Thursday, April 24, 2014

Supreme Court Passes On Exessive Fines Issue with Regard to Restitution in a NonTax Case (4/24/14)

In Paroline v. United States, 2014 U.S. LEXIS 2936 (U.S. Apr. 23, 2014), here, the Court held (from Scotus Blog here):
Each individual — among hundreds and maybe thousands — found guilty of keeping and looking at images of a child being sexually abused must pay the victim something more than a “trivial” sum, but none of them can be required to pay for all that the victim has lost, the Supreme Court ruled Wednesday in a five-to-four decision.
Essentially, the Court read the statute to require proof of proximate cause -- a legal nexus concept applicable in other areas of the law -- to link the offense committed to the harm for which damages are awarded as restitution.  So a single offender, Paroline, may have caused the victim damage but not all of the damage caused by other independent possessors and viewers.

Paroline has no practical immediate applicability to the subject of federal tax crimes.  But, the Court did have some general statements about restitution and the possible application of the Excessive Fines Clause.
The reality is that the victim’s suggested approach would amount to holding each possessor of her images liable for the conduct of thousands of other independently acting possessors and distributors, with no legal or practical avenue for seeking contribution. That approach is so severe it might raise questions under the Excessive Fines Clause of the Eighth Amendment. To be sure, this Court has said that “the Excessive Fines Clause was intended to limit only those fines directly imposed by, and payable to, the government.” Browning-Ferris Industries of Vt., Inc. v. Kelco Disposal, Inc., 492 U. S. 257, 268 (1989). But while restitution under §2259 is paid to a victim, it is imposed by the Government “at the culmination of a criminal proceeding and requires conviction of an underlying” crime, United States v. Bajakajian, 524 U. S. 321, 328 (1998). Thus, despite the differences between restitution and a traditional fine, restitution still implicates “the prosecutorial powers of government,” Browning-Ferris, supra, at 275. The primary goal of restitution is remedial or compensatory, cf. Bajakajian, supra, at 329, but it also serves punitive purposes, see Pasquantino v. United States, 544 U. S. 349, 365 (2005) (“The purpose of awarding restitution” under 18 U. S. C. §3663A “is . . . to mete out appropriate criminal punishment”); Kelly, 479 U. S., at 49, n. 10.  That may be “sufficient to bring [it] within the purview of the Excessive Fines Clause,” Bajakajian, supra, at 329, n. 4. And there is a real question whether holding a single possessor liable for millions of dollars in losses collectively caused by thousands of independent actors might be excessive and disproportionate in these circumstances. These concerns offer further reason not to interpret the statute the way the victim suggests.
Readers of this blog will recall that the Excessive Fines Clause is implicated by multi-year application of the 50% willful FBAR penalty.  The FBAR penalty is pure penalty and not reimbursement for any harm done, so even the policy arguments made in Paroline would not apply to mitigate full bore application of the Exessive Fines Clause.  In this regard, keep in mind that the Government has tax assessment and collection tools to obtain any financial reimbursement to which it is entitled.  As a result, the FBAR penalties (and even the miscellaneous penalty in lieu of FBAR inside the OVDI/P) often many times exceeds the tax involved.  I had a case where the miscellaneous penalty was over 12,000 times the tax involved.  We opted out and the resulting nonwillful penalty was 1/40th of the miscellaneous penalty, so the Excessive Fines issue was avoided.

It might be helpful to take a quick look at Bajakajian, opinion here,cited in Paroline, which is applicable in the FBAR context.  Here is my discussion of Bajakajian from my Federal Tax Crimes book:
In United States v. Bajakajian, 524 U.S. 321 (1998), the Supreme Court held that criminal forfeiture is subject to the Constitution’s prohibition against Excessive Fines and further held that the forfeiture under consideration there violated that Constitutional guarantee.  In that case, a citizen with a mid-eastern background attempted to leave the United States with a large sum of cash ($356,144).  The cash was not derived from a criminal enterprise, or at least so the Court assumed, and was being transported to repay a legitimate debt.  The mid-eastern background perhaps gave the citizen a cultural disposition to secrecy regarding financial affairs.  The citizen failed to disclose on the CMIR (Cash and Monetary Instrument Report) that must be filled out in exiting the United States that he was transporting the cash.  Using “cash-sniffing” dogs, Customs discovered the cash and inquired of the citizen, whereupon the citizen told a falsehood about the cash.  The citizen was then arrested and indicted for (1) failing to report the cash as required pursuant to 31 U.S.C. § 5316(a)(1), (2) making false statements to customs under 18 U.S.C., § 1001 and (3) forfeiture of the $357,144 pursuant to 18 U.S.C. § 982(a)(1) (the criminal forfeiture provision).  (Note that the Government could not have asserted civil forfeiture because the money was not criminally derived.)  The district court held that the requested forfeiture violated the Excessive Fines guarantee and limited the forfeiture to $15,000.  The Supreme Court agreed. 
The Court started its analysis as follows: 
The touchstone of the constitutional inquiry under the Excessive Fines Clause is the principle of proportionality: The amount of the forfeiture must bear some relationship to the gravity of the offense that it is designed to punish. * * * *. Until today, however, we have not articulated a standard for determining whether a punitive forfeiture is constitutionally excessive. We now hold that a punitive forfeiture violates the Excessive Fines Clause if it is grossly disproportional to the gravity of a defendant’s offense. 
[End of quote from Bajakajian] 
First, the Court discussed the critical distinction between civil in rem forfeiture and criminal  forfeiture. Second, the court concluded that the Section 982 forfeiture was criminal in personam forfeiture.  Third, the Court held that the Excessive Fines prohibition required that the punishment be proportional to the gravity of the offense.  Here, the offense for which the forfeiture was sought was solely the failure to fill out the CMIR properly.  The offense of lying to Government agents under 18 U.S.C. § 1001 was not the basis for the forfeiture.  Relative to the crime of failure to fill out the CMIR properly, a 100% forfeiture was disproportional.   In this regard, the Court noted that the cash was not the instrumentality of a crime, such as a pistol or drugs. 
As the dissent notes, the Court’s holding only applies to criminal forfeitures.  Civil forfeitures are not subject to the Excessive Fines prohibition; civil forfeiture statutes frequently provide for full forfeiture.  See e.g., 18 U.S.C. § 981 imposing civil forfeiture for property involved in a transaction or attempted transaction in violation of §§ 1956 and 1957, the money laundering provisions.  Hence, as the dissent cautions, the wave of the future is to provide for civil forfeitures as a substitute for criminal forfeitures.  Subsequently, CAFRA was amended to provide in the case of civil forfeiture that proportionality will apply, thus resolving for the present this potential overreaching in the civil forfeiture provisions.
I question whether the line between civil and criminal forfeiture is quite so crisp as the dissent notes, so that the same penalty is unconstitutional if it is called a criminal penalty but not if it is called a civil penalty.  The FBAR penalty, of course, is a civil penalty, but it is a civil penalty that is imposed on the same conduct as the criminal penalty of failure to file the FBAR.

In this regard, note how deftly the court moved restitution into the criminal realm solely because it was imposed in sentencing.  But, restitution's primary purpose is not to impose punishment but to compensate the victim.  Imposing restitution at sentencing puts some additional authority behind the defendant's obligation to compensate -- existing outside the criminal proceeding -- but it seems to me that imposing that additional authority is not punishment in the common meaning of the term. If that is true, the line between civil and criminal concepts are indeed blurred, because the Court was willing to entertain the possibility that, but for its reading of the statute, the Excessive Fines Clause might be implicated.


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  2. Jack,

    Any thoughts on the US Government's recent attempt to combine traditional money laundering forfeiture penalties with tax evasion cases? saw this recently on Forbes from one of the OVDP lawyers you list:

  3. To gottaloveUStax,

    I have no specific thoughts on the case, I think it is the one I blogged about here:

    It is critically important to consider the specific facts of the case (all of which cannot even be known from the pleadings) to see what exactly is motivating the Government. My sense is that there is more than meets the eye in the case, which makes it very difficult to extrapolate from the case to other cases and other risks.

    However, I do doubt that such forfeitures will become mainstream in tax enforcement related to foreign accounts.

    Best regards,

    Jack Townsend

  4. Interesting discussion as to the difference between compensation and punishment. It seems to me that when someone joins OVDI (a truly voluntary disclosure in which the government might never have found out about the accounts unless the taxpayer revealed them) and pays back taxes with interest, that compensates the government; there was no harm done by failure to file the FBAR in a timely manner. Therefore the FBAR penalty, I would argue, is entirely punitive in such cases, which raises the question of what is appropriate punishment when no harm was done.


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