Tax Court Finds Fraud Based, in Part, On Negative Inference from Fifth Amendment Assertion (7/31/12)

In Loren-Maltese v. Commissioner, T.C. Memo. 2012-214, here, the Tax Court introduces the legal issues as follows:

It's the facts that make this case interesting, but there are three issues of law that color its background: the general rules of tax fraud, the proper tax treatment of money taken by a politician from her campaign fund for personal use, and the effect of taking the Fifth Amendment in civil litigation. 

I address the first and third issues because they are within the scope of this blog.  The discussion of the requirements for fraud are probably familiar to most readers of this blog, but many may not know or fully appreciate the negative inference that may be drawn in a civil case from invoking the Fifth Amendment.

I highly summarize the facts the Court found "interesting," noting at the inception "The silence that shouts out" (see the third issue).  The taxpayer in the case was an elected local official with strong political tentacles of the Republican variety.  According to the findings, "her coiffure is legendary in Chicagoland." Her late husband was also, so he pled to criminal charges, "prominent Cicero politician who confessed to being a mob bookmaker and pleaded guilty to a federal gambling charge."  The taxpayer and her husband abused their positions for reasons of both animus and personal gain.  This got the attention of federal prosecutors.  So found the Tax Court:

In June 2001 a federal grand jury indicted her and several coconspirators for conspiracy to defraud the Town through a pattern of racketeering via multiple acts of bribery, money laundering, mail and wire fraud, official misconduct, and interstate transportation of stolen property. Her criminal trial lasted about three months, culminating in a conviction on August 23, 2002, on all but one count of the indictment (the criminal tax charge later tried separately). This put an end to her political career, and she was sentenced to eight years in prison. The government then tried her separately on the criminal-tax charges, but the jury hung, and the government decided not to try her again. See Gov't Motion to Dismiss Count 13 of the Above-Captioned Indictment, United States v. Spano, No. 1:01-cr-348 (N.D. Ill. Jan. 31, 2003), ECF No. 494. Ms. Loren-Maltese and the other conspirators appealed their convictions and sentences to the Seventh Circuit, which upheld the convictions but remanded for resentencing. See United States v. Spano, 421 F.3d 599 (7th Cir. 2005). The trial court then upheld the original sentence, and she remained imprisoned until 2010.

UBS Loses Big on Facebook (7/31/12)

This was just too good to pass up.  The internet is filled with articles chronicling UBS' misguided Facebook play.  See, e.g., Mark Scott, UBS Profit Falls on Facebook Loss (NYT Deal%k 7/31/12), here.  I am sure other banks and heavy hitters suffered the same fate (just as others on the other side achieved a windfall).  Just a couple of questions.  Does this mega-loss have anything to do with greed?  Does anyone feel sorry for UBS?  UBS does, of course, blame someone else (Nasdaq) for at least some of its Facebook woes.

Two Other UBS Clients Sentenced (7/31/12)

DOJ Tax has announced the sentencing of two other UBS clients.  The press release is here. The key facts are:

Taxpayers:  Sean Roberts and Nadia Roberts
Sentence Date: 7/30/12
Banks: UBS (also accounts in Isle of Man branch of UK bank, Hong Kong, New Zealand,, South Africa, and Liechtenstein bank through Swiss branch)
Entities: Yes (Interline Trade Associates, Limited (a nominee Isle of Man trust), Excalibur Investments Limited, Modest Winner, Tisours, LLC)
Enablers:  "UBS BANKER C.U.;"  "ACCOUNT MANAGER B.S., owner of a Zurich-based financial services company.
Guilt: By Plea Agreement
Count(s) of Conviction: Tax Perjury (1 count) for each of the Roberts
Admissions:  Filing false income tax returns for 2004 - 2008
Maximum Possible Sentence:  3 years.
Sentence Imposed: 1 year and 1 day (eligible for good time credit, 18 USC 3624(b), which can knock off up to 47 days).
Probation: ?
Ages at Sentencing:  ?
Tax Loss: $709,675
Restitution:  $709,675

Civil income tax with penalties and interest:  The defendants agree to cooperate in determining tax liabilities for 2003 forward for individuals and their corporation.

FBAR Penalty: $2,500,000+ (derived high balance is $5,000,000+)
Court: Eastern District of California
Judge: Anthony W. Ishii (Wikipedia entry here)

Are Kastigar Hearings Required Beyond Compelled Testimony Situations (7/30/12)

In Kastigar v. United States, 406 U.S. 441 (1972), the Supreme Court held that, where a witness who has invoked the Fifth Amendment is nevertheless compelled to testify by court order, the protection to insure that the prosecutors do not improperly benefit from the compelled testimony is a hearing in which the prosecutors must prove that its case will not be based on that evidence.  By way of background, in earlier cases, the Court had determined that the compelled testimony under 18 U.S.C. §§ 6002 and 6003 was use and derivative use immunity (as opposed to solely use immunity).  Use and derivative use immunity, the Court had opined, was coterminous with the Fifth Amendment Privilege, and thus fully protective of that Privilege even when the witness's assertion of the Privilege is overridden by the order to testify.  In Kastigar, the Court carved out a procedure, called the Kastigar hearing, where the prosecutors must prove that the Government's case is not based on tainted compelled testimony.  "This burden of proof . . . is not limited to a negation of taint; rather, it imposes on the prosecution the affirmative duty to prove that the evidence it proposes to use is derived from a legitimate source wholly independent of the compelled testimony." Kastigar, 406 U.S. at 460.  The requirement for a predicate Kastigar hearing is a substantial protection for a witness who may later become a defendant because the rigors of the burden imposed on the Government to prove lack of use in the case are substantial.  (For other blog entries on Kastigar, see here.)

One question that has lingered since Kastigar is whether there might be other areas, particularly in the context of privileged communications, where a Kastigar-like hearing is compelled in order to preserve the privilege.  Keep in mind that, if, at trial, the Government attempts improperly to use privileged communications (say attorney-client communications), the defense can object and the matter of the proper use of such communications can be resolved at that time.  Alternatively, the defense might obtain some form of advance hearing via a motion in limine by mounting a credible argument that the Government may improperly rely upon privileged documents.  These "corrective mechanisms" could be available even in compelled testimony over Fifth Amendment privileges, but the Supreme Court had granted in Kastigar the right to the hearing in which the burden is on the Government to disprove improper use.  So, one might think, why would this need for a Kastigar-like corrective mechanism not apply to other potential improper use of other privileged materials the Government posseses?

Are Emails Stored on the ISP's Computer Subject to Fourth Amendment Protections? (7/28/12)

I had a client who seemed obsessed about not wanting to communicate anything substantive in emails.  I did not think that avoiding substantive email content was a material risk, particularly given the nature of my work (civil and criminal tax controversy, including offshore account matters).  So, I thought I would offer this blog with some thoughts based on some research I have done.

The point of departure will be the case of United States v. Warshak, 631 F.3d 266 (6th Cir. 2010), here, reh'g and reh'g en banc denied, 2011 U.S. App. LEXIS 5007 (6th Cir. 2010), a case of phenomenal scope (and sheer length, some 67 pages in F.3d).  Warshak covers both the email issue and a number of other issues that arise in white collar crime (including its subset, federal tax crimes).  So it is a prominent case and even has its own Wikipedia page, here.

In order to introduce the case, I cut and paste from the opening of the case:

Berkeley Premium Nutraceuticals, Inc.,  was an incredibly profitable company that served as the distributor of Enzyte, an herbal supplement purported to enhance male sexual performance. In this appeal, defendants Steven Warshak ("Warshak"), Harriet Warshak ("Harriet"), and TCI Media, Inc. ("TCI"), challenge their convictions stemming from a massive scheme to defraud Berkeley's customers. Warshak and Harriet also challenge their sentences, as well as two forfeiture judgments. 

Given the volume and complexity of the issues presented, we provide the following summary of our holdings: 

(1) Warshak enjoyed a reasonable expectation of privacy in his emails vis-a-vis NuVox, his Internet Service Provider. See Katz v. United States, 389 U.S. 347, 88 S. Ct. 507, 19 L. Ed. 2d 576 (1967). Thus, government agents violated his Fourth Amendment rights by compelling NuVox to turn over the emails without first obtaining a warrant based on probable cause. However, because the agents relied in good faith on provisions of the Stored Communications Act, the exclusionary rule does not apply in this instance. See Illinois v. Krull, 480 U.S. 340, 107 S. Ct. 1160, 94 L. Ed. 2d 364 (1987). 

Another UBS Client is Sentenced (7/26/12)

Luis A. Quintero was sentenced yesterday according to the Press Release from the USAO SDFL, here.

Here are the key facts:

Taxpayer:  Luis A. Quintero
Sentence Date: 7/25/12
Bank: UBS
Entities: Yes (Murano Development Corp (BVI) and Credimax Corporation, S.A. (Panama.)
Guilt: By Plea Agreement
Count(s) of Conviction: FBAR (1 count)
Maximum Possible Sentence:  5 years.
Sentence Imposed: 4 months.
Probation: ?
Age at Sentencing:  64
Tax Loss: ?
Civil income tax with penalties and interest:  ?
Restitution:  ?
FBAR Penalty: $2,000,000 (may be rounded; high balance was $4,005,618)
Court: Southern District of Florida
Judge: Frederico A. Moreno (Wikipedia entry here)

Tax Justice Network: World's Elites Hide Trillions Offshore (7/23/12)

The Tax Prof Blog reports on the Tax Justice Network Study of the amount of offshoring among what readers of this blog often refer to as whales.  See World's Elite Hide $21-32 Trillion From Tax Man in Offshore Accounts (Tax Prof Blog 7/22/12), here.

The Tax Prof Blog quotes the following from the report:

At least $21 trillion of unreported private financial wealth was owned by wealthy individuals via tax havens at the end of 2010. This sum is equivalent to the size of the United States and Japanese economies combined. 

There may be as much as $32 trillion of hidden financial assets held offshore by high net worth individuals, according to our report The Price of Offshore Revisited, which is thought to be the most detailed and rigorous study ever made of financial assets held in offshore financial centres and secrecy structures. 

We consider these numbers to be conservative. This is only financial wealth and excludes a welter of real estate, yachts and other non--financial assets owned via offshore structures.
The research for the Tax Justice Network by former McKinsey & Co Chief Economist James Henry comes amid growing concerns about an enormous and growing gulf between rich and poor in countries around the globe. Accompanying this research is another study by TJN, entitled Inequality: You Don't Know the Half of It, which demonstrates that all studies of economic inequality to date have failed to account properly for this missing wealth. It concludes that inequality is far worse than we think.

Tax Dodgers at Baseball Hall of Fame (7/23/12)

Todays' New York Times has an article on Tax Dodgers at the National Baseball Hall of fame.  Colin Moynihan, Protest Gets a Pedestal Among Baseball’s Greats (NYT 7/22/12), here.  The name Tax Dodgers may conjure up for some readers memories of prominent baseball players who have run afoul of the criminal tax law -- like Duke Snider, Pete Rose and Darryl Strawberry.  But this take is a different one.

The team name on the jersey displayed is the "Tax Dodgers" (the uniform is reminiscent of the Brooklyn Dodgers famed uniform), but the hat displays a 1% logo.  (There is a picture of the jersey and the hat with the article.)

Thus, the Tax Dodger concept is a political statement connected with the Occupy Wall Street movement:

The items, which were donated by a satirical street theater group tied to Occupy Wall Street, have been included in the Hall of Fame Museum not because of their political content but because they reflect baseball’s prominent place in the national landscape, said Tom Shieber, senior curator at the museum. 

* * * * 

The idea to form the Tax Dodgers came early in 2012. A group of Occupy Wall Street activists formed a street theater group to satirize people and companies that use lobbying or loopholes to lower the amount of taxes they pay or to eliminate payments altogether. 

The group roamed through Midtown Manhattan on tax day, April 17, swinging baseball bats and singing about economic deception to the tune of “Take Me Out to the Ball Game.” They visited the Eighth Avenue post office where last-minute filers were standing in line, said Gan Golan, a member of the group, and brought a giant cardboard baseball mitt, emblazoned with the word “Mitt,” to a Romney fund-raiser at the Trump Tower on Fifth Avenue.

For my prior blog on Duke Snider's death, see Duke Snider Dies: A Great Baseball Player Who Made a Wrong Choice (2/27/11), here.

Senate Subcommiittee Report Discusses Offshore Account Father-Son Convictions (7/20/12)

I previously reported on the Senate report focusing on alleged money laundering by HSBC.  See Senate Subcommittee to Report on HSBC Money Laundering (7/16/12), here.  The report has many anecdotes of misbehavior, but one relates to a prosecution and conviction we have discussed before.  We noted the prosecution of a father and son team -- Mauricio Cohen Assor and Leon Cohen Levy

My prior blogs on this father-son team are:

• Father-Son Convictions Affirmed (4/21/12), here.
• First Sentencing in Offshore Case that Went to Trial (2/5/11), here.
• More Offshore Account Charges -- Of HSBC (Reputedly) and Recorded Conversations (4/21/10), here.

The Senate Subcommittee's report describes their conduct in more detail as follows (pp. 279-281, footnotes omitted):

Cohen Bearer Share Accounts. Mauricio Cohen Assor and Leon Cohen Levy, father and son, were hotel developers in Miami Beach.1667 On April 14, 2010, both were indicted in Florida on charges of conspiring to commit tax fraud and filing false tax returns.The Justice Department charged that the Cohens had used bearer share corporations and shell companies to help conceal $150 million in assets and $49 million in income from the IRS. Both resided in Miami Beach, Florida.   

The indictment explained that “bearer share corporations are often set up in tax havens to hide the true ownership of assets, because ownership records are not maintained and nominee officers and directors are often used to appear to control the affairs of the corporation.” 

UBS as Repeat Offender (7/20/12)

The investigative reporter James B. Stewart, has written another good article, UBS’s Track Record of Averting Prosecution (NYT 2012), here.

This article is prompted most immediately by the big banks roles in the LIBOR scandal, but it notes that UBS is a repeat offender of many criminal violations.  While other large banks (e.g., HSBC) are repeat offenders also, UBS "in many ways, UBS is in a league of its own given its track record for scandals."

The article discusses the DOJ guidelines for charging corporations and then provides a litany of UBS offenses:

As the Justice Department points out in its guidelines for charging a corporation with a crime: “A corporation, like a natural person, is expected to learn from its mistakes,” and “a history of similar misconduct may be probative of a corporate culture that encouraged, or at least condoned, such misdeeds, regardless of any compliance programs. Criminal prosecution of a corporation may be particularly appropriate where the corporation previously had been subject to noncriminal guidance, warnings, or sanctions.” 

* * * * 

The bank’s recidivism seems rivaled only by its ability to escape prosecution: 

¶UBS obtained a deferred prosecution agreement in 2009 for conspiring to defraud the United States of tax revenue by creating more than 17,000 secret Swiss accounts for United States taxpayers who failed to declare income and committed tax fraud. UBS bankers trolled for wealthy clients susceptible to tax evasion schemes at professional tennis matches, polo tournaments and celebrity events. One UBS banker smuggled diamonds in a toothpaste tube to accommodate a client. In return for the deferred prosecution agreement, UBS agreed to pay $780 million in fines and penalties and disclose the identities of many of its United States clients. At the same time it settled Securities and Exchange Commission charges that it acted as an unregistered broker dealer and investment adviser to American clients and paid a $200 million fine. In October 2010 the government said UBS had fully complied with its obligations under the agreement and dropped the charges. 

Fourth Circuit Reverses Williams on Willfulness (7/20/12; revised 7/24/12)

The Fourth Circuit just released its nonprecedential opinion in United States v. Williams, (4th Cir. 2012), here or here.  Bottom-line it reverses the district court's holding that Williams had not acted willfully in failing to file his FBAR.  Williams, as readers will recall, involved very bad facts for Williams, but Williams nonetheless convinced the district court that the Government had not proved willfulness.  The appellate panel split 2-1 in reversing the district court.  

I previously posted quick comments immediately after the decision, but now am refining those comments as of 7/24/12 with the benefit of other practitioners' comments and particularly with the benefit of a Tax Notes article, Jeremiuah Coder, FBAR Penalty CAse Reversal Raises Questions About Civil Willfulness Standard, 2012 TNT 142-2 (7/24/12) (cited hereafter as Coder article):

PRELIMINARY COMMENTS ON THE OPINIONS:

1.  Before moving to the merits of the opinions (the majority and dissenting), I think perhaps the most important feature of the case is that it is an unpublished opinion.  Page 2 of the pdf opinion states:  "Unpublished opinions are not binding precedent in this circuit.."  I discuss unpublished opinions at the end of this blog, because they are a big subject.  But, I ask readers to question whether anyone should view an opinion as precedent for anything if the Court drafting the opinion says it is not precedent.  The opinion thus has any effect only if it is internally persuasive in its reasoning.  In that sense, therefore, other than the fact that it is a court stating the opinion, it should be no more effective than a law review article or a legal brief in a case.  Only if the reasoning is persuasive should it have any effect.  Thus, beyond deciding the case at hand (critically important to Mr. Williams), I don't view Williams as being a strong win or a strong loss in terms of its effect on other taxpayers.

2.  This invites us to focus on the persuasiveness of the Williams majority and dissenting opinions to see how and if they may apply in future cases.

3.  Another interesting feature is that, on the very unusual facts of Williams, four judges have now had to state some opinion on the Williams facts.  Two of those judges held for the Government, and two either held or would have held for Williams.

Judge or Jury Trial? What are the Stats? (7/20/12)

Parties in criminal trials should at least consider whether to exercise the right to trial by jury or have a trial to the judge instead.  I am aware of no hard and fast rules on when that is a good choice -- it is a judgment call in the final analysis.  Factors, obviously, include which judge (reading the tea leaves about a judge is not a precise art), costs (a judge trial is likely to be less costly than jury trials), no hung jury (although some may like the possibility), etc.)  I did recently find an article addressing the issue of a key factor -- statistical  outcomes -- that readers may find helpful.  The article apparently appeared in the Wall Street Journal, but is republished here:  Tamer El-Ghobashy, Judge's Acquit More Often Than Juries (Fordham University School of Law Newsroom 8/6/11), here.


The article is a good, quick read.  The article also discusses factors other than statistical outcomes.

The article uses as its centerpiece a case where the defense lawyer was Susan Hoffinger, an exceptional New York lawyer, whose bio is here.  I had the pleasure of working with Ms. Hoffinger and her father, Jack Hoffinger (bio here), in the KPMG-related criminal mega-case in NYC.  Jack is exceptional also.

Defendant Waives Attorney-Client Privilege by Asserting Reliance on FBAR Advice Defense (7/19/12)

In United States v. Kerr, 2012 U.S. Dist. LEXIS 98836 (D AZ 2012), here, a case with two U.S. taxpayers and their lawyer as defendants, the court held that the indicted U.S. taxpayers' claims of reliance constituted a waiver of their attorney-client privilege with respect to communications with their lawyer, the one that was indicted with them.  (The indictment in the case was discussed in a prior blog, 2 Taxpayers and their U.S. Lawyer Indicted re Foreign Accounts (2/1/12), here.)  The Government had argued alternatively that the crime-fraud exception applied, but the holding on waiver mooted the need for the court to address that alternative holding.

The Court's analysis of the waiver holder is short, so I cut and paste it here:

Attorney-client privilege may be waived where a party raises a claim or defense that, in fairness, requires the disclosure of protected communication. See Chevron Corp., 974 F.2d at 1162. In Chevron, the plaintiff sought to compel disclosure of documents that supported the defendant's affirmative claim that "[i]nsofar as the decision to proceed with an investment in Chevron was based upon tax considerations, it was made in reliance upon the advice of our tax counsel." Id. at 1163. In response, the defendant refused to supply the documents, arguing that the communications were protected by attorney-client privilege. The Ninth Circuit disagreed, holding that the defendant could not "invoke the attorney-client privilege" to deny the plaintiff of the information it needed to demonstrate the defendant's violation of disclosure requirements. Id. As a result, the defendant was found to have implicitly waived the attorney-client privilege with respect to all relevant communications. 

Similarly, to the extent that Kerr claims that both his and Quiel's failure to file FBARs and their filing of allegedly false tax returns were based on the advice of counsel, Kerr places at issue the reporting and tax advice they received from Rusch. As Kerr argues in his Response, "the defendants were merely following Rusch's advice and did not engage in 'willful' misconduct, as required by the relevant statute." Doc. 76 at 7. Consequently, Kerr cannot invoke the attorney-client privilege to deny the government the very communications and information it must refute in order to prove that Defendants conspired to defraud the United States, willfully failed to file FBARs, and willfully filed false tax returns for tax years 2007 and 2008. 

Third Circuit Addresses Kastigar Requirements After Immunized Testimony (7/19/12)

In United States v. Bagdis, 2012 U.S. App. LEXIS 14672 (3d Cir. 2012), here, cert denied, 2013 U.S. LEXIS 917 (1/22/13), a nonprecedential opinion, the Third Circuit affirmed a taxpayer's conviction for one count of attempting to obstruct the administration of the Internal Revenue Code (§ 7212, 3 year max per count); seven counts of conspiracy to defraud the United States (18 USC § 371, the Klein conspiracy,. 5 year max per count); eight counts of aiding and assisting in the preparation of false tax returns (§ 7206(2), 3 year max per count); three counts of failure to file tax returns or supply information (§ 7203, 1 year max per count); and five counts of failure to file currency transaction reports by a business (31 USC § 5322, 5 year max per count).  (My rough and ready calculation of the permitted effect of "stacking" these to reach the maximum possible sentence indicates a maximum sentence of 90 years.)

In calculating the Guidelines range, the court included an obstruction 2 level enhancement.  The range thus derived was 121 months to 151 months.  The court sentenced to 120 months, but assigned that 120 months to the count for tax obstruction (§ 7212), with the sentencing on the other 26 counts to run concurrently.  The judge must have been asleep at the bench on that one, because the defendants was convicted of only one count of tax obstruction, with a maximum sentence of 3 years (36 months) and sentencing in excess of a count of conviction is a no-no.  (As my calculation above indicates, there is certainly a way to achieve a 120 month sentence, but it cannot be done the way the sentencing judge did it.)  After the parties called the error to the sentencing judge's attention, he then proceeded to make the same genre of error by imposing a sentence of 42 months on an aiding and assisting that had a statutory maximum of 36 months.  [The court of appeals' discussion on this point is less than satisfying, but I decline to speculate further about it; the case was remanded to permit the sentencing judge to get it right this time.]

On appeal, the defendant claimed that the district court had erred by not forcing a Kastigar hearing to prove that the Government had not used immunized testimony.  Kastigar v. United States, 406 U.S. 441 (1972).  The background was that, in its investigation leading to the instant prosecution, the IRS conducted a sting operation on the defendant, a lawyer, who marketed his services as created a labyrinth of corporations to hide taxable income in plain sight.  During that sting operation, the defendant disclosed to the sting agents that the lawyer had given immunized testimony in another district, a phenomenon previously unknown to the investigators.  The immunity had been granted in that separate investigation by letter that "afforded protection that [was] coextensive with, and no less than, formal statutory use immunity" codified at 18 U.S.C. § 6002." A "taint team" was established to insure that, in the current investigation, the IRS used no information from the immunized testimony.  After indictment, the defendant then sought a Kastigar hearing.  (I attach at the end of this blog some materials from the current draft of my Federal Tax Crimes text that explain the purpose of the Kastigar hearing.)

Booker Variances - How Far Can a Sentencing Court Go? (7/18/12)

Since Booker, white collar crime practitioners -- including tax crime practitioners -- have devoted much creative time to Booker variances from the rigidity of the Sentencing Guidelines.  See, for example, my blog on Major 3d Circuit En Banc Decision on Booker Sentencing in Tax Case (4/17/09), here, discussing a major Booker downward variance in a tax case.

Doug Berman, the sentencing guru, has a posting about a significant 1st Circuit decision, United States v. Prosperi, 686 F.3d 32 (1st Cir. 2012), here.  Berman's posting, First Circuit affirms (way-)below-guideline sentence for Big Dig white-collar offenders, is here.

Berman quotes the opening paragraphs of Prosperi and then concludes:  "Prosperi is a must-read not just for white-collar federal sentencing practitioners, but for all those still unsure about the scope of sentencing discretion in the post-Booker world."  So, I offer the opening and the closing paragraphs of the opinion.

The United States challenges the sentences imposed on appellees Robert Prosperi and Gregory Stevenson after their conviction of mail fraud, highway project fraud, and conspiracy to defraud the government. Both appellees were employees of Aggregate Industries NE, Inc. ("Aggregate"), a subcontractor that provided concrete for Boston's Central Artery/Tunnel project, popularly known as the "Big Dig." The government charged that over the course of nine years Aggregate knowingly provided concrete that failed to meet project specifications and concealed that failure by creating false documentation purporting to show that the concrete provided complied with the relevant specifications. Several employees of Aggregate, including Prosperi and Stevenson, were convicted of criminal offenses for their roles in the scheme. 

At sentencing, the district court calculated the guidelines sentencing range ("GSR") for Prosperi and Stevenson as 87- to 108-months incarceration. Then, explaining fully its rationale for a below-guidelines sentence, the court sentenced Prosperi and Stevenson to six months of home monitoring, three years of probation, and 1,000 hours of community service. The government now appeals, arguing that under Gall v. United States, 552 U.S. 38 (2007), the sentences imposed by the district court were substantively unreasonable and that the appellees' crimes warrant incarceration.

We affirm. Although the degree to which the sentences vary from the GSR gives us pause, the district court's explanation ultimately supports the reasonableness of the sentences imposed. The district court emphasized that its finding on the loss amount caused by the crimes, the most significant factor in determining the GSR, was imprecise and did not fairly reflect the defendants' culpability. Hence it would not permit the loss estimate to unduly drive its sentencing decision. Relatedly, it found that there was insufficient evidence to conclude that the defendants' conduct made the Big Dig unsafe in any way or that the defendants profited from the offenses. The court then supplemented these critical findings with consideration of the individual circumstances of the defendants and concluded that probationary sentences were appropriate. We cannot say that it abused its discretion in doing so. 

Some Nontax Voluntary Disclosures Don't Work (7/18/12)

Jonathan Turley reports this morning of an instance where a disclosure, apparently voluntary, did not avoid prosecution.  Arizona Man Interviews For Border Patrol and Proceeds To Confess To Child Molestation, Bestiality, and Drug Use (Jonathan Turley Blog 7/18/12), here.

We can be thankful that, in our tax universe, we have a voluntary disclosure practice that will work.

Appeals Waivers as Problems and Not (Always) Solutions (7/18/12; Updated 8/23/12)

In United States v. Ernst (4th Cir. No. 12-4012 (7/16/12), here, an unpublished decision, the defendant pled guilty to violations of tax obstruction (§ 7212(a)) and failure to file (§ 7203).  The plea agreement had a broadly worded appeals waiver.  On appeal, the Fourth Circuit affirmed an appeals waiver, but remanded for factual findings regarding the defendant's ability to pay the substantial restitution ($4,490,966.08) and fashioning an appropriate payment schedule.

Although Ernst is an unpublished opinion, it should remind practitioners of certain key points discussed in the opinion:

1.  Appeals waivers will be sustained.  While acknowledging that an appeals waiver will not be sustained if "if to do so would result in a miscarriage of justice," Ernst was not such a case.  This is what is generally a routine acceptance of an appeals waiver.  I provide further discussion of appeals waivers below.

2.  To the extent that defendant complains of ineffective assistance of counsel, these claims should be raised in a 28 USC § 2255 proceeding rather than on direct appeal.

3.  The defendant knowingly and intelligently entered the plea agreement including the appeals waiver despite his alleged mental condition.

4.  Restitution was properly ordered pursuant to the defendant's agreement in the plea agreement to pay restitution.  In this regard, readers will recall that, for Title 26 tax crimes, restitution is not permitted unless the defendant agrees to restitution.  See 18 USC §3663(a)(3) ("The court may also order restitution in any criminal case to the extent agreed to by the parties in a plea agreement.").

5.  Remand is required to making the factual findings to support a payment schedule.

Senate Subcommittee to Report on HSBC Money Laundering (7/16/12)

NYT's DealBook (or DealB%k) reports that a Senate subcommittee is shining the light on HSBC, a known suspect for criminal conduct, this time for money laundering.  See Nathaniel Popper, Scathing Report Details Money Laundering at HSBC (NYT DealB%k 7/16/02), here.

Here are the opening paragraphs:

The global bank HSBC has been used by Mexican drug cartels looking to get cash back into the United States, by Saudi Arabian banks that needed access to dollars despite their terrorist ties, and by Iranians who wanted to circumvent United States sanctions. 

A 335-page report set to be released Tuesday levels these accusations and says that both bank executives and regulators at the Office of the Comptroller of the Currency ignored warning signs and failed to stop the illegal behavior at various times between 2001 and 2010.

The report is the product of a yearlong investigation by a United States Senate subcommittee, which points to HSBC as an indication of a broader problem of illegal money flowing through international financial institutions into the United States, and the failure of American bank regulators to catch the problems.

I will post more later after the report is actually available.
I do note that large banks are much in the news nowadays in various unflattering contexts.  JP Morgan Chase and Barclays included.  Now HSBC, again in another context.  And in the not too recent past UBS and even HSBC (redundant).



The Senate Permanent Subcommittee on Investigations Media Report is here.  The report can be downloaded from that site.


The hearing agenda, with identities of witnesses and their written statements for download, is here.  (Actually, the hearing is going on during the morning of 7/17/12 and there is a live feed of the hearing at that site as well.)

Form 8938 Resource (7/13/12)

I wanted to make readers aware of this resource article:

Hale Sheppard, The New Duty to Report Foreign Financial Assets on Form 8938: Demystifying the Complex Rules and Severe Consequences of Noncompliance, International Tax Journal 13 (May - June 2012), here.

I have paged through it but have not studied it.  Still, it looks excellent, consistent with Hale's reputation.  When (if) I have time to study it, I may offer some comments.  However, I hope readers who have the interest will also read the article and make comments as well.

France and Germany Get Tough with Credit Suisse (7/11/12)

The internet news reports that France and Germany are taking action.  The following is from Kim Willsher, France, Germany tax evasion inquiries target Swiss bank clients (Los Angeles Times 7/11/12), here.

PARIS — France and Germany have launched a series of raids on the offices and homes of bank officials and their wealthy customers in an ongoing inquiry aimed at cracking down on those who evade taxes by using Swiss banks. 

On Tuesday, German police searched the homes of an unspecified number of Credit Suisse bank customers suspected of tax evasion. In France, detectives raided the offices of Swiss banking and finance house UBS in three major cities: Lyon, Bordeaux and Strasbourg. 

* * * *  

The homes of several high-ranking UBS employees in Strasbourg were also searched Tuesday, according to a French police source. The French prosecutor's office refused comment, saying the investigation was ongoing. The bank said it would cooperate. 

* * * * 

In Germany, tax officials are investigating about 5,000 clients of Credit Suisse over Bermuda-based life insurance products used by some wealthy clients to avoid taxes. The bank insisted it stopped selling the products in 2009. 

Age and Sentencing -- On the Rara Avis (7/11/12)

One of the issues presented in sentencing of older defendants is whether a sentence stated in years can effectively be a life sentence.  Judge Posner of the Seventh Circuit authored an interesting discussion of this issue in United States v. Johnson, 685 F.3d 660 (7th Cir. 2012), here,

The defendant was 70 years old at sentencing for counts of convictions for controlled substances and possession of an unregistered firearm.  On appeal, the defendant's lawyer filed an Anders brief, "seeking leave to withdraw on the ground that he can't find a colorable ground for an appeal."  Judge Posner found one issue that he wanted to discuss:

The only possible such ground is the judge's decision not to give a below-guidelines sentence despite the defendant's age, a question discussed at length at the sentencing hearing, where his lawyer argued that the defendant should get a shorter sentence than 78 months (six and a half years) because he is (or rather was, at sentencing) 70 years old (he is now 71) and so might die before he was released from prison. The judge consulted the Census Bureau's life-expectancy table and found that the life expectancy of a black male aged 70 is 12.4 years. So even without any time off for good behavior, which would reduce his time served by a maximum of 10 months and thus to 5 years and 8 months, the defendant's sentence does not exceed his life expectancy.

Under the facts, therefore, there was no indication that the sentencing nominated in years would in fact be a life sentence.  But, the facts did suggest to Judge Posner "two questions: the bearing of old age on sentencing, and the bearing of life expectancy on sentencing."

Sealed Indictments - A Primer (7/11/12; revised 6/29/16)

I am in the process of updating my Federal Tax Crimes book.  I just added a discussion on sealed indictments and thought the readers of this blog might be interested in the subject (the following is a cut and paste from the draft of the revision):

The indictment is a public document.  FRCrP Rule 6(e)(4) permits the Magistrate Judge to seal an indictment “until the defendant is in custody or has been released pending trial.”  The following is from a Federal Judicial Center publication:

An indictment is sometimes filed under seal and kept sealed until the defendant appears. The indictment is kept sealed so as to not tip off the defendant. In some districts, indictments are initially sealed as a matter of course. Once the defendant has appeared, the indictment can be unsealed. If the defendant cooperates with the government’s prosecution of others, who may be defendants in the same case or defendants in cases with other case numbers, then the case may remain sealed because of cooperation. Sometimes an indictment remains sealed after the defendant appears because no one thought to unseal it. 

In a multi-defendant case, it is possible to seal the prosecution against one defendant while the prosecution against another defendant is not sealed. For this project, only cases sealed as to all defendants were counted as sealed cases. In a few of these, the court kept the case sealed until all defendants appeared, which presumably would require either the explicit or implicit consent of those defendants who did appear. 

Sometimes the government asks the court to dismiss a sealed indictment against a defendant who has not yet appeared. Perhaps the government has decided not to prosecute the defendant after all, or the government has decided to prosecute the defendant with a different indictment or in a different jurisdiction. In a few cases, the sealed indictment was transferred. It is not clear whether such indictments should remain sealed permanently. n1640

7th Circuit Speaks on Convictions for Tax Evasion and Failure to File (7/7/12)

In United States v. Collins, ___ F.3d ___, 2012 U.S. App. LEXIS 13743 (7th Cir. 2012), here GS here, the defendant, a former city councilman and vice-mayor of East St. Louis, IL, was convicted of tax evasion (§ 7201), failure to file (§ 7203), and voter fraud (42 U.S.C. § 1973i(c)).  I focus here on the tax counts of conviction.

The key facts are that, while being investigated for voter fraud and related possible crimes, the federal agents check his IRS records and discovered that he had not filed income tax returns since March 1992.  He was indicted for tax "was indicted on nine counts: three counts of tax evasion in violation of 26 U.S.C. § 7201 (for tax years 2003, 2004, and 2005); [and] three counts of willful failure to file tax returns in violation of 26 U.S.C. § 7203 (for the same years)."  With this background, the key facets of the case are:

1.  The Cheek Instructions.  The defendant complained that the district court had given only the standard Cheek instructions from the Seventh Circuit's Pattern Jury Instructions.  These instructions were (i) "the term 'willfully' means the voluntary and intentional violation of a known legal duty," and that "defendant does not act willfully if he believes in good faith that he is acting within the law."  The additional instruction defendant sought and the district court refused to given was that willful did not include "negligence, inadvertence, justifiable excuse, mistake, or a misunderstanding of the law."  This nuance on the word willfully is, of course, a correct nuance and implicit in the instructions that the trial court did give.  The Court of Appeals held that the trial court had not abused its discretion in not giving that requested instruction, invoking standard holdings that the jury was adequately instructed by the instructions given.  The Court of Appeals said (685 F.3d at 656):

Collins's jury was properly instructed on the element of willfulness; the two pattern instructions necessarily—if implicitly—excluded a conviction based on negligent failure to file. Collins's proposed supplemental instruction regarding negligence was redundant and therefore unnecessary. It was also wholly unsupported by the evidence in this case. Collins's persistent failure to file federal and state tax returns—spanning nearly 20 years—cannot plausibly be attributed to mere "negligence."

2.  Conviction for Evasion and Failure to File for the Same Years.  The defendant complained about the sufficiency of the evidence to support the jury conviction on the tax evasion counts.  If that argument prevailed, the defendant would have still been guilty of the three counts of failure to file crime which is a misdemeanor and, setting aside the voter fraud, would have capped the sentence at 36 months (although the Sentencing Guidelines factors would not have been affected).  The Court of Appeals found ample evidence that established the minimal sufficiency to allow the jury's convictions to stand.  In the course of its discussion, the Court of Appeals said (685 F.3d at 656), some case citations omitted):

Vatican Bank as Money Laundering and Tax Haven? (7/7/12)

As the world moves to more transparency from financial institutions (most notably Swiss institutions who have exploited their ability to hide ill-gotten gains and taxable income), it is not surprising that that another bastion of secrecy -- the Vatican, or the diplomatic lingo, the Holy See, see Wikipedia here -- is being targeted, although from a different direction.  See Andreas Wassermann and Peter Wensierski, Transparency vs. Money Laundering: Catholic Church Fears Growing Vatican Bank Scandal (Spiegel 7/2/12), here.

The Vatican Bank, "officially known as the Institute for Works of Religion (IOR)," like the rest of the Vatican is shrouded in secrecy.  (Did Jesus and the Disciples keep their finances secret?)  According to the article, the Vatican Bank is "something akin to a trust company for clandestine monetary transactions that is not only used by the Church, but allegedly also by the mafia as well as corrupt politicians and companies."  Italian officials, the article reports, are "rummaging around their [the Bank's] secret affairs."

Among other interesting quotes from the article:

For more than 40 years, the IOR, founded in 1942, has been regularly embroiled in scandals, including bribery money for political parties, mafia money-laundering and, repeatedly, anonymous accounts. 

Despite all of its sacred and solemn promises, the Vatican has succeeded in keeping the pope's bank a haven for money-launderers. And instead of being on some Caribbean island, this one is right in the middle of Europe, in the heart of Rome. 

Sixth Circuit Rejects Becker-Influenced Sentence (7/5/12)

In United States v. Ciccolini, 2012 U.S. App. LEXIS 13636 (6th Cir. 2012) (unpublished), here, the defendant was an ordained priest who stole from a charity, a Foundation, he was supposed to serve and, in the process, became wealthy.  He structured deposits of his ill-gotten gains into this bank accounts and failed to pay taxes on some of the income.  He was charged with one count of structuring under 31 USC. § 5324(a)(3) and one count of tax perjury under 26 USC. § 7206(1).  He pled guilty to both counts, but prior to doing so had paid the IRS $292,136 as restitution for the taxes involved.  At sentencing, the judge denied the acceptance of responsibility downward adjustment because the defendant lied in the colloquy regarding the source of the structured funds (also taxable income) and applied a 2-level upward adjustment for obstruction, apparently related to the same conduct.  Those adjustments with others indicated a guideline sentencing range of 63-78 months.  The sentencing judge then, exercising his Booker discretion under 18 USC  § 3553(a), sentenced the defendant to 1 day in jail (actually 1 day in jail for each count of conviction,  to be served concurrently).  But, he imposed restitution of $3,500,000, to be paid to the Foundation from which the defendant stole.  

For sentencing guideline and Booker fans, this seems facially an odd result.  Certainly moving from an indicated sentencing range off 63-78 months to 1 day seems -- let me be more bold, is -- odd, particularly after the defendant lied in his colloquy.  The restitution amount is also odd, at least in the facts of the case.  The rub was that the restitution was far beyond what the restitution statute, 18 USC  § 3553(a), permits (the statute did not permit restitution for the crimes of conviction).  That was the rub.  The Sixth Circuit, thus, apparently had no choice but to reverse the sentence.  The Court noted that, because the 1 day incarceration sentence was related to the restitution amount, both facets must be reversed for resentencing.

So, how did the sentencing court get to the odd and offsetting sentencing components -- one day incarceration (decidedly too little under normal sentencing concepts) and $3,500,000 (decidedly too high under normal sentencing concepts)?