State of the Offshore Voluntary Disclosure Initiative

Readers interested in the state of the IRS's Offshore Voluntary Disclosure Initiative (OVDI) may be interested in the following publication: Mark E. Matthews and Scott D. Michel, IRS’s Voluntary Disclosure Program for Offshore Accounts: A Critical Assessment After One Year, 181 DTR J-1 (9/21/10).   The article may be reviewed or downloaded here. The authors, both prominent practitioners in this area of the law, provide a good summary of the history of voluntary disclosure and the implementation of the current OVDI, with emphasis on the program through the first stage cutoff for taxpayers entering the program by 10/15/09.

Yet Another UBS Client Bites the Dust

On September 21, 2010, Jules Robbins, an 84 year old retired watch distributor, was sentenced to one year probation for hiding his Swiss accounts that held, at their peak, almost $42MM. From the USAO SDNY Press Release:

In 2000, ROBBINS used the services of a U.S.-educated Swiss attorney to set up a sham Hong Kong corporation which was listed as the holder of his account and to serve as the nominal head of the corporation. In fact, UBS internal documents specified that ROBBINS wanted to be "100% in charge" of investment decisions concerning his UBS accounts. ROBBINS also took numerous steps to conceal his interest in these accounts from the IRS, including having his Swiss attorney receive all of the correspondence relating to the account at his law firm in Switzerland. As of December 31, 2007, ROBBINS' UBS accounts collectively contained almost $42 million.

ROBBINS, 84, of Jericho, New York, pled guilty on April 15, 2010, to five counts of subscribing to false federal income tax returns. As part of his plea agreement with the Government, ROBBINS paid a civil FBAR penalty of $20,833,345, an amount equal to 50 percent of the highest value of his UBS accounts as of December 31 for the years in which he failed to file FBARs.

According to news reports, Robbins' attorney argued in support of a light sentence that Robbins, the octogenarian, was in fragile health and the FBAR penalty is 80% of his net worth (meaning that his remaining 20% would be about $5MM. From the Bloomberg report, Robbins apologized and "asked the judge for mercy, breaking down several times as he told Holwell of the 'shame, aggravation and sleepless nights during the past many months.'"

The Triple Whammy from Breach of Trust Illegal Income -- Ouch, That Hurts

In United States v. Welch, 2010 U.S. App. LEXIS 19107 (5th Cir. 2010) (unpublished), the Court affirmed a relatively rare upward variance from the guidelines sentencing range in a tax case. The background (from an update in my book) is:

The Guidelines provide an upward adjustment if the defendant abused a position of public or private trust “in a manner that significantly facilitated the commission or concealment of the offense.” §3B1.3. A tax crime involving only the breach of the duty to the Government to report and/or pay tax does not invoke this upward adjustment, but if the tax crime involves or arises from some other conduct that does breach a position of public or private trust, then this upward adjustment may apply. For example, if the tax crime is failure to report embezzled income, this adjustment may apply as well as the two level adjustment §2T1.1(b)(1) for illegal income and then, even worse, a sentencing court may consider the nontax breach of trust conduct as a factor warranting an upward variance.

In Welch, the defendant was charged under Section 7206(1) (tax perjury) for failing to report embezzlement income of $622,000. In computing the Guidelines range, the sentencing court included an illegal source adjustment (S.G. §2T1.1(b)(1)) and a breach of trust adjustment under §3B1.3. The court then determined to vary upward from the thus enhanced Guidelines range because the defendant's embezzlement had not been prosecuted and thus, in the court's view, the Guidelines calculations even as thus enhanced did not adequately reflect the seriousness of the conduct.

The Fifth Circuit sustained as a proper application of the sentencing court's authority under Booker.  The Court said succinctly:

The district court was entitled to base its variance upon the embezzlement, even if that offense was already accounted for in the Guidelines calculation. United States v. Brantley, 537 F.3d 347, 350 (5th Cir. 2008); United States v. Williams, 517 F.3d 801, 810-11 (5th Cir. 2008) (holding that a district court may rely upon factors already incorporated by the Guidelines to support a non-Guidelines sentence).

Picky, Picky - Tax Perjury is Not Tax Evasion / Fraud

I write just to note that the Third Circuit made a mistake that I hope my students do not make. In United States v. Riley, ___ F.3d ___ (3d Cir. 2010), 2010 U.S. App. LEXIS 19310 (3d Cir. 2010) the defendant was convicted of three counts of tax perjury under Section 7206(1). It is elementary that tax perjury is not tax evasion (or tax fraud as it is sometimes called), which requires a key additional element of tax due and owing. In its opinion, the Third Circuit refers to the tax perjury counts of conviction as "tax fraud" and "tax evasion."

The error does not appear to have affected the opinion. The court reversed on the honest services conviction based on Skilling, but otherwise sustained the convictions.

Another UBS Client Bites the Dust - One Year Sentence (9/17/10)

Another UBS client was sentenced today in New York. According to this blog posting by Janet Novack of Forbes' Taxing Matters, Frederico Hernandez was sentenced to a year in prison. After I get more details, I may do another posting if there is something material to add or correct. In the meantime, I recommend you to Ms. Novack's blog post which is quite good for such quick reporting.

I do make the following points:

1. The report is that Mr. Hernandez got a one-year sentence.  Mr. Hernandez would have been better off to get a sentence of 1 year and 1 day because the good time credit (about 15%, although the calculation can be tricky) is not available for sentences of less than one year and one day. 18 USC 3624(b). The good time credit for a sentence of one year and one day is 47 days, making the defendant with good time serve only 319 days. A defendant with a one year sentence must serve 365 days with no good time credit.  What a difference a day makes..  The Judge (Denny Chin) surely knew of this difference and, apparently was not quite willing to go there for this defendant.

2. Hernandez and the Government agreed in the plea that the tax loss was $84,423. However, the Government apparently asserted at sentencing that the real tax loss was in excess of $500,000. I have not seen the plea agreement, so there is a nuance somewhere that I am missing on this. In any event, the Probation Office and the Court are not locked into the tax loss that the Government and the defendant agree upon in the plea agreement (dare I say conspire to smoke past the court; the devil made me say that). The higher tax loss would, of course drive up the base offense level and, as a result, the Guidelines sentencing range after all adjustments.  And, of course, with a higher Guidelines sentencing range, a sentencing judge will have to vary more than if the sentencing range were lower.

3. According to the article, the plea was for tax perjury (Section 7206(1)) for the years 2004-2008, during which period he reported $503,682 of AGI, whereas during the period his real AGI was $1.9 million. And, as alleged by the government, he had the same pattern of conduct in the years 2001 through 2003. With the higher amounts, the Guidelines range would have been 30 to 37 months. Question for students: assuming that the pattern of the conduct was the same in all years, what would have been the effect had he pleaded to a single count?

4. Even the year is the longest UBS depositor sentence to date. Was this guy worse than the earlier ones or did he just get in line later than they did? What does that portend for later comers?

5. The Government urged the Court to sentence to 18 to 24 months to send a message. The court obviously wanted to send a different message -- first to the defendant before the court and, perhaps only derivatively, to the universe of tax cheats and wannabe tax cheats.

Ms. Novack also has a prior blog on how courts are lenient in tax crimes and certain other federal crimes relative to the typical federal crimes prosecuted in the courts. That blog is here.

Addendum:  9/17 @ 5:40pm:  Readers might want to take a look at this, at least tangentially related, WSJ Law Blog titled Planning A Prison Stay? The Options Can Be Overwhelming.

Addendum #2 9/18 @ 9:15am:  I have corrected the federal good time credit calculation which was in error in an earlier version of the blog.  There has been some confusion over the years about precisely how it is calculated.  But, the BOP controls the process and calculates it to allow 47 days GTC for a 1 year and 1 day sentence.  For a discussion, see here.

Addendum #3 9/20/10 @ 10:15am.  See Bloomberg article here and USAO SDNY release here.

Sixth Circuit on Klein Conspiracy and Tax Evasion (9/16/10)

On September 15, 2010, the Sixth Circuit decide United States v. Damra, 621 F.3d 474 (6th Cir. 2010). The decision is long (51 pages) and addresses a number of issues. I deal here only with three of them that I think are in the mainstream for readers of this blog.

1. Klein Conspiracy - Is Willfulness An Element of the Crime?

Damra was convicted of a Klein conspiracy. Most readers will know that the federal conspiracy statute, 18 USC 371, defines two types of conspiracies -- an offense conspiracy and a conspiracy to defraud, known in the tax arena as a Klein conspiracy. If the offense underlying the offense conspiracy has a willfulness element, that element is imported as an element of the offense conspiracy. Specifically, a conspiracy to commit a tax crime having a willfulness element must meet the Cheek spin of intentional violation of a known legal duty. But, the Klein conspiracy has no reference point to import a willfulness element. So the question is what is the mens rea required in a Klein conspiracy?

Damra complained on appeal that the trial court did not instruct the jury that the Government must have proved that the defendant acted "willfully." Bottom line, the Sixth Circuit held that the instructions as given sufficiently conveyed the concept to the jury that the trial court did not commit reversible error. In the process of reaching that bottom line, the Sixth Circuit reiterated a prior holding willfulness is a required element of a Klein conspiracy, quoting an earlier case (United States v. Beverly, 369 F.3d 516, 532 (6th Cir. 2004) (citations omitted)) as follows (p. 498).

To establish a conspiracy, in violation of 18 U.S.C. § 371, the government must prove beyond a reasonable doubt that there was "an agreement between two or more persons to act together in committing an offense, and an overt act in furtherance of the conspiracy." This requirement has been broken down into a four-part test, which requires the government to prove that: "1) the conspiracy described in the indictment "was wilfully [sic] formed, and was existing at or about the time alleged; 2) the accused willfully [sic] became a member of the conspiracy; 3) one of the conspirators thereafter knowingly committed at least one overt act charged in the indictment at or about the time and place alleged; and 4) that overt act was knowingly done in furtherance of some object or purpose of the conspiracy as charged."

Notwithstanding that holding, the Sixth Circuit's pattern jury instructions defined the crime in terms of "knowingly and voluntarily" participating in the conspiracy rather than willfully doing so. In effect, Court held that these terms are sufficient to convey the willfulness concept, concluding (p. 500):

As the district court's instructions tracked our pattern instructions, as we have repeatedly approved of the "knowingly and voluntarily" formulation of the second element of conspiracy to defraud the government under 18 U.S.C. § 371, and as "willful" is in fact defined in part as "voluntary," we find that the district court did not omit the willfulness element of § 371 conspiracy when it instructed the jury, and so did not commit plain error in issuing its instructions as to Count 1.

JAT Comment: I think the Court did not crisply address or resolve the issue. The issue is whether, if indeed willfulness, at least in the Cheek sense, is an element of the Klein conspiracy, the words "intentionally and voluntarily" cover the same ground adequately to inform the jury. I don't believe that the Government believes that it does. I address that notion in my article, See John A. Townsend, Is Making the IRS's Job Harder Enough?, 9 Hous. & Bus. Tax L.J. 260 (2009). As I note in that article, the Government has taken the position that the Klein conspiracy is free of the Cheek willfulness spin that the defendant intend to violate a known legal duty but simply has to intend to join the conspiracy to defraud (defraud encompassing acts that are not necessarily illegal). And, if you parse the language of Beverly quoted above, the use of the word willfully does not seem to address the Cheek willfulness requirement in the sense of an intentional violation of a known legal duty. Indeed, in a later footnote (footnote 7), the Sixth Circuit says: ""The intent element of § 371 does not require the government to prove that the conspirators were aware of the criminality of their objective . . . ." United States v. Khalife, 106 F.3d 1300, 1303 (6th Cir. 1997) (quoting United States v. Collins, 78 F.3d 1021, 1038 (6th Cir. 1996))."

2. Tax Evasion - Separate Good Faith Instruction?

The defendant argued that the trial court erred in failing to give a good faith instruction on the tax evasion charge. Bottom line, the Court said that the standard Cheek willfulness instructions adequately covered the ground. The Court reasoned (p. 502):

Sentencing Tax Loss, Unfiled Returns and Deductions (9/15/10)

I write today about two recent cases, one which held that, for civil tax purposes, a taxpayer who fails to file is not entitled to claim his or her itemized deductions in a civil tax proceeding and the other applying the same rule in a criminal case at sentencing in calculating the tax loss. See Jahn v. Commissioner, 2010 U.S. App. LEXIS 17525 (3d Cir. 2010) (unpublished opinion, here); and United States v. Kellar, 2010 U.S. App. LEXIS 19129 (5th Cir. 2010) (unpublished opinion, here), respectively. I made some revisions to my book and include the following revised section on calculating the tax loss in an failure to file case (footnotes omitted).

Consider the application of this rule [permitting estimates of the tax loss for the tax loss calculation] where the tax offense is failure to file rather a fraudulent return omitting income or misstating claimed deductions or credits. If the defendant originally filed a fraudulent return without claiming otherwise available deductions or credits, I suppose that some sense of fairness could support denying the deductions or credits since the tax loss the defendant intended was not affected by the unclaimed deductions. But, if the defendant filed no return, is he or she to be further punished in the sentencing phase by rigid estimates simply because he or she did not claim the deductions? I can certainly make a distinction between the two circumstances.

Third Circuit Decision in Stadtmauer - Willful Blindness (Conscious Avoidance) (9/10/10)

The Third Circuit issued a very interesting opinion yesterday in a tax crimes case. The opinion is United States v. Stadtmauer, 620 F.3d 238 (3rd Cir. 2010), here. The opinion is 88 pages long and covers several important issues. I plan to discuss the issues in separate blogs, but first I start the Court's introduction to the opinion:

Following a two-month jury trial in the District Court for the District of New Jersey, Richard Stadtmauer was convicted of one count of conspiracy to defraud the United States (in violation of 18 U.S.C. § 371), and nine counts of willfully aiding in the filing of materially false or fraudulent tax returns (in violation of 26 U.S.C. § 7206(2)). On appeal, Stadtmauer raises many challenges to these convictions. We deal principally with the issue Stadtmauer raises last: whether the District Court erred in giving a willful blindness instruction in this case, including whether the Supreme Court's decision in Cheek v. United States, 498 U.S. 192 (1991), forecloses the possibility that willful blindness may satisfy the legal knowledge component of the "willfulness" element of criminal tax offenses. We join our sister circuit courts in concluding that Cheek does not prohibit a willful blindness instruction that applies to a defendant's knowledge of relevant tax law. We reject also Stadtmauer's other claims of error, and thus affirm.

Government Fails to Prove Willfulness in FBAR Civil Case (9/2/10)

In Williams v. United States (EDVA Civil Action No. 1:09-cv-437, decision dated 9/1/10), the court declined to find willfulness.

The opinion is relatively short, so I won't rehash the opinion. Some significant facts from the case are:

1. "Between 1993 and 2000 Williams deposited more than $7,000,000 in assets in the accounts, earning more than $800,000 in income over that period."

2. During the year in issue (2000, for which the FBAR was due 6/30/01), the Swiss were focusing on the accounts perhaps at the request of the U.S., the Swiss interviewed Williams about the accounts, the Swiss froze the accounts at the request of the U.S. and the U.S. was aware of the accounts (it is not stated whether that request was a tax driven request or some other law enforcement imperative request.) (The timing of some of these events were disputed by the Government, but the district judge would have none of that.)

3. On his 2000 1040, Williams failed to include the income from the accounts and, on Schedule B, failed to check the FBAR question.

4. Williams failed to file the FBAR by June 30, 2001.

5. Williams' lawyers and accountants had advised him of the requirement to file the FBAR.

Court Addresses Attorney-Client Privilege in Suit Against Tax Shelter Promoters

In Green v. Beer, 2010 U.S. Dist. LEXIS 87484 (SDNY 8/24/10) (involving a taxpayer suit against tax shelter promoters, Judge Kimba Wood addressed objections a magistrate's determination of discovery issues involving the attorney-client privilege. The issues resolved by Judge Wood are.

1. Waiver by Disclosure to Third Parties.

The general rule is that disclosure to third parties waives the privilege. That took care of the plaintiff's disclosures to financial advisers that the defendants wanted to see (I suppose, to address whether plaintiffs really relied on defendants). However, one set of disclosures fit an exception -- a disclosure to an agent assisting in the flow of communications between the attorney and the client. The circumstance was:

In contrast, Daniel Green, the son of the Green Plaintiffs, received email communications from counsel, which he then provided to his parents. He explained in his affidavit that his technical assistance was necessary for his parents to timely receive the email communications from counsel:

My parents are not proficient in the use [of] electronic mail and, due to the time-sensitive nature of these communications, it was necessary for these communications to be delivered to my email address to ensure a timely receipt. My parents regularly rely on me to send and receive emails for them.

Important to the Court's resolution of the issue was the New York Statute on the issue which provides (Section 4548 of the New York Civil Practice Law and Rules):

No communication . . . shall lose its privileged character for the sole reason that it is communicated by electronic means or because persons necessary for the delivery or facilitation of such electronic communication may have access to the content of the communication.

Perhaps some readers have focused on this type of issue in a federal proceeding, and most particularly a tax case. Would the New York statutory wrinkle on the attorney client privilege be relevant? Federal issue cases in federal courts (specifically federal tax cases) look to the general common law attorney client privilege without local state embellishments. See FRE 501; see also Rule 502 (providing limitations on when disclosure constitutes waiver of the privilege). Ultimately, Judge Wood held that the privilege had not been waived because, as a matter of fact under the circumstances, the defendant was an important agent to assist in communications, citing inter alia, Kovel (United States v. Kovel, 296 F.2d 918, 921 (2d Cir. 1961)) and Adlman (United States v. Adlman, 68 F.3d. 1495, 1499 (2d Cir. 1995))

2.  Waiver By Asserting Reliance on Defendants.

a.  At the Inception.  Even as to communications made to the attorney otherwise within the scope of the privilege, courts have held that a party may waive the privilege by affirmatively claiming reliance on the lawyer in defense of a claim against that party-client. This is often seen in tax criminal and civil tax cases where, as a defense to a criminal or civil penalty, the client as a party asserts that he or she relied upon his or her lawyer and therefore should not be subject to the penalty. In the tax cases of which I am aware, this claim operates as a waiver of the attorney-client privilege. In Green, however, the plaintiffs were not affirmatively alleging reliance on their lawyers present at the creation. Rather, they were asserting that they relied upon the defendants (the tax shelter promoters/enablers). I suppose that is an implied representation that they were not relying upon their lawyers.  The defendants wanted to test the plaintiffs claim by seeing what plaintiffs told their lawyers, what advice they received and whether, therefore, they really relied upon the defendants as they claim. The magistrate judge held that the plaintiffs had not waived the privilege, and the district court sustained the magistrate's holding. The district court did acknowledge that there are conflicting holdings within the district, but "To the extent that there is a split in the case law, however, the magistrate judge's order cannot be considered clearly erroneous or contrary to law." (see fn. 3.) (I just wonder whether Is this the right context to be applying the clearly erroneous or contrary to law standard.)

b. In Settling with the IRS.  The magistrate found any attorney-client communications related to the settlement with the IRS irrelevant to the issues presented.  In a short holding, the district court affirmed.