Monday, May 12, 2014

When is Booker Variance Too Much? Per DOJ, Certainly in the Ty Warner Case (5/12/14)

The Government has filed its opening brief in the Ty Warner appeal.  The brief is here. Briefly, Ty Warner was, at least in quantity, the biggest offshore account abuser both from a tax evaded perspective and a wealth perspective.  I assume that most readers already know something about the saga of Ty Warner's offshore bank account adventures.  For Federal Tax Crime Blogs on Ty Warner, see here.  Suffice it to say that he got probation despite very ugly sentencing factors under the Guidelines and even under 18 USC 3553, here.

The legal background, highly summarized, is that the district court is required to calculate and respectfully consider the Sentencing Guidelines.  Nevertheless, the district court sentences under 18 USC 3553.  Applying 3553, the district court can vary from the Sentencing Guidelines calculations.  It is not the wild west with each sentencing judge's gut reactions and predilection controlling the result, as existed in sentencing prior to the Guidelines, but it has certainly moved in that direction since Booker, so long as the sentencing judge articulates some basis that would permit a court to say that the sentencing judge did not abuse his discretion.

I did not see anything unexpected or startling in the brief.  Just taking the facts and working them in a professional manner. The Government basically argues that the district judge was too lenient and, indeed, so lenient that he exceeded the Booker discretion.

Keep in mind that the brief is just one litigant's side of the story.  Mr. Warner has yet to be heard in support of the sentencing.  He too has exceptional lawyers.  So the case will be well briefed.  I will post the subsequent briefs as I get them.

I offer some excerpts I think either helpful to readers or just interesting to me (omitting footnotes and distracting record references):
Over the course of over a decade, defendant hid more than $100 million in secret Swiss bank accounts, refused to report at least $24 million of income to the Internal Revenue Service, and evaded at least $5.5 million in taxes. Defendant was sentenced to a term of probation, 500 hours of community service, and a fine of $100,000. Was this a reasonable sentence? 
A. Defendant’s Tax Evasion 
* * * * 
At the time of sentencing, defendant’s self-reported net worth was approximately $1.7 billion dollars. 
* * * * 
Defendant has not disclosed, and the government is not aware of, the amount of funds defendant used to open this UBS AG account, although defendant admitted in his plea agreement that the account was worth approximately $93 million six years after he opened it, in December 2002. Nor has defendant disclosed the source of these initial funds or whether he paid taxes on them. The books and records of defendant’s company show the funds were not transferred from the company, nor did they come from defendant’s personal domestic bank accounts.  
[After transferring his funds from UBS to Zuercher Kantonalbank] He placed his funds at Zuercher Kantonalbank in the name of a nominee Liechtenstein entity, the “Molani Foundation,” instead of holding the funds in his own name. Defendant’s actions further concealed his name from the Zuercher Kantonalbank account because it appeared in the bank records that the Molani Foundation was the true owner of the account.  
* * * * 
In total, for the tax years 19995 through 2007, defendant failed to report $24,448,912 in income, causing a tax loss to the government of $5,594,877. 
[After the first OVDP program]   
For the next six months, defendant continued to conceal the existence of his offshore account, failing in June 2009 to file the FBAR reporting form for the year 2008. In August 2009, defendant’s former banker at UBS AG, Hansreudi Schumacher, was indicted, as was one of his banker’s former clients, toy manufacturer Jeffrey Chernick. Only after defendant learned that his banker had been indicted, in September 2009, did defendant attempt to take advantage of the IRS’s voluntary disclosure program. Defendant, however, was already under criminal investigation, and so was ineligible for the program.  
Defendant was served with a grand jury subpoena for his foreign bank records on or about September 12, 2011. In response, defendant moved to quash the subpoena. PSR, Gov’t Version at 3. The district court ruled in the defendant’s favor, but the government appealed, and this Court ruled that defendant must comply with the subpoena. In re Special February 2011-1 Grand Jury Subpoena Dated September 12, 2011, 691 F.3d 903, 909 (7th Cir. 2012), cert. denied 133 S.Ct. 2338 (2013). 
The defendant agreed that the tax loss, including relevant conduct, was $5,594,877 and that the advisory Sentencing Guidelines range was 46-57 months’ imprisonment. Defendant agreed to pay restitution arising from his offense conduct as well as any relevant conduct. Additionally, defendant agreed that, “in order to resolve his civil liability for willfully failing to file annual Reports of Foreign Bank and Financial Accounts for calendar years 1996 through 2008,” he would pay a civil penalty of $53,522,248, an amount that represents 50% of the highest balance of his undeclared accounts, which was $107,104,968 in 2008. See 31 U.S.C. § 5321(a)(5)(C)-(D) & (b)(1) (providing for a civil fine of 50% of the value of an undisclosed account for each willful violation of the annual reporting requirement). Both parties agreed that a three-level reduction in the Guidelines level for acceptance of responsibility under U.S.S.G. § 3E1.1 was appropriate. 
* * * * 
[Among the factors considered were motivation]  The district court explained that defendant “acted in a way a lot of other people acted, who try to cheat the government” and that the court “spent a lot of hours trying to figure out” why people act in this manner. The court asked, “Is it a disenchantment with the government? Is it a desire not to share the spoils of your labor with the government? Is it some other reason? Is it to keep as much as you can?” before concluding, “I do not know the motivations; and, frankly, I do not know Mr. Warner’s either.”  
The district court acknowledged the seriousness of the offense, stating that the defendant “hid a substantial amount of money from the government for a number of years and failed to report and pay taxes on the income earned from the hidden funds.” The court further acknowledged that “the crime for which he stands convicted is a serious one, it goes to the essence of how we govern ourselves.”  
* * * * 
The bulk of the district court’s explanation of its sentence was devoted to discussing defendant’s charitable contributions. The court stated the defendant was “a very unique individual” because of “his services and kindness to mankind, all of which was done without a view toward using it at sentencing.” The court acknowledged it received approximately 70 letters, and read several of the letters in their entirety during the sentencing hearing, including two letters from attorneys who had previously represented defendant. The court explained that it considered all the letters, including the ones it did not specifically reference, as they “describe a host of other actions, large and small, which reflect on Mr. Warner.” Ultimately, the district court characterized the question before it as “whether society would be better off with Mr. Warner in jail or whether it would be best served by utilizing his talents and beneficence to help make this a better world,” explaining: 
Mr. Warner’s private acts of kindness, generosity, and benevolence are overwhelming. Never have I had a defendant in any case—white collar or otherwise—demonstrate the level of humanity and concern for the welfare of others as has Mr. Warner. 
The letters I described were only a small part of his good works, most done quietly and privately,  and motivated by the purest of intentions. 
[Defendant] did things that I am not aware anyone else does. Certainly, not anyone before me. And it would be unjust for me to ignore that, not measure it and say, in the end, that trumps all of the ill-will and misconduct he engaged in.  
And really—and I believe this with all of my heart—society will be best-served by allowing him to continue his good works.  
The district court also provided a written statement of reasons, in which the court notated that the reason for the variance was the nature and circumstances of the offense and the history and characteristics of the defendant under 18 U.S.C. § 3553(a)(1). R. 31. The court then wrote: 
The Guidelines did not reflect the contributions made by the defendant in the millions of dollars for a variety of public and private charities and causes over the course of many years. As a result, for this and other reasons, the Guidelines do not describe similarly situated defendants. 
* * * * 
Defendant H. Ty Warner’s sentence of probation was substantively unreasonable. Defendant hid over $100 million in secret offshore accounts for more than a decade, lying to the government every year about the existence of the undeclared accounts and fraudulently underreporting his income, ultimately evading at least $5.5 million in taxes. Nevertheless, while the Guidelines range was 46 to 57 months’ imprisonment, the district court instead sentenced defendant to a term of probation and community service. In doing so, the district court put unreasonable and undue weight on defendant’s charitable contributions without evaluating the context of defendant’s wealth (more than $1.7 billion; on letters submitted in support of defendant, many of which came from former or current employees and professional advisers; on back taxes and civil fines defendant paid to resolve his separate civil liabilities; and on the “embarrassment” felt by defendant. The non-custodial sentence failed to recognize the seriousness of the offense and the need to deter others. The district court also failed to consider that imposing the lowest possible statutory sentence on this defendant, who had the highest tax loss of any defendant with an undeclared UBS AG account, would give rise to an unwarranted sentencing disparity and undermine the ability of courts to impose appropriate sentences on those defendants less culpable than Warner.  
* * * * 
It was unreasonable for the district court to rely so heavily on Warner’s  charity. A defendant’s acts of charity cannot “trump” his criminal conduct,absent truly exceptional circumstances not present here. As this Court has noted: “Wealthy people commonly make gifts to charity. They are to be commended for doing so but should not be allowed to treat charity as a getout-of-jail card.” United States v. Vrdolyak, 593 F.3d 676, 682 (7th Cir. 2010). 
[The Government then rips into this as a factor to justify a substantial variance; among the arguments was one that inches to some type of golden rule argument regarding charitable contributions.] 
Charitable donations over the course of fourteen years that equal approximately two per cent of current net worth are not extraordinary. The median household net worth was $68,828 in 2011; if that household gave 2% of its net worth, or $1,377, over fourteen years (less than $100 per year), it would not be deemed an “exceptional” amount. Given Warner’s net worth, to qualify as extraordinary, he would have had to donate a much greater percentage of his wealth to charity. Indeed, among billionaires such as Warner, it is not unheard of for them to pledge fully one half of their wealth. Additionally, in no sense did defendant’s charitable contributions cause him any deprivation or sacrifice, as his assets include a $153 million residence, numerous luxury automobiles, and art valued at over $41 million.  
[Addressing the weight the sentencing court put on Warner's payment of the tax liabilities] 
The defendant made such payments the week before his sentencing hearing. As the government argued, this payment was simply defendant’s “paying what he owed all along,” with the interest being “a sum directly attributable to his failure to pay the taxes on time in the first place.” For these  reasons, as this Court noted in Repking, making restitution “does little to support the [a] below-range sentence.” 467 F.3d at 1096. Only “extraordinary efforts to make restitution supports a reduced sentence,” id., which is not the case for Warner—he merely paid the taxes and interest using funds from his Swiss bank account, which he still maintained in 2014. 
The government recognizes that Warner’s eventual payment of what he owed demonstrated his acceptance of responsibility: for that reason, the government agreed to a three-level sentencing reduction under U.S.S.G. §3E1.1. [s]ee also Repking, 467 F.3d at 1096 (noting that “repayment of stolen funds” figures into the Guidelines reduction under § 3E1.1). But such an acceptance of responsibility—payment of one’s lawful obligations—is no more “a get-out-of-jail card” than making charitable contributions. Vrdolyak, 593 F.3d at 683. Otherwise, defendants with the means to pay their civil liabilities to their victims could avoid sentences of imprisonment, while those lacking such means would end up behind bars. Such a result would be unfair and unreasonable. See U.S.S.G. §5H1.10 (socioeconomic status is not relevant in the determination of a sentence); 28 U.S.C. § 994(d) (“The [Sentencing] Commission shall assure that the guidelines and policy statements are entirely neutral as to the race, sex, national origin, creed, and socioeconomic status of offenders.”); see also United States v. Stefonek, 179 F.3d 1030, 1038 (7th Cir. 1999) (“Criminals who have the education and training that enables people to make a decent living without resorting to crime are more rather than less culpable than their desperately poor and deprived brethren in crime.”). 
The remaining portion of Warner’s payment, a civil penalty of approximately $54 million, represented only a fraction of defendant’s potential civil liability for his FBAR violations. As the government  explained to the district court, the Bank Secrecy Act provides a 50% penalty for each year an individual willfully violates the annual foreign-account reporting requirement by failing to file an FBAR form, see 31 U.S.C. § 5321(a)(5)(C)-(D), and defendant admitted to concealing the existence of two different offshore accounts by failing to file FBAR forms over a period of thirteen years. Defendant’s plea agreement was a negotiated benefit to defendant, as it “resolv[ed] [defendant’s] civil liability” for all these years—for defendant’s “willfully failing to file annual Reports of Foreign Bank and Financial Accounts for calendar years 1996 through 2008”—by requiring him to pay the 50% civil penalty for only one year, 2008. Had defendant been held accountable for the civil penalty of 50% of the account balance for each year he failed to file the FBAR, rather than just one, he would have faced hundreds of millions of dollars in additional civil fines. Therefore, defendant received a substantial benefit in the plea agreement by limiting the penalty to only year of his FBAR violation. 
* * * * 
The civil penalty paid by defendant constituted “less than 3% of the defendant’s net worth” and, accordingly, was not “materially penalizing.” The district court stated that the government “properly” makes the argument that “if we measure [defendant’s] wealth, it is a small percentage.” However, the court went on to state that, “that is one way to look at it, but it is also a lot of money for the government to defray whatever the expenses of running the government  are.” Id. The federal government’s budget has no proper bearing on the defendant’s sentence, except to the extent that defendant evaded and underpaid his civil tax obligations for twelve years.  
To reward defendant for his ability to pay the civil penalty owed also creates a disparity between those who can afford to pay and those who cannot. As the district court in the Southern District of Florida explained during a sentencing hearing for a defendant convicted of similar conduct:  
I understand that [the defendant] is going to have to pay, or has paid, significant tax penalties on the civil side, because his offenses occurred with regards to overseas accounts. 
And so, although that is certainly a factor that I would take into account, it can’t be one that simply calls for a probationary sentence. If that were the case, then an individual who had committed tax fraud, but still had the means to be able to pay civil penalties, could simply say ‘I’ve done what I was supposed to-do, I’ve been punished monetarily on the civil side, so I shouldn’t serve any time in prison.’ That’s not the way things should work either. 
R. 26 at 28; App. 89 (quoting United States v. Barouh, 10-CR-20034, Doc. 27 at 26 (sentencing defendant to 10 months’ incarceration)). Criminal tax sanctions exist to serve a purpose beyond that possible in an administrative or civil regime.
What I draw from the sentence is that, when the hypothetical client is in the criminal cross-hairs asks the hypothetical reasonably well educated and experienced criminal tax attorney with good judgement whether he [the client] will be treated as well as Ty Warner, the right answer is likely to be: "You're not rich enough to get that quality of justice."

But then, the fat lady has not yet sung.


  1. Jack,

    if they had won their argument that the entities were not pass-through and therefore, there was no tax loss/none of the income was attributable to them, would that have made much difference?

  2. Apparently it would have made a lot of difference. Note that Hough's lawyers argued that the tax loss was zero. I assume this was because, had the been corporations for tax purposes, since they conducted active businesses, the income in the corporations would not be taxed until actually distributed by the entities and not as earned by the entities.

    Had they achieved a zero tax loss, she probably would have received no or de minimis incarceration, with perhaps home detention for all or some of it. Quite a difference.

    Jack Townsend

  3. Well yes, in a normal case, but given failure to file an FBAR would presumably be among the crimes committed, I would have thought sentencing could go forward under Title 31 guidelines, which would not involve tax loss (or is that incorrect).

  4. gottaloveUStax,

    Where there is an FBAR violation related to a pattern that is essentially tax-crime related, the sentencings have all been kicked into the tax crimes guidelines. That has some consequences -- generally beneficial to the defendant. First, the tax guidelines are less onerous than the guidelines that would apply to an FBAR violation outside a tax setting (which looks to the high amount in the account rather than tax loss related to the account). I have a long footnote in my Federal Tax Crimes book on that. Second, by pushing into the tax guidelines, the conduct will all be grouped in the same way as if there had only been a tax crime conviction. (This gets into sentencing group concepts which I don't discuss right now, but suffice it to say that grouping is good.)

    Jack Townsend

  5. All the OVDI/Ps incl. FATCA over the next 10 years cannot make up for this :
    IRS made improper EITC payments of $13.3-$15.6 billion in FY 2013, or about 22-26% of all EITC payments.


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