Monday, December 31, 2012

Another Attorney Pleads to Obstructive Conduct (12/31/12)

William A. Hirst, a Pleasanton, Calif. attorney, pled guilty to making a false statement to the IRS (18 USC Section 1001, here).  See press release of USAO ND CA, here.  The press release has a link to the indictment; the link is here.

The background is that the attorney apparently tried to cover his tracks for some incompletely implemented estate planning.  The press release says:
According to the plea agreement, in February 2004, Hirst assisted a client in estate tax planning. Hirst prepared 11 deeds gifting fractional interests in eleven parcels of his client’s real properties to his client’s daughter. On Feb. 12, 2004, Hirst also acted as the notary public for the client’s signature on all 11 deeds. Eight of the deeds were recorded with the county recorder in March 2004. The remaining three deeds were lost or destroyed after having been signed by the client. The client died on Feb. 27, 2004, and the estate’s accountant filed the estate’s federal estate tax return with the IRS on Feb. 2, 2005. That return did not list the daughter’s interests that were conveyed by the three lost or destroyed deeds. Hirst re-drafted the three missing deeds and signed the client’s name. They were recorded on April 4, 2005. During an IRS estate tax return audit, Hirst was served a summons to produce his notary log reflecting the execution of the 11 deeds and was later questioned by IRS estate tax attorneys about the deeds, including the three deeds recorded on April 4, 2005. Hirst told the IRS he found the three lost deeds in a file and recorded them, which was false since Hirst knew he signed the client’s signature to the three deeds recorded on April 4, 2005.
This is a variation of a theme we have see before.  See Cincinnati Attorney Pleads to Tax Obstruction (Federal Tax Crimes Blog 5/3/12), here.

Sunday, December 23, 2012

First Circuit Addresses Circuit Split Over Over Standard of Review Involving the Denial of an Advice-of-Counsel Jury Instruction (12/22/12)

The Circuit Splits Blog has this entry, Circuits Split Over Standard of Review Involving the Denial of an Advice-of-Counsel Jury Instruction (Circuit Splits Blog 12/17/12), here, addressing the First Circuit's decision in United States v. Powers, 702 F.3d 1 (1st Cir. 12/14/12), here.  The advice of counsel defense is often encountered in tax cases as a specific nuance on the requirement that the defendant have acted with intent to violate a known legal duty; if the defendant relied upon advice of counsel that it was not a legal duty, then the defendant should be acquitted.

The Circuit Splits Blog explains:
When a defendant's argument at trial boils down to, "My attorney advised me that it was okay to proceed, so I did.", a defendant may ask the court to give the jury such an instruction. When the court's response is "No.", should an appellate court review the lower court's determination de novo or apply an abuse-of-discretion standard? 
The answer:  It depends.

One unusual aspect of Powers is that the Government itself asked for the reliance on counsel instruction, in anticipation of the defendant raising the defense as it he claimed he would.  But then, the defendant's evidence was less than expected, so the Government withdrew  the request and the Court refused to give the instruction.

Here is the First Circuit's answer in full context and its affect on the bottom-line holding (footnote omitted):

Saturday, December 22, 2012

Evasion of Payment Statute of Limitations Runs from the Last Affirmative Act (12/22/12)

In United States v. Irby, 703 F.3d 280 (2d Cir. 12/18/12), here, the taxpayer was convicted for tax evasion under Section 7201, here, for the combination of (i) failing to file a return and (ii) subsequent affirmative acts thereafter to avoid payment of the tax due.  The latter affirmative acts, of course, transformed a failure to file case into a tax evasion case.  The statute of limitations for evasion is six-years, but from which date.  Section 6531(2), here.  In this type of case, involving failure to file which itself is a lesser misdemeanor crime, what makes it a felony is the affirmative act.  Hence, the Fifth Circuit sustained counting the period from the date of the last affirmative act after the due date of the return.  The Court said (most cases and quotation marks omitted):
The other circuits that have expressly considered the issue have concluded that the statute of limitations for section 7201 offenses runs from the later date of either: when the tax return was due or the defendant's last affirmative act of tax evasion. In Dandy, The Sixth Circuit addressed facts similar to those at issue here, where the defendant did not file tax returns for 1982 and 1983, but the last act of evasion did not occur until 1985. The Dandy court found that the statute of limitation runs from the last evasive act because it is these evasive acts  which form the basis of the crimes alleged in the indictment." In Ferris, the First Circuit supported the rule by pointedly stating, the defendant, however, by deceitful statements continued his tax evasion through date of last act of evasion. No circuit has rejected the last affirmative act of tax evasion rule. 
The rule, therefore, is well-supported in Supreme Court precedent and in the caselaw of other circuits. One element of the section 7201 offense is the commission of an affirmative act seeking to evade tax liability, which can be shown through the individual's willful failure to file a tax return, or through continued evasive acts intending to avoid the payment of taxes. The statute of limitations accrues from the later of the two. 
Irby last acted to evade the payment of his taxes in 2006, by using nominee trusts to conceal his assets. Because he was indicted in 2011, the district court did not err in concluding that Count I was not barred by the statute of limitations.

Charging Decisions for Trust Fund Tax Crimes - 7202 or 7201 (12/22/12)

In United States v. Farr, 701 F.3d 1274 (10th Cir. 12/27/12), here, the defendant served as administrator of her late husband's medical clinic.  The clinic did not withhold from its employees (by paying them net of withholding) but failed to pay over the deemed withheld amount to the Government.  The IRS assessed a trust fund recovery penalty (TFRP) under Section 6672, here.  She dilly-dallied.  "When . . . Farr did not pay the penalty assessed against her, a civil proceeding evolved into a criminal one."  The Government then charged her with tax evasion under Section 7201, here.  After some trial level sparring and some appeals, the Government sought a new indictment for tax evasion under Section 7201.  The defendant was convicted.  This appeal ensued.

The key issue in this appeal that I want to discuss is defendant's argument that the conviction should be reversed because the Government improperly charged her for tax evasion under Section 7201 rather than for willful failure to collect and pay over under Section 7202, here.  Her argument, as stated by the Court of Appeals, was:
Farr argues, as she did in her motion to dismiss, that the Internal Revenue Code (IRC) "provides a specific criminal penalty for those responsible for collecting and paying trust fund taxes who willfully fail to do so under § 7202." App. at 29-30. She argues that the indictment should therefore have charged her with violating § 7202 rather than § 7201. In support, she asserts that "[w]hile ordinarily the government is free to charge under whatever statute it deems appropriate under the facts in question, when Congress sets forth provisions governing the duties, penalties, and procedures with respect to specific conduct or individuals as it did in Section[] 7202 . . . , the government may not ignore th[at] provision[] specifically deemed by Congress to be the appropriate vehicle under which to impose prosecution, simply because it favors another better." Id. at 31.
The Court of appeals rejected the argument as follows:

Wednesday, December 19, 2012

More Swiss Bank Enablers Indicted (12/18/12)

There is a newly unsealed indictment, here, today of three Swiss bankers in the usual venue, the Southern District of New York.  The press release by USAO SDNY is here.  The defendants are Stephan Fellman, Otto Huppi, and Christof Reist who worked for Bank 1, a Zurich bank, as "client advisor to various individuals, including U.S. taxpayers who maintained accounts at Swiss Bank No. 1."  Similar allegations, although fewer, are made regarding one or more of the defendants' activities at Swiss Bank No. 2, Swiss Bank No. 3.and Swiss Bank No. 4.  [I will post the names of the pseudononymous banks when I get that information.]

The indictment alleges a Klein conspiracy "to defraud the United States, to conceal from the IRS the existence of bank accounts maintained at Swiss Bank No. 1, and the income earned in these accounts (hereafter "the undeclared accounts"), and to evade U.S. taxes on income generated in those accounts."  Specifically, they (with other client advisors of Swiss Bank No. 1"conspired with U.S. taxpayer-clients to hide at least $423,000,000 in assets from the IRS."  The U.S. taxpayer-clients are alleged to be members of the conspiracy.  The trio, in the order listed, "personally managed undeclared U.S. taxpayer assets worth at least $104,000,000, $14,800,000, and $5,400,000 respectively."

Now familiar acts of stealth to impair or impede the IRS are alleged: (i) code names; (ii) no mail to U.S.; (iii) meetings in Switzerland; (iv) meetings in the U.S., (v) sham corporate entities, (vi) use of a correspondent bank account in the U.S. for client access to funds, and (vii) U.S. taxpayer-clients filed false returns and failed to file FBARs.  UBS appears several times as a bank from which funds were transferred into Swiss Bank No. 1 after the pressure and resulting publicity on UBS beginning in 2008.

The indictment makes specific allegations for clients names "Client 1," "Client 2," and so forth, but these merely make specific allegations in the nature of the stealth allegations summarized above.

On my quick review, I saw nothing out of the ordinary in this indictment of the enablers.  If I have or obtain from others any more insight of potential use to readers, I will post it.

Further on the Second Circuit Detour on the Interpretation of the Defraud / Klein Conspiracy (12/18/12)

I write today on the Second Circuit's detour in Coplan to question the foundations of the expansive reading in Hammerschmidt of the defraud conspiracy (a Klein conspiracy in a tax setting).  Readers of this blog will know that I have a long-term interest in the subject -- see e.g., my earlier post on the Coplan case, Coplan #1 - Panel Questions Validity of Klein Conspiracy (Federal Tax Crimes Blog 12/1/12), here, and my 2009 article covering the scope of the Klein conspiracy and its Code counterpart, tax obstruction under Section 7212(a), John A. Townsend, Is Making the IRS's Job Harder Enough?, 9 Hous. & Bus. Tax L.J. 260 (2009), here).

Tax Notes Today has an article on the topic, Shamik Trivedi, Is Klein on the Ropes?, 2012 TNT 244-1 (12/19/12).  I thought I would use this pulpit -- not a bully pulpit, but my pulpit -- to address some of the issues raised in the article.

To state the obvious, the issue is all about interpretation.  In Hammerschmidt, the Supreme Court interpreted the word "defraud" in the defraud conspiracy statute (now 18 USC 371, here) broadly and atypically to the usual meaning of the word "defraud."  The "atypicalness" of the interpretation is what prompted the Second Circuit's detour in Coplan.  In hindsight, that expansive interpretation cannot be justified by the normal techniques of interpreting a statute, but the Supreme Court clearly so interpreted the statute.  The Supreme Court's interpretations are the law until overruled.  It is all about interpretation, and the Supreme Court has interpreted.  (Sorry for the redundancy, but it is important.)

I am reminded of a similar process of interpreting the Bible.  In his monumental work, Professor Jim Kugel addresses that process in a way that, I think parallels what happens in this type of interpretation process.  James L. Kugle, How to Read the Bible: A Guide to Scripture, Then and Now (Free Press 2008), here.  Professor Kugel makes the point that the process of interpretation could -- and I think he would say should -- involve giving words meanings not necessarily intended by the original drafters.  I know that will strike religious fundamentalists and constitutional originalists as blasphemy, but it happens both in the context of religion and law (Justice Scalia notwithstanding).  Just to pick a quote from Professor Kugel's book to illustrate:

Tuesday, December 18, 2012

Articles on Offshore Bank Accounts (12/18/12)

Villanova Law Review has the following series of articles arising from a Villanova seminar:


Leslie Book
Page 421, here.
This article is an introduction to the seminar and article topics,
Taxation of Offshore Accounts

Michael C. Durst
Page 433, here.
This article is a short discussion of some ideas for reform.
T. Keith Fogg
Page 441, here.
This article discusses the development of the original offshore initiative in the late 1990s, dealing with credit cards issued by banks in some Caribbean countries which seemed to offer an evidence proof method of repatriating money in offshore banks; but the John Doe summons to credit card companies and processers and good stealth detective work helped the IRS identify many U.S. taxpayers and the first offshore voluntary disclosure initiative drew in many taxpayers.

Friday, December 14, 2012

ABA Tax Section Webcast on Opting Out and FBAR Litigation

The ABA Tax Section is sponsoring a CLE Teleconference and Live Audio Webcast titled:  Through the Looking Glass (Parts I and II): Opting Out of the OVDI Penalty Structure and Litigating FBAR Penalties, on January 16, 2013 1-3pm..  The weib site for the presentation, with a link for signing up, is here.  The participants are major players in the OVDI brouhaha, so I look forward to learning from them.

I have a separate blog entry reporting on this webinar:  Report on Webinar on Opting Out and Litigating FBAR Penalties (Federal Tax Crimes Blog 1/17/13), here.


This panel will discuss matters relating to opting out of the IRS Offshore Voluntary Disclosure Initiative, including “opt-out” mechanics and procedures, and issues relating to examination, negotiation and settlement expectations arising in various “opt-out” scenarios. The panel will also emphasize procedural and substantive issues that are emerging in FBAR assessments and litigation.


Megan L. Brackney, Kostelanetz & Fink LLP, New York, NY
David A. Breen, Senior Counsel, Office of Chief Counsel, SB/SE, IRS, Philadelphia, PA
Caroline D. Ciraolo, Rosenberg Martin Greenberg LLP, Baltimore, MD
David H. Dickieson, Schertler & Onorato LLP, Washington, DC
Mark E. Matthews, Caplin & Drysdale Chartered, Washington, DC
John C. McDougal, Special Trial Attorney, Small Business/Self-Employed Division, Office of Chief Counsel, IRS, Washington, DC
Richard J. Sapinski, Sills Cummis & Gross PC, Newark, NJ
Thomas J. Sawyer, Senior Litigation Counsel, Counsel for International Tax Matters, Tax Division, Department of Justice, Washington, DC
Zhanna A. Ziering, Caplin & Drysdale Chartered, New York, NY

Wednesday, December 12, 2012

Reasonable Doubt - Explaining It to a Jury (12/12/12)

In United States v. Catlett,  (4th Cir. 12/11/12), here, an unpublished opinion, the Court affirmed Catlett's conviction for "conspiracy to defraud the Internal Revenue Service, in violation of 18 U.S.C. § 371 (2006); ten counts of aiding in the preparation of false tax returns, in violation of 26 U.S.C. § 7206(2) (2006); and corruptly endeavoring to obstruct the administration of the internal revenue laws and aiding and abetting, in violation of 18 U.S.C. § 2 (2006), 26 U.S.C. § 7212(a) (2006)."  The opinion is unpublished and seems to have little ongoing import, since it covers ground previous covered.

I did note the following from the opinion:
Catlett also argues that the district court erred in refusing his proposed jury instruction on the definition of reasonable doubt. However, the district court did not err as "[i]t is well settled in this circuit that a district court should not attempt to define the term 'reasonable doubt' in a jury instruction absent a specific request for such a definition from the jury." United States v. Oriakhi, 57 F.3d 1290, 1300 (4th Cir. 1995) (citation omitted).
This is an odd notion that courts tell the jury that they must convict beyond a reasonable doubt but then do not, at the beginning, offer to tell them what the concept means.  In those circuits that offer no further explanation -- at least until the jury inquires -- there is an assumption that the jury knows what those words mean.  And most juries do not inquire further.  Do they know what it means?  I don't know, for as we know (and have discussed on this blog),  juries are a bit of a black box in terms of how they reach their verdict.  See e.g., Coplan #2 - The Sufficiency Challenge for the Conspiracy Counts (Federal Tax Crimes Blog 12/2/12), here.

I offer as a download here the portion of my Federal Tax Crimes book dealing with the concept of reasonable doubt and explaining it to a jury.

Third Circuit on Crime-Fraud Exception to Attorney-Client and Work-Product Privileges (12/12/12)

The Third Circuit yesterday issue a major opinion involving assertions of the attorney-client and work-product privileges and the application of the crime-fraud exception to those privileges.  In Re: Grand Jury John Doe 1; John Doe 2; ABC Corporation, 705 F.3d 133 (3d Cir. 12/11/12), here.  The introduction of the majority opinion is (footnotes omitted):
ABC Corp., John Doe 1, and John Doe 2 are subjects of an ongoing grand jury investigation into an alleged criminal tax scheme.1 As part of that scheme, ABC Corp., under the direction of John Doe 1 and John Doe 2, purchased and subsequently sold numerous companies. These consolidated appeals concern whether documents and testimony relating to legal advice obtained by ABC Corp. in connection with these transactions are shielded by the attorney-client and work product privileges. 
When ABC Corp. objected that the Government had improperly served a subpoena for documents on ABC Corp., the Government issued grand jury subpoenas for those documents to ABC Corp.'s current outside counsel—LaCheen, Wittels & Greenberg, LLP, and Blank Rome, LLP. Later, it also served subpoenas for documents and testimony on three attorneys formerly employed by ABC Corp. as in-house counsel. In each instance, the firms and counsel asserted attorney-client and work product privileges on ABC Corp.'s behalf, the Government moved to enforce the subpoenas, and ABC Corp. opposed the motion as the purported privilege holder. 
The District Court granted the Government's motions to enforce based in part on the crime-fraud exception, which permits the Government to obtain access to otherwise privileged communications and work product when they are used in furtherance of an ongoing or future crime. Finding that the requested communications and work product either did not qualify as privileged or that any protection afforded was vitiated by this exception, the Court largely rejected ABC Corp.'s privilege claims and issued corresponding disclosure orders—the first directed to ABC Corp., LaCheen Wittels, and Blank Rome in March 2012 (the "March Order"), and the second directed to the three in-house counsel in June 2012 (the "June Order").

Tuesday, December 11, 2012

Another Required Records Case; Another Government Win (12/11/12).

We have another required records case and the Government continues its trend of winning these cases.  In re Grand Jury Subpoena Dated February 2, 2012, 908 F. Supp. 2d 348 (ED NY 12/10/12), Bianco, J.  There is nothing particularly exceptional about the case except perhaps two makeweight predicate taxpayer (in this context, "witness") arguments before reaching the required records issue.

First, the witness argued that the summons should not be enforced because the Government already has copies of the documents it seeks from the witness.  The Court rejects this argument as follows:
[R]espondent's argument that the government already possesses the information requested by the Subpoena is based upon sheer speculation and is denied by the government. (See Gov't Reply Mem. of Law at 2) ("The respondent's argument begins with the false premise that the government already possesses the records sought by the Subpoena."); (id.) ("The respondent . . . has no basis for his contention that the government 'already possesses the documents sought by the subpoena.'" (quoting Resp't's Mem. of Law in Opp'n at 3)). Although the government attached to its motion to compel a selection of documents from one foreign bank account with dates spanning from 1992 to August 2008, those documents are hardly (on their face) co-extensive with the scope of the Subpoena. Specifically, the Subpoena required the production of documents for a five-year period prior to February 2012. Thus, the government's selection does not contain any documents for the majority of the five-year period covered by the Subpoena. Moreover, there are no documents from other foreign banks at which the respondent, unbeknownst to the government, may have had accounts. In other words, it is self-evident that the government would have no way of ensuring that all such records from all foreign bank accounts — for which respondent has a financial interest, or is a signatory, or has authority over — have been uncovered unless respondent complies with the Subpoena. In short, there is no reason to believe that the government already possesses all documents sought by the Subpoena. Additionally, the fact that the government has some of respondent's foreign bank records clearly does not preclude it from seeking all such relevant foreign bank records. See, e.g., United States v. Dionisio, 410 U.S. 1, 13 (1973) ("The grand jury may well find it desirable to call numerous witnesses in the course of an investigation. It does not follow that each witness may resist a subpoena on the ground that too many witnesses have been called.").

Statistics on Tax Prosecutions - A New Article Offers Some Insight (12/11/12)

Readers interested in the broader role of plea agreements in the Federal criminal universe, should read a new article, Kyle Graham, Crimes, Widgets, and Plea Bargaining: An Analysis of Charge Content, Pleas and Trials, 100 Calif. L. Rev. 1572 (2012), here.

The author bases the article on a lot of statistics that he has combined into a database useful for the subject of the article.  The sources of the database are summarized at p. 1574 n. 2.  The author concludes the article as follows (pp. 1629-30):
In the final analysis, this Article argues that in at least one important way, crimes should be treated more like widgets, or at least more like "normal" products. Just as corporations engage in market studies prior to a product launch, they also will periodically assess whether their existing products have generated substantial profits, or are leading to losses. Congress and state legislatures have manufactured thousands of crimes. It is difficult to believe that all of these crimes have produced the "profits" - social gains - that legislators believed they would. Close review of crime-specific data would allow states and the federal government to shut down poor-performing product lines, streamline others, and perhaps even add a few new models. Crimes may  [*1630]  not represent widgets, but that does not mean we cannot take an inventory of our previous orders.
The author makes some interesting comments in the body of the article about criminal tax prosecutions are follows:

More IRS and DOJ Entreaties to Join OVDP 2012 (12/11/12)

I have blogged some reports of events at a criminal tax fraud and tax controversy conference sponsored by the American Bar Association Section of Taxation and Criminal Justice Section.  I continue with a summary of a new article, Jeremiah Coder, Numerous New John Doe Summonses in the Works, 2012 TNT 238-1 (12/11/12).  I have requested permission to post the article and will do so if  I receive permission.  In the meaning.  The gravamen of the report is that Government officials are encouraging taxpayers to join OVDP 2012 because of the risk -- at least for some -- of worse consequences if they do not.  Here is a summary of the reports:

1.  John McDougal, a major IRS player in the offshore initiative:
a. The IRS has more John Doe Summonses being prepared, targeting banks and other entities in countries other than Switzerland.
b. The IRS' increased activity, including prosecutions, will increase the incentive to join OVDP.
c.   The IRS is deploying the resources to handle the opt outs consistently through experienced agents, managers and counsel.
d. Opt out agents are taking "neutral positions" in order to properly apply the penalties."
e. Treaty requests are increasing and productive.
f. Checking the schedule B foreign account question "no" will not necessarily result in the willful penalty.

2.  Mark Daly, a DOJ Tax attorney,
a. enablers of foreign bank accounts have found it in their interests to provide information to DOJ Tax.
b. The information received under the deferred prosecution agreement is not covered by the privacy restrictions of Section 6103.  (JAT note:  this apparently would not include the 4,500 (app) which I think was received under the Exchange of Information provision of the Double Tax treaty, so that it would be subject to Section 6103.)

3.  Kevin Downing, a practitioner and formerly major DOJ Tax player in the offshore prosecutions:  "taxpayers can expect future bombshell announcements to come from the government, in part because of whistleblower activity"

Monday, December 10, 2012

I Should At Least Mention Stolen Identity Refund Fraud (12/10/12)

I have not spent any time discussion stolen identity refund fraud ("SIRF") on this blog.  I know it exists and is important, indeed very important in terms of revenue and confidence in the system.  But, SIFR is just blatant stealing and is not the type of tax fraud (more subtle stealing?) that interests me or, I think, most of my readers.  As mentioned in a new article on the Criminal Tax Fraud conference in Las Vegas last week, commentators lamented, in effect, that the IRS is devoting valuable resources to SIRF rather than the type of tax fraud we all know and love.  See Shamik Trivedi, Current and Former CI Officals Debate Focus on Stolen Identity Refund Fraud, 2012 TNT 237-8 (12/10/12).  As reported, they said:
In 2006 CI was running 4,000 open investigations per year, and the most recent figures, from 2011, show more than 5,100 investigations per year, Speier [Richard Speier, former Chief of CI and now on the good side] said. "So I'm trying to figure out, with the escalation of enforcement priority devoted to refund crime, what that leaves for the rest?" 
Ian M. Comisky of Blank Rome LLP was more direct: "You're taking the finest financial investigators in the world, and you're having them do street crime."
I doubt that I will be spending much, if any, time on this blog with SIRF.

Fourth Circuit Rejects Claims of Wrongful Tax Return Information Disclosures by IRS CI Agents Assisting Grand Jury (12/10/12)

In Tucker v. United States, 2012 U.S. App. LEXIS 25076 (4th Cir. 12/5/12), here, unpublished, the taxpayer sued the United States for alleged wrongful disclosures of tax return information under Sections 6103, here, and 7431, here.  The alleged wrongful disclosures were by CI agents assisting in a tax grand jury investigation.  The alleged disclosures were that (1) someone -- being the taxpayer -- would be going to jail for tax evasion (or some variation thereof) and (2) that the CI agents were assisting a grand jury conducting a tax investigation.  The district court rejected the taxpayer's claims.  The Fourth Circuit affirmed.

The first claim addressed was that one Agent told the taxpayer's son that "he [the agent] didn't see any reason why he [the son] should go up the river for something somebody else did."  Without explanation for its conclusion, the Fourth Circuit held:
We agree with the district court that the alleged "up the river" comment did not constitute a disclosure of Tucker's return information as defined in § 6103(b)(2)(A), and therefore, is not actionable under § 7431(a)(1). Accordingly, we affirm the judgment in favor of the government with respect to this statement.
This holding is too cryptic to comment on it.  However, the Fourth Circuit panel's ex cathedra conclusion without analysis does not give a great deal of comfort that the holding is correct.  It may be; I just don't know.  Certainly, the statement as quoted does contain an allegation that "somebody else" committed a crime and, in context, that "somebody else" appears to be the taxpayer.  And, since that conclusion was likely reached based at least in part upon information developed in the IRS phase of the investigation, that information would appear to be return information.  So, I can wonder, but can conclude only that the Fourth Circuit did not articulate a basis for its conclusion.

Saturday, December 8, 2012

DOJ Tax and IRS Entreaties to Join OVDP 2012 (12/8/12)

I posted an earlier blog on a report from the American Bar Association Section of Taxation's annual National Institute on Criminal Tax Fraud in Las Vegas.  See IRS and Practitioners Comment on Streamlined OVDI Procedure (12/7/12), here, reporting on Shamik Trivedi, IRS Urges Low Risk Account Holders to Apply Under Streamlined Procedures, 2012 TNT 236-3 (12/7/12).

Some other key points from the article are:

1. Per Kathryn Keneally, AAG TAX, DOJ Tax and IRS priority is to identify those who moved money "from one investigated bank  to another, especially to those banks that may not have any U.S. operations;" their time is running out.  I think this is a bit too cryptic.  There's some detail behind it that I could speculate.  My speculations are often wrong, so I refrain and spare the reader.

2.  Per IRS Deputy Chief Counsel, the IRS is getting information from "lots of whistleblowers," treaty requests and data mining of information received from other taxpayers in the offshore voluntary disclosure programs.

These are in effect pleas / warnings to taxpayers to turn themselves in by joining OVDP 2012.  I suspect that the truth is that, if a significant number of taxpayers do not turn themselves in, the IRS will have limited ability to discover, investigate and prosecute criminally or civilly all of that dataset.  DOJ Tax and the  IRS are trying to convince taxpayers that the form of audit lottery they play going far now will have worse odds than it had previously.  Perhaps everyone involved will not suffer the consequences, but many will and, among the many that will, could be you.  And the consequences could be far worse than if you come clean now and get right for the past and going forward.

Hale Sheppard Article on Lessons from Williams (12/8/12)

Hale Sheppard, a frequent commentator on the IRS's offshore account initiative, has published a new article on the Williams case that has been a frequent topic on this blog.  The new article appears in the December 2012 issue of Journal of Taxation and is titled Third Time's the Charm: Government Finally Collects ‘Willful’ FBAR Penalty in Williams.  The article can be obtained from the Tax Blawg blog entry titled IRS Finally Collects Civil “Willful” FBAR Penalty in Williams Case – Court Introduces New Lower Standard for Penalizing Taxpayers with Unreported Foreign Accounts (Tax Blawg 12/7/12), here (providing a link with a summary) or directly with this link, here, provided on that blog here.  The article itself has a good history of the civil and criminal journey of Mr. Williams which produced several noteworthy case opinions.

The blog summary end (substantially as the article ends) s as follows:
Alarmists might conclude that Williams stands for the proposition that (i) the standard for asserting civil FBAR penalties is willfulness, (ii) in this context, the government can establish willfulness by showing that the taxpayer was merely reckless, (iii) recklessness exists where a taxpayer does not read and understand every aspect of a complex tax return, including all schedules and statements attached to the return (including Schedule B), as well as any separate forms (including the FBAR) alluded to in the schedules, and (iv) the taxpayer’s motive for not filing an FBAR is not relevant.  Pragmatists, on the other hand, might see Williams as an aberration, based on narrow facts, with little precedential value, and with questionable real-world applicability.  Most people likely will fall somewhere in between.  Regardless of the viewpoint, it is undeniable that Williams introduced issues critical to the FBAR debate, many of which remain unresolved.  Taxpayers and their advisors would be wise to follow the evolving issues, as the incidence of FBAR and other international tax enforcement issues will continue to rise in the future.
Now, some of the related drill down from the article including only the parts I think particularly relevant for my blog (footnotes omitted):

Friday, December 7, 2012

IRS and Practitioners Comment on Streamlined OVDI Procedure (12/7/12)

The American Bar Association Section of Taxation's annual National Institute on Criminal Tax Fraud in Las Vegas is going on now.  A topic of discussion was the relatively new New Streamlined Filing Compliance Procedures for Non-Resident, Non-Filer U.S. Taxpayers (see IRS Instructions here).  Here are excerpts from the program regarding this Procedure  (Shamik Trivedi, IRS Urges Low Risk Account Holders to Apply Under Streamlined Procedures, 2012 TNT 236-3 (12/7/12)):
Taxpayers who do not necessarily meet all the factors under the IRS's streamlined filing compliance procedures for previously unreported offshore accounts should nonetheless apply to the program if they are low-risk account holders, senior IRS officials said December 6. 
The streamlined program, introduced August 31, was meant as a way to allow low-risk, noncompliant account holders to come clean to the government. It introduced a $1,500 threshold for tax due in a year, as well as factors that would increase a taxpayer's risk. Those taxpayers that had no risk factors and met the $1,500 threshold would have their applications "processed in a streamlined manner," the IRS said at the time.  
Just because a taxpayer fails to qualify under the criteria as being low risk is not a reason to avoid applying to the program, said David Horton, director of the IRS Large Business and International Division's international individual compliance function. Missing one of the factors only means that a revenue agent will review the taxpayer's application, Horton said at the American Bar Association Section of Taxation's annual National Institute on Criminal Tax Fraud in Las Vegas.

Judge Rakoff''s Criticism of the Mechanics of the Sentencing Guidelines (12/7/12)

I am a bit late on this report but it comes from a nontax criminal case of some prominence.  It is United States v. Gupta, 2012 U.S. Dist. LEXIS 154226 (SD NY 10/24/12), here, where a former Goldman Sachs director was sentenced for conviction of one count  of conspiracy and three counts of securities fraud.  Judge Rakoff is yet another in a long line of judges who complain about the numbers approach of the Sentencing Guidelines.  Tax crimes practitioners need to be aware of criticisms of the Guidelines because they maybe able to use them some day.

Here is the opening that all white collar practitioners (including tax crimes practitioners) can appreciate:
Imposing a sentence on a fellow human being is a formidable responsibility. It requires a court to consider, with great care and sensitivity, a large complex of facts, and factors. The notion that this complicated analysis, and moral responsibility, can be reduced to the mechanical adding-up of a small set of numbers artificially assigned to a few arbitrarily-selected variables wars with common sense. Whereas apples and oranges may have but a few salient qualities, human beings in their interactions with society are too complicated to be treated-like commodities, and the attempt to do so can only lead to bizarre results. 
Nowhere is this more obvious than in this very case, where the Sentencing Guidelines assign just 2 points to Mr. Gupta for his abuse of a position of trust -- the very heart of his offense -- yet assign him no fewer than 18 points for the resultant but unpredictable monetary gains made by others, from which Mr. Gupta did not in any direct sense receive one penny.

Thursday, December 6, 2012

Is Restitution a Criminal Penalty Requiring the Jury to Speak? (12/6/12)

The Seventh Circuit today decided United States v. Wolfe, 701 F.3d 1206 (7th Cir. 2012), here,, cert. den. 133 S. Ct. 2797 (2013), adopting the minority view that restitution is a civil penalty that does not require the jury to determine the facts.  Doug Berman has a good discussion for an overview of the holding.  See Seventh Circuit rejects extending Southern Union to restitution based on (minority) view it is not a criminal penalty (Sentencing Law and Policy Blog 12/5/12), here.

Aside from the substantive merits of the restitution  issue, Judge Bauer addresses the pressure on a court to override a circuit  court precedent to conform with the majority of the circuits.
Having examined our sister circuits who have addressed whether restitution is civil or criminal in nature, we find ourselves in the minority. Only the Eighth and Tenth Circuits, like us, have found restitution to be civil in nature. See United States v. Millot, 433 F.3d 1057, 1062 (8th Cir. 2006) (stating that restitution orders "are not in the nature of a criminal penalty." (quoting United States v. Carruth, 418 F.3d 900, 904 (8th Cir. 2005))); United States v. Nichols, 169 F.3d 1255, 1279-80 (10th Cir. 1999) (stating that the purpose of restitution under the Victim Witness Protection Act "is not to punish defendants or provide a windfall for crime victims but rather to ensure that victims, to the greatest extent possible, are made whole for their losses." (quoting United States v. Arutunoff, 1 F.3d 1112, 1121 (10th Cir. 1993))).\ 
But a "compelling reason" is required to overrule our Circuit's precedent. United States v. Kendrick, 647 F.3d 732, 734 (7th Cir. 2011). Being in the minority is not enough. This is true even if the trend is against us. See Patel v. Holder, 563 F.3d 565, 569-71 (7th Cir. 2009) (Ripple, J., concurring) (agreeing with the court's judgment because it was based on this Circuit's precedent but writing separately to discuss how our interpretation of the statute "puts us on the distinct minority side of an intercircuit split"); but see Russ v. Watts, 414 F.3d 783, 788 (7th Cir. 2005) (describing why we may overturn our Circuit precedent if no other circuit accepts it (quoting United States v. Hill, 48 F.3d 228, 232 (7th Cir. 1995))). 
Readers will recall that mandatory restitution is not permitted for the Title 26 tax crimes, but is for the Title 28 tax crimes (most prominently, conspiracy).  Usually pleas for Title 26 crimes will include a restitution for the taxes involved.  That provision will then permit the remedies normally available for restitution, as well  as the recently enacted tax assessment remedies for restitution.  See New Statute for Civil Effect of Restitution in Tax Cases (at Least Title 26 Crimes of Conviction) (2/11/11),  here.

Coplan #8 - Summary (12/6/12)

I have finished my trip through Coplan.  I thought a good summary, without the details, but the gravamen of the  Court of Appeals approach and concerns is this "cut and paste" from the excellent blog of a colleague.  Peter D. Hardy, Second Circuit Vacates Part of Tax Shelter Case (White Collar Crime Prof Blog 12/4/12), here.  Mr. Hardy's commentary is focused principally on the sufficiency of the evidence claims.  Here are some excerpts:
The opinion is lengthy and complex, and resists easy summarization.  It is well worth reading because it discusses in detail a kaleidoscope of issues relevant to any "white collar" criminal trial, from evidentiary rulings to jury instructions to sentencing.  This commentary is limited to the sufficiency of evidence claims, and some of their implications for lawyers as potential defendants. 
The panel in Coplan displayed a remarkable willingness to comb through an extremely complicated trial record and test every nuanced inference that the government urged could be drawn from the evidence in support of the verdicts.  The bottom-line holding of the panel was that, after making all inferences in favor of the government, the convictions had to be vacated because the evidence of guilt was at best in equipose. 
Although this general principle can be stated easily, its practical application in Coplan involved the panel conducting a particularized review of the evidence that appellate courts often forego.  For example, one important fact for Shapiro was that a tax opinion letter provided to shelter clients stated that, for the purposes of the "economic substance" test governing tax-related transactions, the clients had a "substantial nontax business purpose" (OK, per the Coplan panel), rather than stating, as it had before Shapiro’s revisions, that the clients had a "principle" (sic - principal) investment purpose.  Likewise, although Shapiro had reviewed letters and attended phone conferences deemed incriminating by the government, his involvement in such conduct was not "habitual" or otherwise substantial.  As for Nissenbaum’s Section 7212(a) conviction, his response to the IDR that the government characterized as obstructive – a partial explanation of the clients’ subjective business reasons for participating in the tax shelters – could not sustain the conviction because the IDR drafted by the IRS had sought all reasons held by the clients, rather than their primary reason.  If this sounds somewhat murky and convoluted, it is.  The point is that multiple convictions for very significant offenses were vacated after much effort at extremely fine line-drawing.

Coplan #7 - Booker Variance Fixes a Glitch in the Guidelines (12/6/12)

One of the defendants, Charles Bolton, pled guilty to a single conspiracy count alleging a conspiracy with three objectives -- a defraud / Klein objective and a two offense objectives and objectives (false statement (18 USC § 1001, here) and to impair and impede the IRS (§ 7212(a), here).  The trial judge sentenced Bolton to a 15 month term of imprisonment and imposed a $3 million fine.  Bolton appealed both this term of imprisonment and his fine.  Just a couple of comments before moving to the sentencing:
  1. Plea agreements usually have a term waiving appeal with, in some cases, appeal permitted on some issues; apparently Bolton's permitted an appeal on these issues;
  2. This conspiracy count was different from the conspiracy count on which the others were tried which involved a defraud / Klein conspiracy objective and two offense objectives (evasion (§ 7201, here) and false statement (18 USC § 1001).
  3. The assertion of a defraud / Klein conspiracy and an offense conspiracy to violated § 7212(a) seems to be redundant.  What am I missing here?  The redundancy, if it exists, is irrelevant to any real world issue, but it seems odd.  (At one point, DOJ Tax in the CTM described § 7212(a) as a one person Klein conspiracy, so the concept of a conspiracy to commit a conspiracy is odd.)
Now, moving to the facts, Bolton, the operator of an investment firm used to implement investing strategies for the shelters, was involved in the concerted action among the defendants.  For example, Bolton proposed a the following "cover story" for a shelter that the trial defendants adopted to pass on to the IRS:
That cover story attributed a key step in the Add-On transaction—the transfer of digital options from the individual partnership to a newly formed LLC—to a request from trader Andrew Krieger to consolidate accounts for administrative convenience. There was no meaningful dispute at trial that the "consolidation cover story" was false.
On appeal, Bolton challenged the procedural and substantive reasonableness of his 15 month sentence.

Wednesday, December 5, 2012

Coplan # 6 - Court Approves the Economic Substance Instruction (12/5/12)

I continue discussion of the issues in United States v. Coplan, et al., 703 F.3d 46 (2d Cir. 11/29/12), here and here.

The Court affirmed the economic substance instruction.  Economic substance is not a clearly defined concept in the tax law, and there are various interpretations of it.  Hence, in my view, it is a difficult concept to convey to a jury.  [Remember the black box nature of the jury I discussed in an earlier blog on Coplan, Coplan #2 - The Sufficiency Challenge for the Conspiracy Counts (Federal Tax Crimes Blog 12/2/12), here. Nevertheless, in a criminal tax case, the courts seem to adopt the most taxpayer friendly version of the economic substance concept (except to the extent they are bound by Circuit precedent) and instruct the jury accordingly.  I think that is what happened in Coplan (subject to Circuit precedent) and the other principal tax shelter criminal tax cases.  I am not saying that is right, because even as thus interpreted, the concept is a difficult one for a lay jury to understand.

Let's see what the Court said about the instruction.  I enclose at the end of this blog the complete economic substance instruction that was given.  The portion that the Court deemed relevant is included in a footnote to the opinion, so I cut and paste here the entire discussion on economic substance (including the footnote with the relevant excerpts from the instructions but excluding another footnote dealing with the codified economic substance doctrine in 26 USC § 7701(o), here):  I present first the excerpted portion of the Economic Substance instruction and then include the text of the discussion without footnotes:

   fn40 With respect to the economic substance test, the District Court instructed the jury as follows:
In order to establish that a transaction lacks economic substance, the government must prove two elements beyond a reasonable doubt: The first element is that there was no reasonable possibility that the transaction would result in a profit. The second element is that the relevant taxpayer had no business purpose for engaging in the transaction in question apart from the creation of the tax deduction.
. . . .
Now, let me say a few words about your determination as to whether or not there was a reasonable possibility that the shelter would result in a profit. This element requires you to reach an objective judgment about whether the government has proved that there was no reasonable possibility that the shelter would result in a profit. In other words, this does not depend upon what the taxpayer believed about the profit potential. It requires you to consider all of the evidence and reach a conclusion about whether the government has proved beyond a reasonable doubt that there was no reasonable possibility of a profit on the tax shelter after the fees and other costs were paid. If you find that the government has proved beyond a reasonable doubt that there was no reasonable possibility of a profit, then you move on to the second element, whether the relevant taxpayer had no business purpose for engaging in the tax shelter. If you find that the government has not proved the lack of a reasonable possibility of a profit, then you must reject the government's theory and find the defendants not guilty.
A VI: 424/6176-77 (paragraph breaks omitted).

Hapless Mr. Williams Loses Again (12/5/12)

I have blogged on Joseph B. Williams III before.  He is the gentleman subject to the FBAR willful penalty that drew such a problematic opinion from the Fourth Circuit imposing the penalty.  See Fourth Circuit Reverses Williams on Willfulness (Federal Tax Crimes Blog 7/20/12; revised 7/24/12), here.  There was a related civil proceeding regarding his income taxes.  I  reported the Tax Court decision in that case earlier.  The Williams Offshore Account Saga Continues - You Win Some, You Lose Some (4/28/11), here.  The Fourth Circuit has now decided the appeal in the Tax Court case, Williams v. Commissioner (4th Cir. - No. No. 11-1804 12/3/12), here, an unpublished opinion, holding against Mr. Williams on the points he raised on appeal.

The Fourth Circuit unpublished decision plows no new ground (which is probably why it is unpublished).  Hence all it does is remind practitioners of settled propositions in the particular fact situation before the court.  The key propositions (with some fleshing out by me for context matters not addressed in the opinion) are:

1.  A guilty plea to income tax evasion for one or more years will be collateral estoppel in an ensuing civil case involving the same years.  Collateral estoppel after a guilty plea for income tax evasion will govern the unlimited statute of limitations in Section 6501(c)(1), here, and the civil fraud penalty in Section 6663, here.  Depending upon the plea and the allocution, It may not determine anything other than a minimum number for the tax liability itself.

2. Tax evasion under Section 7201, here, encompasses evasion of assessment or evasion of payment, or both (it is fair to say that evasion of assessment involves evasion of payment).

Tuesday, December 4, 2012

Coplan #5 - Conscious Avoidance / Willful Blindness - Affirmed as to 1; Sidestepped as to 2 (12/4/12)

I continue discussion of the issues in United States v. Coplan, et al., 703 F.3d 46 (2d Cir. 11/29/12), here and here.

Readers will recall that I have discussed in these blogs the concept of conscious avoidance which appears under various labels (most prominently now, willful blindness (see fn 39 of the opinion below).  The concept, in summary (at risk of losing nuance), is that the statutory requirement for a specific intent (willfulness for a tax crime) can be satisfied if a defendant does not have that intent but consciously avoids learning of a fact that would be a key element of criminality.  Three defendants in Coplan appealed the use a conscious avoidance instruction.

Here is the conscious avoidance instruction for tax evasion that was given (this is not in the opinion, I obtained if from another source):
In determining if a defendant acted knowingly, you may consider whether he deliberately closed his eyes to what otherwise would have  been obvious to him. If, for example, you find beyond a reasonable doubt that the defendant you are considering was aware of a high probability that a CDS Add-On shelter transaction lacked a reasonable possibility of a profit, and that the defendant acted with a conscious purpose to avoid learning the truth about whether or not the shelter had a reasonable possibility of a profit, then the knowledge element is satisfied. In other words, it is no defense that a defendant deliberately closed his eyes to what was right in front of him. On the other hand, if you find that a shelter lacked a reasonable possibility of a profit but that the defendant you are considering actually believed in good faith that the shelter had a reasonable possibility of a profit, then the defendant cannot be convicted of tax evasion on the substantive count you are considering.
I quote the Court's conscious avoidance discussion in full:
B. Conscious Avoidance Instruction 
The defendants further argue that there was no factual basis for the conscious avoidance instruction in connection with Counts Two and Three, the tax evasion charges. "'A conscious avoidance instruction permits a jury to find that a defendant had culpable knowledge of a fact when the evidence shows that the defendant intentionally avoided confirming the fact.'" United States v. Quinones, 635 F.3d 590, 594 (2d Cir. 2011) (quoting United States v. Ferrarini, 219 F.3d 145, 154 (2d Cir. 2000)). fn39 A conscious avoidance instruction is appropriate only when (1) "a defendant asserts the lack of some specific aspect of knowledge required for conviction," and (2) "the appropriate factual predicate for the charge exists, i.e., the evidence is such that a rational juror may reach the conclusion beyond a reasonable doubt that the defendant was aware of a high probability of the fact in dispute and consciously avoided confirming that fact." United States v. Ferguson, 676 F.3d 260, 278 (2d Cir. 2011) (quotation marks omitted). The Government need not choose between an "actual knowledge" and a "conscious avoidance" theory. United States v. Kaplan, 490 F.3d 110, 128 n.7 (2d Cir. 2007).

Coplan #4 - Court Approves Defraud / Klein Instruction -- Making the IRS Job Harder May Be Enough (12/4/12)

I noted in an earlier blog that the Court questioned the expansion of the expansion of the word defraud in defining the criminal conduct necessary for a defraud / Klein conspiracy.  Coplan #1 - Panel Questions Validity of Klein Conspiracy (12/1/12), here.  I quoted the entire instruction in that blog entry, so I won't repeat it here.  Some of the defendants complained that the district declined to give their requested instruction that would advise the jury of limitations on the scope of conduct that was criminalized under the expanded definition of defraud.  (I have written on that issue before and cite my article and related materials at the end of this blog.)

The Court's treatment of this argument is fairly summary, so I quote it in full (footnote containing the instruction  omitted)
In this case, the defendants proposed a jury instruction on Count One that emphasized the distinction between acts that made the IRS's job more difficult and acts that were done deceitfully or dishonestly. Their requested instruction included a number of examples that, in the defendants' view, could not constitute a conspiracy to defraud, in order to advance the defense theory that their conduct was legitimate advocacy on behalf of their clients. See, e.g., A VI: 262 (proposed jury instruction) ("It is not illegal simply to make the IRS's job harder. This is particularly true for the defendants, whose professional obligations as attorneys or certified public accountants required them to represent the interests of their clients vigorously in their dealings with adversaries, such as the IRS."). The District Court adopted the substance of the proposed charge, but declined to include the defendants' examples or to inform the jury about the special obligations of tax professionals who represent clients in an adversarial setting. 
We affirm the District Court's ruling primarily because the defendants' proposed charge did not "accurately represent[ ] the law in every respect." Feliciano, 223 F.3d at 116 (quotation marks omitted). The examples of purportedly lawful conduct proffered by the defendants included the following: "an agreement between witnesses not to tell the government something unless specifically asked about it; advice from an attorney to a client to assert his constitutional right not to speak to government investigators; an agreement not to create a document that individuals had no obligation to create." A VI: 262. Although these acts are not necessarily deceitful, no bright line rule excludes such acts from supporting a conspiracy to defraud. See Cont'l Ore Co. v. Union Carbide & Carbon Corp., 370 U.S. 690, 707 (1962) ("[I]t is well settled that acts which are in themselves legal lose that character when they become constituent elements of an unlawful scheme."). We are not unsympathetic to the defendants' view that a lay jury may struggle to fully apprehend the obligations of tax professionals zealously (and lawfully) representing clients before the IRS. Nevertheless, because the current understanding of the Klein doctrine does not categorically exclude the foregoing acts, the District Court properly omitted the proposed examples from the jury instructions.

Monday, December 3, 2012

Coplan #3 - Venue for False Statements (18 USC 1001) (12/3/12)

This is the third in the series on the major and lengthy opinion in United States v. Coplan, et al., 703 F.3d 46 (2d Cir. 11/29/12), here and here (bookmarked version).  Venue is the topic of this blog.

One of the defendants, Vaughan, challenged venue for the false statement count (18 USC 1001, here) in the Southern District of New York, DOJ's preferred venue for the mega tax shelter trials) rather than in Tennessee where he made the statement.  The key facts are that the statement was made in Tennessee but worked its way to SDNY where the agents considered the statement in the investigation being conducted in SDNY.  Essentially, the Court held that the false statement crime can be committee wherever the statement is properly considered, so that venue can be in the district where the statement is made and the district where the statement is considered.

I thought I would just cut and paste the major portion the discussion of venue for those not familiar with some of the venue concepts (some case citations omitted and some footnotes omitted):
Because "[p]roper venue in criminal proceedings was a matter of concern to the Nation's founders," the United States Constitution "twice safeguards the defendant's venue right." United States v. Cabrales, 524 U.S. 1, 6 (1998). Article III requires that "the Trial of all Crimes . . . shall be held in the State where the said Crimes shall have been committed." U.S. Const. art. III, § 2, cl. 3. The Sixth Amendment further provides that "[i]n all criminal prosecutions, the accused shall enjoy the right to a speedy and public trial, by an impartial jury of the State and district wherein the crime shall have been committed." Id. amend VI; fn31 see also Fed. R. Crim. P. 18 (requiring that "the government must prosecute an offense in a district where the offense was committed"). 
  fn31 "Technically, Article III specifies 'venue' and the Sixth Amendment specifies 'vicinage,' but that refined distinction is no longer of practical importance." United States v. Royer, 549 F.3d 886, 893 n.8 (2d Cir. 2008).

Tax Conviction and Sentence Affirmed Under Unusual Circumstances (12/3/12)

In United States v. Moore, 2012 U.S. App. LEXIS 24621 (4th Cir.  11/28/12) (unpublished), here, the defendant raised many arguments, but I address only two here.

1.  Error in Computing Tax Due at Trial then Conceded at Sentencing.

The prosecutors used the modified bank-deposits method of proof but failed to take into account some expenditures in prosecuting the defendant for tax perjury (Section 7206(1)).  By sentencing, the Government realized the mistake and reduced the tax loss for sentencing by the amounts erroneously not considered before.  The defendant argued that the reduction was newly discovered evidence entitling him to a new trial under Rule 33, FRCrP, here.   The Court rejected the argument on the basis that the defendant  had not shown that the new evidence would have affected the verdict.  Here are the key excerpts of the opinion:
Moore also seeks a new trial based on newly discovered evidence. He argues that, at trial, the government's bank- deposits analysis overstated his taxable income for 2005 through 2007 by $191,236 because he had paid that amount in local and state taxes but did not deduct that amount from gross receipts. By the time of sentencing the government agreed that Moore should be credited with these payments, but at trial it had admitted only that the number should be decreased by about $92,000. Moore argues that Agent Rager's eventual concession at sentencing that the original calculation of Moore's unpaid tax liability was incorrect constituted newly discovered evidence, entitling him to a new trial. We disagree that this development merited a new trial.

Circuit Splits on Defense Witness Immunity (12/3/12)

I have previously written on the issue of a defense request to immunize a witness who invokes his Fifth Amendment privilege, thereby refusing to give testimony potentially helpful  to the defense.  The prosecution can grant immunity when it needs the testimony.  The defense can't.  The  courts will not intervene to give some form of relief except in rare circumstances.  I have previously blogged on various aspects of that issue, and list those blogs at the end of this blog.

I write today to provide some update links for information on this subject.  The Circuit Split Blog  has this discussion of  and link to a law review note.  See New Article Highlights Immunity Grants to Defense Witnesses (Circuit Split Blog 11/30/12), here.  The  note is Nathaniel Lipanovich, Resolving the Circuit Split on Defense Immunity: How the Prosecutorial Misconduct Test Has Failed Defendants and What the Supreme Court Should Do About It, 91 Tex. L. Rev. 175 (2012), here.  I recommend review the Circuit Split Blog entry for its inclusion of a graphic graph.

My prior blogs in reverse chronological order are:\

  • Petition for Certiorari on Issue of Whether Defense Witness Invoking Fifth But Offering Testimony After Conviction is Newly Discovered Evidence (11/14/12), here
  • Defense Witness Immunity (10/10/12), here
  • A White Collar Crime Case with Issues Relevant to Tax Crimes (10/10/12), here; and 
  • Defense Witness Immunity: Prosecutor Discretion and Compelling Testimony of a Reluctant Witness in Criminal Cases (9/6/11), here.

Whistleblowers and FBAR Penalties (12/3/12)

The IRS has determined that the whistleblower award provided in 7623, here, does not allow awards for information leading to FBAR penalties.  See PMTA 2012-10 (April 23,2012), here.  Practitioners have questioned the propriety and the wisdom of  that interpretation.  See e.g., a National Whistleblower Center tome, dated 11/5/12, here.

The issue seems to turn upon whether the scope of Section 7623 covers collections related to non-tax matters administered by the IRS.  I will not  get into the merits because the  items above do that adequately.

I will note that this possibility should give at least the bigger players in the offshore evasion game some concern.  Even if Section 7623 were not to cover FBAR penalties, it would cover any of the related penalties (such as the 5471 penalty and the 3520 penalties).  And, if the IRS were ever to impose an "in-lieu of" penalty instead of the FBAR penalty, that penalty would be subject to award.  I know that the only "in lieu of" penalties on the table now are the OVDI /  OVDP penalties where the taxpayer voluntary outs himself before the IRS knows about the taxpayer's offshore antics.  But, it seems to me that the IRS could offer the whistleblown taxpayer an in lieu of penalty instead of an FBAR penalty in order to have a basis for a whistleblower award.  Keep in mind that, at least for the 7623(b) award, over $2 million has to be involved, so that this opportunity to pay an award could generate some good leads and revenue for the IRS.

Sunday, December 2, 2012

Coplan #2 - The Sufficiency Challenge for the Conspiracy Counts (12/2/12)

In Coplanhere and here, introduced in prior blogs, the Court next addressed the defendants' sufficiency challenges on appeal.  Sufficiency is a term of art in a criminal appeal.  It means basically that, on the evidence presented, no rational trier of fact -- the jury -- could have found the essential factual elements of the crime.  As the panel notes, proving that circumstance is a very high bar.  Everyone who has represented convicted defendants on appeal or observed the process knows that it is a high bar, and rarely met.  In most cases, I suspect that the trial judge will recognize the deficiency and grant a FRCrP Rule 29, here, motion for acquittal, so a good sufficiency challenge will usually not get to the court of appeals.  Which is to say that many inadequate sufficiency challenges do get to the court of appeals.

I am going to step back and briefly address the question of why that is a high bar.  Our legal myth is that the jury makes the right decision at least in most cases, so we will start out with the presumption that it did so in very case.   That is a rebuttable presumption, the issue being the level of proof required to overcome the presumption.  Why do we give the benefit of the doubt to a jury verdict where the jury does not even state why it reached its verdict, which would be required in order to assess properly whether the jury acted rationally.  We just assume that, if the verdict could have been rational, it is rational.  (By contrast, if the judge is the trier of fact in a civil case, Rule 52(a), FRCP, requires the judge to make findings of fact and conclusions of law that will, usually, indicate whether the judge acted rationally.  But if it is the jury in a criminal inquiry, the question -- at least as articulated -- is not whether jury did make a rational verdict but if it possibly could have.  Why?  I offer an answer from a book I recently read, highly recommended.    Kenji Yoshino, A Thousand Times More Fair: What Shakespeare's Plays Teach Us About Justice (2012).   The author develops concepts of justice presented in Shakespeare's major plays.  Key points in his chapter on Othello are (I indent the following some  of which are my own words; most of the words are quotes which I  indicate with quotation marks):
"The great eighteenth-century legal commentator William Blackstone maintained that for every case that turned on an issue of law, over a hundred turned on an issue of fact. To live in such a world—as we always have and will—means justice will be driven by those who determine what happened. Law calls such personages “factfinders.” 
In the factfinding process, the author develops differences between a rational factfinding process -- with focus on the process rather than a particular factfinding -- and supernatural factfinding (such as trial by ordeal) in which God becomes the factfinder to speak the truth.
"As legal historian George Fisher points out, we use the jury not because it is an infallible factfinder, but because it gives us closure in a world in which infallible factfinders do not exist. The jury permits us to evade the inherent difficulties of factfinding, because, like God, the jury need not respond to questions or justify its results. But if so, we have not traveled as far from the supernatural proofs as we may think."

Saturday, December 1, 2012

Coplan #1 - Panel Questions Validity of Klein Conspiracy (12/1/12)

In Coplanhere and here, introduced in yesterday's blog (Major CA2 Decision on E&Y Tax Shelter Convictions (11/29/12), here), the Second Circuit panel's opening shot is to question validity of the defraud / Klein conspiracy.  (The Klein conspiracy is a defraud conspiracy in a tax setting.) The Klein conspiracy is common in federal tax crimes.  As it has been mused before, the first paragraph in the prosecutors' template indictment is a conspiracy count.  And, in tax crimes, the Klein conspiracy is the first count in many of the prosecutions.

The issue is the meaning of the word "defraud" in the conspiracy statute, 18 UCS 371(a), here.  The pertinent part of the provision is short, so I quote it, bolfacing the words that are important here:
If two or more persons conspire either to commit any offense against the United States, or to defraud the United States, or any agency thereof in any manner or for any purpose, and one or more of such persons do any act to effect the object of the conspiracy, each shall be fined under this title or imprisoned not more than five years, or both.
What does "defraud" mean?  The panel questions the conventional wisdom as to what that word means in the statute as enacted by Congress many years ago.

The essence of the panel's reasoning is that, when the defraud conspiracy was enacted (and even now where the term is used in other statutes and other contexts), "defraud" had and has a specific meaning, derived from long Anglo-American jurisprudence.  That meaning is to "to deprive another of property rights by dishonest means."  The general rule of statutory interpretation is that, when Congress incorporates a word of common understanding into a statute, it means that common understanding to govern interpretation unless it states otherwise.  For the "defraud" conspiracy, there is no indication that Congress used or intended the term defraud in any other sense.  Nevertheless, the Supreme Court expanded the definition of defraud and that expansion has been routinely followed since, including in the seminal case of United States v. Klein, 247 F.2d 908 (2d Cir. 1957), here.  As expanded in the tax context, it means (quoting the instruction actually given to the jury in Coplan, quoted in footnote 38 of the panel decision; it is a long instruction and repeats the key expansion of the word "defraud" at several points and in several ways)):
The term "conspiracy to defraud the United States" therefore means that the defendants and their alleged co-conspirators are accused of conspiring to impede, impair, obstruct or defeat, by fraudulent or dishonest means, the lawful functions of the IRS to ascertain taxes and to collect lawfully due and owing tax revenue.

Thursday, November 29, 2012

Major CA2 Decision on E&Y Tax Shelter Convictions (11/29/12)

The Second Circuit rendered its decision in the Coplan tax shelter appeal from criminal convictions.  United States v. Coplan, et al., 703 F.3d 46 (2d Cir. 11/29/12). I offer four links to the case:  here is the copy from the Court site, here is a pdf that I have bookmarked (will have to download to see and follow the bookmarks), here is a link to a case service and here is a link to the GPO website.

Interestingly, oral argument was on November 14, 2011, so it took the panel to over a year to publish.

Given the scope of the opinion, I am going to address specific topics from the opinion in separate blog entries, beginning first with the Court's discussion of the Klein conspiracy as a prohibited common law crime, a deficiency that this panel of the the Court of Appeals could not remedy because the "common law" Klein conspiracy -- if indeed it as that -- had been approved and thus mandated for the panel by the Supreme Court and earlier Second Circuit precedent.  Other topics will following in separate blogs.

The subsequent blogs are:
  • Coplan #1 - Panel Questions Validity of Klein Conspiracy (12/1/12), here.
  • Coplan #2 - The Sufficiency Challenge for the Conspiracy Counts (12/2/12), here.
  • Coplan #3 - Venue for False Statements (18 USC 1001) (12/3/12), here.
  • Coplan #4 - Court Approves Defraud / Klein Instruction -- Making the IRS Job Harder May Be Enough (12/4/12), here.
  • Coplan #5 - Conscious Avoidance / Willful Blindness - Affirmed as to 1; Sidestepped as to 2 (12/4/12), here.
  • Coplan # 6 - Court Approves the Economic Substance Instruction (12/5/12), here.
  • Coplan #7 - Booker Variance Fixes a Glitch in the Guidelines (5/5/12), here,
  • Coplan #8 - Summary (12/5/12), here.

Wednesday, November 28, 2012

Restitution And Tax Collection from Retirement Accounts - Anti-Alienation (11/28/12)

In United States v. Hermann, 2012 U.S. Dist. LEXIS 166523 (ED VA 11/20/12), here [will create the link when available], the Court held that ERISA's Anti-Alienation provision for covered retirement accounts prevented forcible collection of criminal restitution from those accounts.  The Court concluded:
Although there is no Supreme Court or binding circuit authority squarely on point, there is closely analogous Supreme Court authority confirming that ERISA's anti-alienation and assignment provision bars criminal forfeiture of any interest in an ERISA plan. Thus, in Guidry v. Sheet Metal Workers National Pension Fund, 493 U.S. 365 (1990), a union sought to impose a constructive trust over the pension plan benefits owed to a union official who had pled guilty to embezzling funds from the union, in violation of the Labor Management and Disclosure Act of 1959. Id. at 367-69. On these facts, the Supreme Court rejected the effort to impose a constructive trust on the pension plan benefits, holding that ERISA's anti-alienation and assignment provision prohibited such a constructive trust. Id. at 375-76. Importantly, in reaching this conclusion, the Supreme Court declined "to approve any generalized equitable exception—either for employee malfeasance or for criminal misconduct — to ERISA's prohibition in the assignment or alienation of pension benefits." Id. The Supreme Court further explained that ERISA's anti-alienation and assignment provision "reflects a considered congressional policy choice, a decision to safeguard a stream of income for pensioners . . . even if that decision prevents others from securing relief for the wrongs done them." Id. Indeed, the Supreme Court made clear that "[i]f exceptions to this policy are to be made, it is for Congress to undertake that task." Id. And it is clear that Congress has made no such exception in ERISA or the criminal forfeiture statute. The latter, 21 U.S.C. § 853, states that forfeiture applies "irrespective of any provision of State law," but it does not except any federal law. To be sure, Guidry does not involve either an ESOP or criminal forfeiture, nonetheless these factual distinctions provide no reason in principle or policy to conclude that the result in Guidry should not control this case and bar forfeiture of defendant's interest in the ESOP.

Daugerdas Denied Access to Funds Subject to Forfeiture (11/28/12)

In United States v. Daugerdas, 2012 U.S. Dist. LEXIS 167631 (SD NY 11/7/12), Judge Pauley denied Daugerdas access to funds the Government seized pursuant to a post-indictment restraining order.  Readers will recall that Daugerdas was the well-compensated master-mind of a large tax shelter scheme that the Government alleged and proved to have been fraudulent.  I cut and paste Judge Pauley's opinion in this blog in the entirety (except for the caption), because it is efficient and well-reasoned and is instructive for federal tax crimes afficionados.



Defendant pro se Paul M. Daugerdas ("Daugerdas") moves to vacate or modify pre-trial restraints on certain proceeds seized by the Government. n1 For the following reasons, his motion is denied.
   n1 Jenner & Block LLP  (Daugerdas' attorney) has advised this Court that it will seek to withdraw as counsel if Daugerdas does not prevail on this motion. This Court permitted Daugerdas to file this motion pro se based on Jenner & Block LLP's  representation that it could not do so. (See Transcript dated June 25, 2012 at 7-8).

A jury convicted Daugerdas of one count of conspiracy to defraud the United States and the IRS, to commit tax evasion, and to commit mail and wire fraud in violation of 18 U.S.C. § 371; eighteen counts of tax evasion in violation of 26 U.S.C. § 7201 and 18 U.S.C. § 2; three counts of personal income tax evasion in violation of 26 U.S.C. § 7201; one count of corruptly obstructing and impeding the due administration of the Internal Revenue Laws in violation of 26 U.S.C. § 7212(a); and one count of mail fraud in violation of 18 U.S.C. §§ 1341 and 2. On June 6, 2012, this Court granted Daugerdas' motion for a new trial. That decision hinged on juror misconduct, not the sufficiency of the evidence. See United States v. Daugerdas,    867 F. Supp. 2d  445, 2012 U.S. Dist. LEXIS 82597, 2012 WL 2149238, at *1 (S.D.N.Y. Jun. 4, 2012). Daugerdas asserts that he cannot afford counsel unless the Government releases additional funds seized pursuant to a post-indictment restraining order.

Tuesday, November 27, 2012

Swiss Bank Pictet & Cie On DOJ Tax Radar Screen (11/27/12)

The news services report that the Justice Department is investigating Swiss bank Pictet & Cie.   See U.S. justice department probes Swiss bank Pictet (Reuters 11/25/12), here.  This should not be news to anyone paying attention to the unfolding events.

The introductory bullet points in the article are:
  • Pictet says will cooperate with U.S. justice
  • Pictet says business with U.S. clients complies with law
  • Bank had already handed over account data
  • Swiss seeking deal to get investigations dropped

The following is from a Tax Notes Today article, Kristen A. Parillo, Swiss Bank Pictet Under Investigation by Justice Department, 2012 TNT 228-3 (11/27/12)

Monday, November 26, 2012

The Cheek Defense in IRS Disbarment Proceedings (11/26/12)

In Banister v. United States Department of the Treasury, 2012 U.S. App. LEXIS 24179 (9th Cir. 2012), here, an unpublished opinion,  the Ninth Circuit affirmed the district court's decision affirming the disbarment of Mr. Banister from practice before the IRS.  The Court opens:
Banister admitted to advising clients that they were not liable for income taxes based on his belief that the Sixteenth Amendment was not properly ratified and his understanding that Section 861 of the Internal Revenue Code, 26 U.S.C. § 861, and the regulations thereunder ("Section 861") exempted the clients from having to pay income taxes. He also admitted to signing a client's tax returns as the returns' preparer when the returns stated that the client was not liable for income taxes under Section 861. We have jurisdiction pursuant to 28 U.S.C. § 1291. We affirm.
The ho-hum, routine, nonprecedential affirmance is not surprising given the claims that Banister made.  But, I think the Court's discussion if Banister's Cheek good faith defense is noteworthy, as a reminder.  The Cheek is that the defendant did not know the law and therefore could not have violated a known legal duty.  Cheek established that this defense was not available to a person who knows the law but claims the law is invalid.  That was Mr. Banister's problem in asserting the belief that the Sixteenth Amendment had not been properly ratified.

But, Mr. Banister had another arrow in his quiver -- that Section 861, properly read, exempted the persons he counseled from the income tax.  The question here was the role of the reasonableness of his belief.  Readers will recall that Cheek established the even an unreasonable belief that the law, properly interpreted, did not apply is a defense, but that the trier of fact (there the jury) could consider the unreasonableness of the belief as bearing upon whether the defendant actually knew the law's command and intentionally violated the command.  The Ninth Circuit said:

Saturday, November 24, 2012

IRS Memo on U.S. Citizens Resident Abroad Per Treaty (11/24/12)

An IRS memo addresses the U.S. tax status of U.S. citizen deemed to be a resident of a foreign country under a tax treaty "tie breaker" rule.  ECC 201247013 (8/10/12, released 11/23/12), here.  The rule stated is:
A U.S. citizen who is treated as a resident of another country under an income tax treaty would still be required to file a Form 1040 (assuming his income meets the filing thresholds) and would still be subject to U.S. tax on his worldwide income (except to the extent one of the exceptions to the saving clause applies).
The particular memo was issued with respect to Israel, but the general rule stated at the conclusion of the memo would seem to apply to other treaty countries with such a tie breaker rule as well.  And, of course, with respect to countries without such treaty tie-breaker, the U.S. citizen is required to pay U.S. tax on worldwide income.

There seems to be nothing surprising here.

Friday, November 23, 2012

IRS Use of Suspicious Activity Reports of Financial Institutions (11/23/12; revised 11/24/12)

Financial institutions are required to file Suspicious Activity Reports with the Financial Crimes Enforcement Network (FinCEN).  31 USC § 5318(g), here; the SAR form is here; FinCEN guidance is here; see also Wikipedia entry here.  For general background, I offer the following from my Federal Tax Crimes book (footnotes omitted):
Although there is no general duty under American law to report crimes, certain financial institutions (including money services businesses and high cash businesses such as casinos) are required to file with FinCen a report, called a Suspicious Activity Report (“SAR,” but not to be confused with the Special Agent’s Report with the same acronym which we encountered earlier).  This SAR combines features of earlier reports and is in addition to the CTR if required.  The SAR is required if the financial institution “knows, suspects, or has reason to suspect the money was derived from illegal activities” or the transaction was “part of a plan to violate federal laws and financial reporting requirements (structuring).”  The financial institution is not required to investigate or confirm that a crime has been committed. The financial institution is prohibited from telling its customer of the filing of the report, even in response to a subpoena.  The financial institution is protected from liability to the customer.  The IRS may share this SAR with the IRS examination function having civil tax responsibility, but components of the IRS receiving the information are required to keep the information secure to the same extent as if received from a confidential informant.
Recently, some divisions of the IRS have released memoranda advising personnel about the control and confidentiality requirements with respect to accessing SAR information.  See e.g., a recent SB/SE Division Memorandum (SBSE-04-1012-063, dated 10/16/12), here, and an estate and gift tax memorandum dated July 13, 2012, here.  See also an earlier Memorandum of Understanding -- in Government acronym-speak, "MOU," referenced and available at IRM 4.26.14, here, Exhibit 4.16.14-2, here.  For some reason, the MOU is reviewable only on line and then on a page by page basis.

Thursday, November 15, 2012

McBride #3 - Summary Analysis

I want to summarize my thoughts about the meaning, if any, of the McBride case beyond reconciling the dispute between the Government and McBride.  What does it tell taxpayers and the tax community?  I think that there has been some hyperbole about the case that will not bear close analysis.

In presenting my analysis, I will assume the reader's familiarity with the two prior blog discussions of the case.  Those are:
  1. McBride #1 - Court Holds Government Must Prove FBAR Willful Penalty by a Preponderance (11/11/12), here.
  2. McBride #2 - Proof of Willfulness (11/13/12), here.

First, as I previously noted, the facts were particularly damning against McBride on many fronts.  So, I am not sure that particular statements should be taken from the case and assume that they are controlling in less-damning fact patterns.  I have addressed a similar concern with respect to the Fourth Circuit's nonprecedential, unpublished opinion in United States v. Williams, 2012 U.S. App. LEXIS 15017 (4th Cir. 2012), here.  See Fourth Circuit Reverses Williams on Willfulness (Federal Tax Crimes Blog 7/20/12; revised 7/24/12), here; see also, however, my blog on nonprecedential opinions, Nonprecedential / Unpublished Appellate Decisions Morphing Into Precedent? (Federal Tax Crimes Blog 8/29/12), here.  Williams also presented an egregiously bad fact pattern, so as I note in the blog for that reason and for the reason that the Fourth Circuit itself said that the opinion was nonprecedential, I am not sure how much enlightenment the Williams opinion offers in less egregious fact patterns.  The McBride opinion relies significantly upon the Williams opinion and thus incorporates by reference the weakness of the Williams opinion as guidance in other cases with less egregious facts.

Wednesday, November 14, 2012

Petition for Certiorari on Issue of Whether Defense Witness Invoking Fifth But Offering Testimony After Conviction is Newly Discovered Evidence (11/14/12)

I have previously written on the problems of a defense witness asserting his or her Fifth Amendment Privilege.  See Defense Witness Immunity: Prosecutor Discretion and Compelling Testimony of a Reluctant Witness in Criminal Cases (Federal Tax Crimes Blog 9/6/11), here; and Defense Witness Immunity (Federal Tax Crimes Blog 10/10/12), here.  The defendant desiring that testimony for defense has limited options, since the general rule is that the prosecution and the Court are not required to confer immunity to a potential defense witness.

Circuit Splits Blog has an entry on whether a witness' testimony after asserting the Fifth during the trial constitutes "newly discovered evidence" under FRCrP Rule 33  Cert. Petition Challenges Lopsided Split Involving the Scope of “Newly Discovered Evidence” in Criminal Cases (Circuit Splits Blog 11/12/12), here.  FRCrP 33 provides:
Rule 33. New trial
(a) Defendant's Motion.   Upon the defendant's motion, the court may vacate any judgment and grant a new trial if the interest of justice so requires. If the case was tried without a jury, the court may take additional testimony and enter a new judgment.
(b) Time to File.
(1) Newly Discovered Evidence. Any motion for a new trial grounded on newly discovered evidence must be filed within 3 years after the verdict or finding of guilty. If an appeal is pending, the court may not grant a motion for a new trial until the appellate court remands the case.
(2) Other Grounds. Any motion for a new trial grounded on any reason other than newly discovered evidence must be filed within 14 days after the verdict or finding of guilty. 
The Circuit Split Blog notes:
This summer the Fourth Circuit joined a majority of its sister circuits in holding that a convicted co-defendant’s exculpatory testimony given after their invocation of the Fifth Amendment does not constitute “newly discovered evidence” under Federal Rule of Criminal Procedure 33. Griffin v. United States, No. 11-7466 (4th Cir. July 24, 2012) (per curiam) (unpublished).
The Second, Third, Fifth, Sixth, Seventh, Tenth, Eleventh, and D.C., Circuits reach the same conclusion as Griffin.  The one competing Circuit opinion is from the First Circuit.  United States v. Montilla-Rivera, 115 F.3d 1060, 1066 (1st Cir. 1997).

The defendant in Griffin has filed a petition for certiorari on the basis the split.  The link to the petition for certiorari is here.