Government Pursues FBAR Penalty in Civil Case (10/31/10)

In United States v. McBride (D. Utah No. 2:09-cv-378-DB-BCW), the Government seeks to enforce civil penalty for failure to file FBARs for 2000 and 2001. The amount sought is the maximum under prior law ($100,000 per year). The defendant participated in an offshore scam orchestrated by Merrill Scott and Associates ("Merrill Scott"). (For more on Merrill Scott, see here and here. Suffice it to say for present purposes that it involved offshore entities and offshore banks.

The Government has filed motion for summary judgment. The memorandum in support of the motion is here, the complaint is here and Dennis Brager's discussion of the case is here. The Government's motion appears strong (at least if it is a fair statement of both the summary judgment evidence and the case itself); the defendant appears destined to lose even if he survives a motion for summary judgment. (Cf the Williams case discussed here.)  I thought readers of this blog might be most interested in the Government's statement of the willfully standard for the maximum FBAR penalty which is now up to 50% of the highest amount in the account for each year. The Government argues that the willfully standard in the FBAR civil penalty is not the same as willfully standard in the criminal tax statutes (interpreted in Cheek to require the intentional violation of a known legal duty). Rather, the Government argues that a lesser standard applies in civil cases and argues, protectively, that even were the Cheek standard to apply, it is met here for purposes of summary judgment. Here is the Government's discussion (pp. 18-20 of the Memorandum).

Ninth Circuit Applies Perlman Rule for Collateral Appeal of Order Rejecting Attorney-Client Privilege for Former Attorneys of NonIndicted Party (10/31/10)

In United States v. Krane, 625 F.3d 568 (9th Cir. 2010), here, the Ninth Circuit upheld the continuing viability of the Perlman rule permitting collateral appeals of rejection of the attorney-client privilege in certain circumstances. Krane arose from a tax shelter prosecution of individuals who conducted their tax shelter activity through Quellos Group LLC. We have previously blogged about this indictment here and here, but suffice it to say now that they were the genre of shelters that led to other prominent prosecutions (e.g., KPMG related individuals and the Daugerdas related individuals). In Krane, the district court allowed the Government to issue a pretrial subpoena for the records of Skadden, Arps, Slate, Meagher & Flom LLP ("Skadden"), a prominent national law firm that had previously represented Quellos, which was not indicted. Quellos advised Skadden that it was asserting the attorney-client privilege. Skadden asserted the privilege. The Government moved to compel. Quellos intervened to sustain the privilege. The trial court rejected the assertion of privilege and ordered Skadden to comply. Quellos appealed the order and the district court stayed compliance with the subpoena pending appeal. The defendants pled guilty. The Government insisted that it needed compliance with the subpoena in order to prepare for sentencing and issued an identical trial subpoena for the sentencing hearing. "Thereafter, Quellos filed a "Notice of Further Proceedings and Suggestion of Mootness" before this court [the Ninth Circuit], which the government opposed." In a footnote, the court noted: "Despite having served the second subpoena on Skadden, the government has yet to file a motion with the district court seeking issuance of a pre-sentencing subpoena duces tecum."

The appeal presented two issues. The first was whether the compulsory order to Skadden Arps was appealable. The second was, if appealable, the pleas of the defendants mooted the need for the subpoenas. The answers to both questions was yes, so the appeal was dismissed, vacated and remanded with instructions.

Other UBS Account Holders are Charged

The Boston Globe reports here that two other UBS account holders were charged in separate cases.  The individuals are Peter Schober and Gregory Rudolph.  According to the article, in each case, the charge is for a single count of failure to file the FBAR presumably for a single year (maximum sentence of 5 years).  The charging documents apparenlty assert that they avoided tax in the amounts of $77,871 and $25,507 respectively.  I will do a supplemental posting to this blog with more details when I get them.

USAO Press Release

Developments on the UBS / Swiss Front

There is a flurry of news this morning about UBS, probably the most egregious of Swiss banks in the business of enabling U.S. tax cheats:

1. The United States filed papers today to drop the criminal case. See the reports from USA Today here and Bloomberg here.

2. The Swiss bank regulator called on the Swiss banks to overhaul their services for wealthy foreigners to avoid the type of debacle with the U.S. tax authorities. See the WSJ report here. I suppose that what the Swiss banks will do is not to abandon the business, but become smarter at it. The Swiss banks make their money, not because they can better manage money and investments than other banks in the world but because, at least until recently, they were better at hiding it from prying eyes. It is unlikely that the Swiss will abandon such a lucrative market (there are still people willing to pay plenty to hide money, be they tax cheats, drug dealers, Middle East potentates raking off money from their citizens, or whatever). So, the Swiss bankers will just have to be smarter and move into deeper stealth mode. It remains to be seen whether the Swiss Government will be diligent in curbing those types of activities or will only do the superficial thing here.

3.  In a related development, the Swiss are reported to be close to some type of deal with the German Government regarding accounts owned by German taxpayers. See Reuters article here.

Another Tax Shelter Lawyer Bites the Dust

Erwin Mayer, a Paul Daugerdas partner and co-defendant in the tax shelter indictment in SD NY, has pled guilty. I have previously blogged on various aspects of the indictment in four parts: Part 1, Part 2, Part 3, and Part 4. Mayer pled to two counts -- conspiracy and tax evasion, both 5 year felonies exposing him to a maximum 10 year sentence.  He also agreed to forfeit money and property worth in excess of $10,000,000,.

The press release by USAO SDNY here summarizes the key admissions for guilts as follows:

During the guilty plea proceeding, MAYER acknowledged that he knew that the tax shelter transactions would be allowed by the IRS only if there was a reasonable possibility of a profit and if the clients were entering into the tax shelter transactions for genuine, non-tax business reasons. MAYER also acknowledged that the losses from the transactions would be allowed only if the clients were utilizing the entities involved in the tax shelters -- such as the partnerships and corporations-- for legitimate, non-tax business reasons and not simply to produce tax losses. MAYER admitted that the tax shelters had no reasonable possibility of resulting in a profit because among other reasons, the costs and fees for most of the transactions exceeded the potential profit, if any.

For some more nuance, see the WSJ Law Blog here.

Daugerdas and a fellow lawyer Donna Guerin remain standing defendants in the case, at least for now.  It is unlikely that the prosecutors will offer Daugerdas a deal -- at least one that would not put him away for a very long time.  But we'll see what happens on Guerin.

Can Signatories Filing FBARs During the Administratively Extended FBAR Filing Period Be Prosecuted for Failure to File? (10/16/10)

Readers will recall that the IRS administratively granted U.S. persons with signatory only authority (i.e., no financial interest) relief provided they filed the FBARs first by June 30, 2010 and then by June 30, 2011. See Administrative Notice 2010-23, March 13, 2010; and Notice 2009-62, (August 31, 2009). The relief was specifically made retroactive. I think most practitioners viewed this as assurance that no untoward result would be forthcoming if the U.S. persons qualifying as signatories only filed by the extended date (now June 30, 2011).

In United States v. Simon, 2010 U.S. Dist. LEXIS 108079 (ND IN 2010), the defendant was indicted for various tax crimes, including failure to file FBAR reports for several years. As to the FBAR counts, the defendant urged that he was a signatory with no financial interest and thus, having filed delinquent FBARs within the extended filing period but before indictment, qualified for the relief, so that the indictments for the FBAR violations must be dismissed. The Government argued that he had a financial interest and thus did not qualify for the relief. In any event, the Government argued, even if he qualified for the signatory relief, the contemporaneous failure each year to file by the statute's due date (June 30 of the year following) was a crime, that crime could not be forgiven by administrative pronouncement, and thus the indictment must stand.

The court agreed. The following is its reasoning:

As the government sees it, Mr. Simon doesn't qualify for relief under the IRS notices because he had a financial interest, not just signature authority, in the foreign accounts. Even if he did qualify, the government argues, administrative relief can't change any criminal liability incurred before amendment of the regulation. The government further contends that the notices haven't become final regulations under the Administrative Procedures Act, and that Congress didn't expressly grant retroactive rule-making authority to the Treasury Department under Title 31. Mr. Simon's January 2010 filing of FBARs for 2005-2007, the government says, doesn't absolve him of criminal liability because under the regulations existing at the time the FBARs had to be filed by June 30 of the following year (June 30 of 2006, 2007, and 2008). The government also notes that Mr. Simon never filed an FBAR for 2003 or 2004.

In reply, Mr. Simon argues that he doesn't have a financial interest in Ichua, JS Elekta or Elekta, that 31 C.F.R. § 103.55 gives the Treasury Secretary authority to make exceptions to the reporting requirements, that the exceptions made by the administrative notices were expressly retroactive, and that he wasn't required to file a FBAR for 2004 because the account balance was less than $10,000. No documentation supports his factual assertions.

Whether Mr. Simon had a financial interest in a foreign account is a matter for resolution at trial, not on pretrial motions. The court agrees with the government, though, that if Mr. Simon committed a crime by failing to file an FBAR when the regulations required him to do so, a later regulatory amendment can't absolve him of criminal liability without retroactive modification of the underlying statute. See United States v. Hark, 320 U.S. 531, 64 S. Ct. 359, 88 L. Ed. 290 (1944); United States v. Uni Oil, Inc., 710 F.2d 1078, 1086 (5th Cir. 1983); City & County of Denver v. Bergland, 695 F.2d 465, 480 (10th Cir. 1982); United States v. Resnick, 455 F.2d 1127, 1134 (5th Cir. 1972); United States v. Masciandaro, 648 F. Supp. 2d 779, 784 (E.D. Va. 2009). The statute hasn't been changed.

Mr. Simon argues that the government is mistaken because none of these cases (or the several others the government cites) involved expressly retroactive regulations. Mr. Simon's description of the cited cases is accurate, but the court disagrees with Mr. Simon as to where that distinction leads. To agree with Mr. Simon that a regulation's self-declaration of retroactivity requires a different outcome would be to hold that an agency acquires the power to forgive crimes already committed by simply declaring its intent to exercise that power. The cited cases teach that even if an agency's regulations becomes intertwined in a crime's definition, it is Congress and not the agency that creates the crime, and only Congress can forgive the crime. See also United States v. U.S. Coin and Currency, 401 U.S. 715, 737-38, 91 S. Ct. 1041, 28 L. Ed. 2d 434 (1971); Allen v. Grand Central Aircraft Co., 347 U.S. 535, 553-555, 74 S. Ct. 745, 98 L. Ed. 933 (1954); United States v. Curtiss-Wright Export Corp., 299 U.S. 304, 332, 57 S. Ct. 216, 81 L. Ed. 255 (1936).

The court denies Mr. Simon's motion to dismiss counts 5 through 8 of the indictment.

I am concerned about this analysis. I think most practitioners working in the voluntary disclosure area have felt comforted by the Notices that the filings by the extended date of June 30, 2011 would solve any criminal problem for signatories. The Court says no; the Government can choose to prosecute despite the Notices.

Of course, there are potential defenses that one might invoke to perhaps prevent the Government from relying upon the FBARs thus elicited from U.S. persons with apparent assurance that all is and will be well.

Of course, the whole issue is really moot in the case if the defendant really had a financial interest rather than just a signatory interest (which appears likely reading between the lines). But, quite frankly, I am still concerned about the Court's holding that a signatory who files by the extended filing date can still be prosecuted.

Any thoughts from readers?

Government Discretion to Charge where Criminal Statutes Overlap (10/16/10)

In United States v. Jenkins, 2010 U.S. Dist. LEXIS 106847 (ED VA 2010), the defendant was charged with tax evasion (§  7201). The evasion related the taxpayer's liability for the Trust Fund Recovery Penalty (§ 6672). The acts of evasion alleged were that, in order to evade payment, he established a business in the name of a nominee and that, in submitting two an offers-in-compromise, he omitted assets and income. The taxpayer was charged for evasion, a five year felony, although he could have been charged under § 7206(5), a three year felony. Section 7206(5) deals specifically with false information submitted in connection with offers-in-compromise.

The taxpayer argued that the Government could not charge him under § 7201 because § 7206(5) was the more specific and thus is the exclusive charge that should / could be brought for the conduct alleged. Bottom-line, the court concluded that the conduct alleged could have been charged under either provision and that the Government had the choice as to which of the two to charge. The Court reasoned:

1. The two provisions are not coterminous because many actions that could violate § 7206(5) would not violate § 7201. In the course of this discussion, the Court noted in a footnote:

During oral argument, government counsel provided an illustrative example of the type of conduct that falls within the scope of § 7206(5), but is not covered by § 7201. A drug dealer may have an outstanding tax obligation and decide to submit an offer-in-compromise. On the Form 656, the drug dealer may falsely state that the "source of funds" is legitimate business activity, but otherwise fill out the forms accurately and correctly. Under those circumstances, the drug dealer could not be prosecuted for tax evasion under § 7201 because there is no affirmative act of evasion or an intent to evade the payment of taxes. Yet, the drug dealer could be prosecuted under § 7206(5) for lying about the "source of funds" because that statute punishes any person who falsifies any document relating to the financial condition of the taxpayer submitted in connection with an offer-in-compromise. See Tr. of 9/17/10 Hr'g at 47-48.

The example is a good one. The same example is often used to describe the difference between § 7201 and § 7206(1), tax perjury. If the drug-dealing taxpayer misdescribed his or her business on Schedule C but otherwise correctly reported his or her tax liability, that person could be charged with tax perjury but not tax evasion.

Update on Fidelity International Advisor Currency Fund A (10/14/10)

I previously blogged three times on the Fidelity International Advisor Currency Fund A case. The principal blog is titled "Judge Finds Ambassador's Tax Shelter Transactions Bullshit (Actually Worse Than That)." The other two blogs with peripheral issues are here and here. The Judge amended his opinion on October 6, 2010 (see here). The amendments do not change the good judge's scathing attack on the behavior of the parties involved.  Rather, the amendments deal principally with the penalty aspect of the opinion. Bottom line, in this TEFRA case proceeding, the good judge attempts to box the ultimate taxpayer in on the penalties to the extent the good judge possibly can. I include the significant new or revised excerpts below, even at the risk of boring the readers with TEFRA-speak. For some this might be boring, but note the skill with which the good judge weaves the web from which there may be no escape:

IV. Conclusions of Law

* * * *

G. Accuracy-Related Penalties

* * * *

61a. A partner's "outside basis" is the partner's basis in his or her partnership interest, A partnership's "inside basis" is the partnership's basis in its own property.
61b. In general, a partner's outside basis in a partnership is not a partnership item. Jade Trading, LLC v. United States, 598 F.3d 1372, 1379-80 (Fed. Cir. 2010). The partnership's inside basis is, however, a partnership item. Stobie Creek Investments LLC v. United States, 608 F.3d 1366, 1380 (Fed. Cir. 2010).
61c. Adjustments made pursuant to an election under 26 U.S.C. § 754 are also partnership items. Id.
61 d. This Court lacks jurisdiction over the imposition of a penalty in this partnership-level to the [*429] extent the penalty relates solely to outside basis. Jade Trading, 598 F.3d at 1379-80; Petaluma Fx Partners, LLC v. Comm'r, 591 F.3d 649, 655, 389 U.S. App. D.C. 64 (D.C. Cir. 2010). However, the Court has jurisdiction over the imposition of penalties relating to misstatements of inside basis and other inaccuracies relating to partnership items.
61e. Because partnerships do not pay income taxes, the actual calculation and imposition of any penalty is determined at a partner-level proceeding. This Court nonetheless has jurisdiction to determine the "applicability" of such a penalty in this proceeding. 26 U.S.C. § 6226(f).

Cheek Good Faith - Must the Defendant Testify to Assert the Good Faith "Defense" (10/13/10)

One of the problems with asserting the so-called Cheek good faith “defense” at trial is that, as one court recently held, the defendant will have to testify to put the good faith defense in play. United States v. Kokenis, ___ F.Supp. 2d ___ (ND IL 2010). Actually, for clarity, the good faith issue is not a defense at all, but the evidence at trial does have to put the issue in play in order to obtain a special Cheek inspired instruction placing the burden of proof on the Government to disprove good faith (see here). While it is hard to imagine a credible assertion of the "defense" where the defendant did not testify, I am not sure that asserting the defense would require the defendant to testify in every case. If there is other evidence from which a reasonable jury could conclude that the defendant acted in good faith, the issue should be in play, the defendant should get the Cheek good faith instruction, and the Government must then prove lack of good faith. I am just not sure that there is no case in which the defendant would have to testify in order the put the issue in play.

The other parts of the short opinion suggest that the evidence at trial in fact negated good faith, anyway so that the court's articulation of a requirement that the defendant testify to put the issue in play appears academic. The following from a couple of the footnotes should give some flavor:

n1 What defense counsel's current motion avoids (quite understandably, in light of its damning nature) is all of the evidence of fraudulent and forged documents that overwhelmingly establish Kokenis' guilt on a number of material items of tax fraud for the years at issue. This Court knows of no authority that holds a taxpayer can hold a good faith belief that he or she is permitted to create bogus documents in an effort to transform what are unquestionably items of personal expenditure into faked business expenses that consequently understate reportable income.

n4 [Footnote by this Court] Once again, even that statement is conspicuously silent as to the undisputed evidence that incontrovertibly established Kokenis' fraudulent intent as to a substantial number of the items that he excluded from reportable income and that could not have been touched by some claimed good faith defense.

Any thoughts from the readers of the Blog?

Addendum 10/13/10 2:15 pm

See further discussion at the Gillette-Torvik Blog here.

Practitioners Complain About U.S. Reliance on Thieves Who Steal from Thieves Who Assist U.S. Taxpayers Cheat on Taxes

Practitioners are all atwitter about the U.S. obtaining information -- presumably for consideration of some sort -- misappropriated from offshore banks and using that information to convict or impose serious civil penalties against persons who joined (conspired might be the right word) with the offshore banks to hide income from the IRS. Among the arguments against such use is that the U.S. is then conspiring with those bank information thieves which is perhaps itself a crime or at least reprehensible conduct even though the target of that activity are offshore bank thieves and their U.S. tax cheat depositors. Thinking by analogy, I suppose it is equally reprehensible if the U.S. were to pay drug cartel employees for information on how to convict drug traffickers or grab their bank accounts. But, the question is, whether that type of conduct is reprehensible or the price we pay for a more civilized society. This debate will not be settled here.

Sometimes the Guilty are Really Guilty, But Not These If You Believe Their Lawyer (Whom the Jury Did Not)

Yesterday, two defendants caught up in the foreign bank account initiative were convicted in the Southern District of Florida, which seems to be the center of the center of activity in this initiative. The Bloomberg report is here, and is reasonably comprehensive for a quick report of the conviction yesterday.

As narrated in the Bloomberg article, the defendants' lawyer proclaimed their innocence. (The article says that the lawyer was "their defense lawyer;" it is unclear to me how any judge would permit one lawyer to represent more than one defendant in a criminal trial.) Thus, it would seem, the defense presentation foreclosed any possibility of seeking a downward adjustment for acceptance of responsibility. As I note in my book:

In tax cases, this adjustment is generally achieved by a plea agreement and acceptance of responsibility sufficiently before the trial date that significant resources are avoided. The Application Note [to SG 3.1.1 provides (and cautions):

3. Entry of a plea of guilty prior to the commencement of trial combined with truthfully admitting the conduct comprising the offense of conviction, and truthfully admitting or not falsely denying any additional relevant conduct for which he is accountable under §1B1.3 (Relevant Conduct) (see Application Note 1(a)), will constitute significant evidence of acceptance of responsibility for the purposes of subsection (a). However, this evidence may be outweighed by conduct of the defendant that is inconsistent with such acceptance of responsibility. A defendant who enters a guilty plea is not entitled to an adjustment under this section as a matter of right.

By the same token, the Guidelines recognize the possibility that a defendant may qualify for this favorable acceptance of responsibility downward adjustment even though not pleading guilty. In “rare situations” a defendant may demonstrate acceptance of responsibility “even though he exercises his constitutional right to a trial,” as “where a defendant goes to trial to assert and preserve issues that do not relate to factual guilt.” [SG 3E1.1, cmt. Note 2.]

Practitioner Experience with No Answers to the FBAR Question on Form 1040 (10/5/10)

Daniel Gottfried posted an article titled Proving Willfulness in FBAR Reporting – Checking “No” Ain’t Apropos. The article is reprinted also in Tax Notes at Tax Notes, Sept. 27, 2010, p. 1394; 128 Tax Notes 1394 (Sept. 27, 2010) and in Tax Notes at 2010 TNT 188-14.

The article presents the results of a survey of practitioners who assist U.S. taxpayer clients in making voluntary disclosures of foreign bank accounts as they relate to the U.S. income and estate tax obligations and the FBAR filing requirements.

The article relies upon considerable anecdotal experience of the survey participants to conclude that answering no to the FBAR question on Schedule B of the 1040 (or failing to answer it) is not persuasive evidence that the taxpayer knew of his or her obligation to file the FBAR. The truly draconian FBAR penalties require that the taxpayer know of the legal duty to file the FBAR and intend to fail to file the FBAR. That standard is practically the same as the willfulness standard for the commonly charged tax crimes, although the burden of proof would be lesser in a civil penalty case than in a criminal case and, as a consequence, there may be some relaxation of the articulation of the standard.

The difficulty of making an FBAR civil penalty case is shown in the recent case of United States v. Williams, Civil Action No. 1:09-cv-437 (E.D. Va., Sept. 1, 2010), which I blogged here. Williams indicates that the Government will have to place on strong evidence for the taxpayer's specific knowledge of the obligation and intent to fail to file. Williams certainly suggests that an even stronger case would be required for the criminal FBAR penalty.