such conduct that is criminal and not criminal? Keep in mind that a bedrock principle of the tax law and other types of related crimes is that a hypothetical reasonable actor should be able to discern the line with clarity, otherwise there can be crime. If there is no discernable line, is there only prosecutorial discretion that keeps practitioners (including Mr. Wood and myself) who have engaged in variations on this theme over the years from prosecution? And, finally, would the courts cry foul as did Judge Kozinski in the Caldwell case?

I'll let my readers chew on those questions. I have already spoken ad nausuem. I would appreciate the readers' responses.

Have a great weekend!

Duplicity in Government Charging of Evasion of Assessment Counts

The Third Circuit issued an important opinion in United States v. Root, 585 F.3d 145 (3d Cir. 2009). The major issue in the opinion is the application of the criminal law concept of "duplicity." Duplicity is defined as "an indictment where the Government charges two or more distinct offenses in one count. In the latter situation, it cannot be determined if the jury's verdict was unanimous as to each distinct offense.)." 1A Charles Alan Wright et al., Federal Practice and Procedure § 142 (3d ed. 1999) (cited in fn. 7 of the concurring opinion in Root). The majority cites a longer list of concerns in duplicity:

The purposes of the prohibition against duplicity include: (1) avoiding the uncertainty of whether a general verdict of guilty conceals a finding of guilty as to one crime and a finding of not guilty as to another; (2) avoiding the risk that the jurors may not have been unanimous as to any one of the crimes charged; (3) assuring the defendant adequate notice; (4) providing the basis for appropriate sentencing; and (5) protecting against double jeopardy in a subsequent prosecution.

(Note that some of these concerns overlap the recent Rigas discussion here.

For Students - Good Trial Multi Issue Opinion - Net Worth, Inconsistent verdicts etc.

I offer the opinion in United States v. Matthew Fox, 2009 U.S. Dist. LEXIS 97638 (D. N.J. 2009) particularly for students in the tax crimes area. In the opinion, the district court denies a convicted defendant's motion for judgment notwithstanding a jury verdict and, alternatively, for a new trial. The opinion does give some sense of how the net worth case developed at trial and how the defense impemented its defense strategies, albeit unsuccessfully.

The case does have some sex it, although barely exposed and only for context. That context is work with a strip club "an Atlantic City gentleman's club called Bare Exposure." The work involved is by the defendant and his wife, appropriate named Melody Fox.

Addressed in the case are:

1. The application of the net worth method of proving a tax crime (how to serve up lead and the tracing of reasonable leads).
2. Inconsistency of verdicts (inconsistent verdicts have a place in our law; reminds me of Emerson's line "A foolish consistency is the hobgoblin of little minds, adored by little statesmen and philosophers and divines.").

And other delightful things. Nothing ground shaking here in terms of establishing new law, but the package of the application of old law is very good.

Read and enjoy.