Ninth Circuit Requires Relevant Conduct Financial Loss Determinations in NonTax Case to be Made by Clear and Convincing Evidence (3/30/15)

Last night, in our Tax Fraud and Money Laundering Class at University of Houston Law School, we covered the U.S. Sentencing Guidelines.  The U.S. Sentencing Guidelines Manual may be viewed here.  We covered the following points:

• The financial loss for financial crimes is the principal driver for the Guidelines.  In the tax Guidelines, the financial loss is called the tax loss.  See S.G. 2T1.1, here (for the major tax crimes); see S.G. 2T4.1 (Tax Table), here.  
• The tax loss from the count(s) of conviction and the tax loss from related unconvicted conduct -- called "relevant conduct" -- can be included the the tax loss for purpose of the determinations.  For the  concept of relevant conduct, see SG 1B1.3, here.  
• These sentencing determinations are generally made by a preponderance of the evidence.  We did note that the Ninth Circuit may require some sentencing determinations to be made by clear and convincing evidence.

This morning, while going through my list of recent cases that I had not yet read, I came across United States v. Hymas, ___ F.3d ___, 2015 U.S. App. LEXIS 4822, 1-21 (9th Cir. Idaho 2015), here.  In Hymas, the Ninth Circuit held that, in the facts of the case, relevant conduct financial loss determinations for nontax financial crimes must be made under by clear and convincing evidence.  Although sentencing determinations are normally made by a preponderance of the evidence, the Ninth Circuit requires those determinations to be made by clear and convincing evidence "when a sentencing factor has an extremely disproportionate effect on the sentence relative to the offense of conviction." United States v. Mezas de Jesus, 217 F.3d 638, 642 (9th Cir. 2000) (citing United States v. Restrepo, 946 F.2d 654, 659 (9th Cir. 1991) (en banc)).  The NInth Circuit has established no "bright-line rule for the disproportionate impact test," but requires it to be made in the context of the totality of the facts under guidance first given in United States v. Valensia, 222 F.3d 1173 (9th Cir. 2000).  The Ninth Circuit said.

Under the Valensia totality of the circumstances test, six factors, none of which is dispositive, guide the determination of whether a sentencing factor has a disproportionate impact on the sentence:(1) whether the enhanced sentence falls within the maximum sentence for the crime alleged in the indictment; (2) whether the enhanced sentence negates the presumption of innocence or the prosecution's burden of proof for the crime alleged in the indictment; (3) whether the facts offered in support of the enhancement create new offenses requiring separate punishment; (4) whether the increase in sentence is based on the extent of a conspiracy; (5) whether an increase in the number of offense levels is less than or equal to four; and (6) whether the length of the enhanced sentence more than doubles the length of the sentence authorized by the initial sentencing guideline range in a case where the defendant would otherwise have received a relatively short sentence.Treadwell, 593 F.3d at 1000.

In Hymas, the Ninth Circuit reviewed the relevant facts as follows:

Swiss Bank BSI SA Is First to Get NonProsecution Agreement; Pays $211 Million (3/31/15)

Swiss Bank BSI SA has entered a nonprosecution agreement with DOJ Tax regarding its tax evasion assistance to U.S. persons.  The key documents related to the NPA are:

1. The NPA, here.
2. NPA Exhibit A, Statement of Facts, here.
3. NPA Exhibit B, BSI SA Board Resolution, here.

Also, DOJ had the following statements or press releases:

1. General press release, here.
2. Statement of Caroline Ciraolo, Acting Assistant Attorney General (Tax), here.
3. Stuart F. Delery, Acting Associate Attorney General, here.

Here are some selected excerpts from the press release (eliminating the promotional aspects) (bold-face supplied by JAT):

According to the terms of the non-prosecution agreement signed today, BSI agrees to cooperate in any related criminal or civil proceedings, demonstrate its implementation of controls to stop misconduct involving undeclared U.S. accounts, and pay a $211 million penalty in return for the department’s agreement not to prosecute BSI for tax-related criminal offenses. 

* * * * 

BSI helped its U.S. clients create sham corporations and trusts that masked the true identity of its U.S. accountholders.  Many of its U.S. clients also opened “numbered” Swiss bank accounts that shielded their identities, even from employees within the Swiss bank.  BSI acknowledged that in order to help keep identities secret, it issued credit or debit cards to many U.S. accountholders without names visible on the card itself.  

BSI not only helped U.S. clients shield their identity from the Internal Revenue Service (IRS). but helped them repatriate cash as well.  BSI admitted that its relationship managers and their U.S. clients used code words in emails to gain access to funds.  BSI disclosed instances where its U.S. clients would use coded language, such as asking their private bankers, “can you download some tunes for us?” or note that their “gas tank is running empty” when they required additional cash to be loaded to their cards. 

From the beginning of the Swiss Bank Program, the department has emphasized the importance of the banks’ helping to identify individuals who facilitate U.S. tax evasion and U.S. accountholders.  BSI provided substantial assistance in this regard.

Swiss Bank Enablers Get Unsupervised Probation and Relatively Light Fines (3/30/15)

Reuters reports that two Swiss bank enablers, Andreas Bachmann and Josef Dorig, received sentences of unsupervised probation and fines of $100,000 and $125,000, respectively.  Sarah N. Lynch, UPDATE 2-Ex-Credit Suisse bankers spared prison in U.S. tax evasion case (Reuters 3/27/15), here.  (For my prior postings on these defendants, see Credit Suisse Banker Pleads Guilty to Tax Conspiracy (Federal Tax Crimes Blog 3/12/14; 3/13/14) (Bachmann), here, and Another Credit Swiss Related Bank Enabler Pleads Guilty (4/30/14) (Dorig), here.

I have noted before that offshore bank tax cheats seem to get lighter sentences than ordinary tax cheats.  It appears from the Reuters article that this may have been a factor in getting a light sentence for these enablers.  Thus, from the article:

Robert Henoch, an attorney at Kobre & Kim who represented Dorig, said on Friday the U.S. should be focused on prosecuting the Americans who dodged taxes. 

"The system is clearly broken, stacked, and unfair to foreign bankers and trust company officials," he said. 

"(Dorig) was put through a four year ordeal while U.S. nationals committing the object crime of tax evasion were allowed to escape with a fine, without even a slap on the wrist."

Interesting argument.  I have not yet seen the Guidelines calculations.  I will probably post more on this sentencing later.

Judge Suppresses Statements During Coercive Interview in Home by Agents While Execution of Search Warrant in Progress (3/28/15)

In United State v. Faux, 2015 U.S. Dist. LEXIS 37051 (D Ct. 2015), here, the defendant was investigated for health care fraud based significantly on a confidential witness.  In the investigation, based on the reported claims of the confidential witness and other matters, the agents obtained a search warrant to search the defendant's home.

The agents executing the search warrant showed up early in the morning, catching the defendant and her husband as they were about to leave for a vacation to Mexico with their son and his family.  "Approximately ten to fifteen agents from three agencies -- the FBI, HHS-OIG and the Criminal Investigations Division of the Internal Revenue Service ('IRS-CID')" executed the search warrant, apparently all having guns which, apparently also, were not drawn during the execution of the search warrant.  The defendant claimed that the agents told her that she was not going anywhere; the agents denied the claim.  The defendant did, in any event, cancel her plans, and the agents heard her do so without correcting her as to whether cancelling the plans was necessary.

Two of the agents -- an FBI agent and an HHS-OIG agent -- questioned Faux in her living room during the execution of the search warrant.  The interview lasted about 2 hours. They did not give her Miranda or even modified Miranda warnings.

The defendant was then indicted for "health care fraud, in violation of 18 U.S.C. § 1347, obstruction of a federal audit, in violation of 18 U.S.C. § 1516, filing a false statement on a tax return, in violation of 26 U.S.C. § 7206, and aiding and abetting under 18 U.S.C. § 2."  The defendant moved to suppress the statements made in the interview.  In deciding the issue, the court make the inquiry as to whether the situation was sufficiently coercive that the Miranda warnings -- which were not given -- were required to be given.  Under the circumstances the court found this particular interview to be in a coercive setting.  While normally, an interview in the home would not be a type of coercive setting such as an arrest and detention, "[U]nder certain circumstances, however, the home may be transformed into a custodial setting."  The court then made the determination that it was:

Although there are factors pointing in both directions, after considering the totality of the circumstances, I find Faux was in custody during the interrogation. Several mitigating factors weigh against a finding of custody in this case. Faux was questioned in the "familiar surroundings" of her home, was not handcuffed during the interrogation, and was not arrested at its conclusion. McPhillips [FBI] and Fontes [HHS-OIG] did not display their weapons or otherwise threaten physical force. Faux was never told that she was not free to leave, and there is no indication that she asked to terminate the interrogation, to leave the residence, or to be questioned in the same room as her husband. And, the tone of the questioning was largely conversational; there is no indication that McPhillips or Fontes raised their voices or made threatening statements in order to elicit responses to their questions. See, e.g., Falso, 293 F. App'x at 839; Berschansky, 958 F. Supp. 2d at 382-83; Groezinger, 625 F. Supp. 2d at 158. 

Yet, there are numerous aggravating factors that, in combination, distinguish this case from others where courts in this Circuit have held that an interrogation was not custodial. First, Faux was interrogated while about a dozen agents from three federal agencies executed a search warrant at her home. Faux did not invite a couple of officers into her home for a friendly chat; she was compelled to admit the officers in numbers they chose. Moreover, Faux's affidavit indicates that she knew or believed that the agents were armed. This is a documents case, not one involving weapons, drugs or other contraband, or a dangerous suspect. A reasonable person would not expect that so many armed officers would be needed to execute a search. The presence of a dozen armed officers would have been intimidating and would have communicated a show of force to a reasonable person, even if weapons were not drawn. Cf. Newton, 369 F.3d at 675 (presence of six officers would not "by itself, have led a reasonable person in [defendant's] shoes to conclude that he was in custody," because "[a]s a parolee, [defendant] was accustomed to parole officers coming to his home to ask questions," and defendant recognized some of the officers present during search).

Third Circuit Affirms Sentence Based on PSR Calculation of Tax Loss In Excess of Stipulated Tax Loss in Plea Agreement (3/27/15)

I recently blogged on the importance for plea agreement purposes to negotiate the tax loss number down to the extent possible.  Relevant Conduct Raised by the Probation Officer and Used by the Sentencing Judge in Calculating the Guidelines (Federal Tax Crimes Blog 3/10/15), here.  However, I noted in the blog that the Probation Office and the Sentencing Judge is not bound by the agreement in the plea agreement as to the tax loss number.  Specifically, in that blog, I discussed the risk of the Probation Officer reporting in the PSR and the Judge agreeing to include relevant conduct not included in the plea agreement.

There is another recent case highlighting this risk.  In United States v. Sepero, 2015 U.S. App. LEXIS 4764 (3d Cir. 2015) (nonprecedential), here, the Third Circuit addressed the defendant's arguments that the Probation Officer improperly deviated from the plea agreement stipulation of tax loss between $1 million and $2.5 million.  The Probation Officer instead determined a tax loss of over $4 million, which increased the tax loss, the resulting tax table determination of the base offense level and thus the resulting Guidelines sentencing calculation.  Since everyone knows that the Probation Office and Sentencing Court is not bound by the plea agreement, this is a risk the defendant takes and can have no legitimate complaint if the Probation Office or sentencing court determine the facts support the higher tax loss.  Recognizing this, the defendant couched his complaint as improper action by the prosecutor inconsistent with the plea agreement in acknowledging that the higher tax loss number was incorrect.  Regarding the requirement that the prosecutor give the defendant the benefit of the bargain, the prosecutor cannot deny facts asserted by the Probation Officer in the PSR or conclusions by the court if they are true.  Thus, if the prosecutor agreed to a $1 million through $2.5 million tax loss and the Probation Officer correctly calculates in the PSR an actual tax loss of over $4 million and that calculation is correct, the prosecutor cannot deny that calculation regardless of what the prosecutor stipulated.  The prosecutor cannot advocate for the higher number, but the prosecutor cannot deny it either.

Here is what the court said in denying relief:

Sepero first argues that his conviction and sentence should be vacated because the government breached the plea agreement. Because he did not raise this issue below, we review for plain error. See Puckett v. United States, 556 U.S. 129, 133-34 (2009) (stating that the plain-error test applies to an unpreserved claim that the government "failed to meet its obligations under a plea agreement"). In the plea agreement, the parties stipulated to a total loss amount between $1 million and $2.5 million. Sepero contends that the government breached the agreement in three ways: by confirming the probation officer's calculated loss amount of over $4 million in the PSR; by confirming the Court's understanding that the facts relating to the calculated loss amount in the PSR were accurate; and by failing to disclose financial records to the probation officer showing that a portion of the supposed loss amounts were actually legitimately invested. 

Those arguments are meritless. The government's statements to the probation officer and the Court relating to the accuracy of the facts contained in the PSR do not amount to a breach of its agreement. In fact, despite the difference in loss amount, in all communications with the probation office, the government expressly stated that it would abide by the stipulations in the plea agreement. Further, in its communications with the Court, the government stressed repeatedly its recommendation that the Court impose a sentence within the stipulated guidelines range, reflecting the lower loss amount, as opposed to the higher range recommended in the PSR. Furthermore, Sepero himself eventually agreed at the sentencing hearing that the facts relating to the loss amount calculations were correct. Thus, the government did not breach the plea agreement by also confirming the Court's understanding of the pertinent facts, nor by failing to provide records that supposedly showed a reduction in the loss amount due to legitimate investments.

Eric Segall Blog on On Judicial Candor, Judge Posner, and the Supreme Court (3/26/15)

I just posted this blog entry on my Federal Tax Procedure Blog and thought readers of this blog might like it as well.

Eric Segall posted this blog on the Dorf on Law Blog:  On Judicial Candor, Judge Posner, and the Supreme Court (Dorf on Law 3/23/15), here.  I think readers of this blog might be interested in it. The whole blog entry is very short.  Offer selected snippets as as teasers to read the whole blog entry:

On Judicial Candor:

Agreement broke down, however, when we discussed what level of candor we should expect from judges in general and the Supreme Court in particular. I argued that it is inappropriate for the Supreme Court to hide behind standard and misleading methods of constitutional interpretation such as precedent, text, and historical analysis when we all know (per our acceptance of the realist critique) that decisions are generated more by what Judge Posner calls “priors” and what I call values writ large, than by legal doctrine. This problem is more pronounced at the Supreme Court than other courts because the Justices choose the hardest cases, there is the most at stake, and there is no effective review of their decisions. 

Judge Posner argued strenuously that I was holding judges in general and the Supreme Court in particular to a standard of candor that we do not place on members of Congress, the President, and other public officials. Judge Posner stated that we know politicians are not candid about the reasons motivating their political choices and we should not be surprised that judges do the same. Judge Posner did distinguish between affirmatively lying, which judges should not do, and not disclosing the true bases of decisions, which he felt was inevitable.

So, Judge Posner is a  proponent that judges can lie, so long as they do not affirmatively lie.  (OK, I pulled a snippet and that is unfair; read the whole blog entry.)

On Originalism (Real or Feigned):

I argued that federal judges are governmental officials appointed for life who exercise coercive power over us and the rule of law requires they tell the litigants and the public the true reasons for their decisions (as best they can). For example, I have argued that Justices Scalia and Thomas quite clearly do not follow an originalist methodology across huge portions of constitutional law and they should stop pretending that they do. Judge Posner suggested that it is quite possible they think originalism drives their decisions and their failure to own up to the priors that actually generate their decisions is based more on a lack of self-reflection than bad faith. I quibbled that since just about everyone outside the Court agrees doctrine does not really drive decisions, that lack of self-reflection on the part of the Justices was a bit alarming. Professor Chen, who earlier in the discussion made a similar point, was sympathetic to this suggestion.

Two Courts' Approaches to Taxpayer Culpability in the Son-of-Boss Bullshit Tax Shelter (3/26/15)

I write today on two recent cases that evidence different approaches to taxpayer culpability for tax underpayment from "investing" in bullshit tax shelters.  These cases are CNT Investors LLC et al. v. Commissioner, 144 T.C. No. 11 (2015), here, and Kerman v. Chenery Associates, Inc. (WD Ky NO. 3:06-CV-00338-CRS 3/23/15), here.

For context, readers will recall that the Son-of-Boss ("SOB") tax shelter and the Custom Adjustable Rate Debt Structure ("CARDS") tax shelter are variations on the theme of no-cost (except promoter fees and reams of paper and commotion) tax benefits from thin air.  They have been the basis for several  prominent criminal prosecutions.  Courts have routinely called them too good to be true.  Most courts have reached that conclusion with respect to the type of sophisticated taxpayers who entered these shelters.  All of these shelters not only involved sophisticated taxpayers but required that those sophisticated taxpayers represent to the promoter and the issuers of the legal opinions that they had a profit motive independent of the tax motive.  In the context of the tax adventure in which that representation was made (tax benefits created from nothing except paper shuffling and payment of large fees to the promoters), that representation was bullshit.  That's my opinion and probably the opinion of most courts that have dealt with the issue.  I am some readers will disagree and I welcome their comments/corrections.

So, let's turn to the cases.  First, I will discuss the Kerman case.

Kerman was a suit by a taxpayer - "investor" against promoters of the adventure.  The originally named defendants were prominent players in the bullshit shelter industry:  Chenery Associates, Inc., Chenery Management, Inc., Sussex Financial Enterprises, Inc, Sidley Austin Brown & Wood, LLP, R. J. Ruble, Roy Hahn, Bayerische Hypo-Und Vereinsbank, HVB U.S. Finance, Inc.   The HVB defendants moved for dismissal of the remaining claims against it.

The IRS had prevailed in the Kerman's Tax Court case. here, and appeal, here, which had, successively, imposed the tax and the 40% accuracy related penalty.  (I will discuss this in more detail in discussing CNT Investors.)  For my blog discussion of the appellate case, see A Self-Proclaimed "Simple Man," "Utterly Uneducated" in Tax and Finance, but Still a Self-Made Multi-Millionaire Loses his Bullshit Tax Shelter Case (Federal Tax Crimes Blog 4/13/13), here. As a result, the Kermans conceded in their suit against the HVB defendants that:  "[i]ndisputably, the[y] participated in the abusive tax-shelter in conjunction with HVB."  Seizing on that concession, "HVB now contends that this admission is fatal to the Kermans' remaining claims against it under the theory of in pari delicto."

The Kerman court opened its discussion as follows:

The common law docntrine in pari delicto is a phrase that is short for the maxim in pari delicto potior est condition defendent is, which means: "In a case of equal or mutual fault . . . the position of the [defending] party . . . is the better one." Bateman Eichler, Hill Richards, Inc. v. Berner, 472 U.S. 299, 306, 105 S. Ct. 2622, 2626, 86 L. Ed. 2d 215 (1985) (quoting Black's Law Dictionary 711 (5th ed. 1979) (alternation in original)). When applied, it serves as a defense that prevents two parties whose wrongdoing are found to be in pari delicto from recovering from one another for any damages that arose from that joint wrongdoing. Bateman Eichler, 472 U.S. at 306, 105 S.Ct. 2622 (footnotes omitted). Courts apply the doctrine based on "two premises: first, that courts should not lend their good offices to mediating disputes among wrongdoers; and second, that denying judicial relief to an admitted wrongdoer is an effective means of deterring illegality." See id.; see also In re Dublin Securities, Inc., 133 F.3d 377, 380 (6th Cir.1997) ("'No Court will lend its aid to a man who founds his cause of action upon an immoral or illegal act.'"). 

In one germane application of the doctrine, a Kentucky court found that when two parties participate in a tax evasion transaction, they are deemed to be in pari delicto. Eline Realty Co. v. Foeman, 252 S.W.2d 15, 19 (Ky. 1952)(citing Stacy v. Williams, 253 Ky. 353, 69 S.W.2d 697; Middlesboro Home Telephone Co., v. Louisville & N. R. Co., 214 Ky. 822, 284 S.W. 104). This is true even if the plaintiff was induced to enter the transaction. Id. Here, the Kermans' admit that "[i]ndisputably, [they] participated in the abusive CARDS tax-shelter with HVB and the other Defendants." DN 227, p. 5. Moreover, they do not even dispute that, as a result, they are in pari delicto with HVB. Id. Instead, they argue that, regardless of whether they are in pari delicto with the Defendants, the defense does not bar their claims for rescission or under KRS §446.070 in this instance. We address these arguments in turn.

French Prosecutor Wants to Charge and Try HSBC's Swiss Unit for Tax Crimes in France (3/13/15)

It is reported that a French prosecutor has requested a trial of HSBC's private bank for assisting French taxpayers in evading French tax.  See Angelique Chrisafis & Sean Farrell, HSBC's Swiss private bank: French prosecutor formally requests trial (3/13/15), here.

I am not familiar with the Swiss criminal system (nor its civil system either), so I cannot offer meaningful comment beyond that presented in the article.  The excerpts I found particularly meaningful from my perspective are:

The French financial state prosecutor has requested that HSBC’s Swiss private bank be sent to criminal trial over a suspected tax-dodging scheme for wealthy customers.
The recommendation follows a lengthy investigation by local magistrates into alleged tax fraud involving 3,000 French taxpayers and is a procedural step that brings the Swiss banking arm one step closer to a possible trial in France. 

The parent company HSBC, which faces a separate ongoing French investigation, said: “This is a normal step in the judicial procedure and the outcome of the matter is not determined as of today.” 

The bank has one month to respond after which French magistrates will take the final decision on whether to hold a trial.  

Le Monde reported that HSBC refused a plea deal that would have avoided a trial. It said HSBC would have had to pay a €1.4bn fine as part of that deal. 

* * * * 

The scandal at HSBC’s Swiss bank came to light when the Guardian and other media organisations around the world published revelations from leaked files. The files showed that the Swiss operation enabled clients to evade and aggressively avoid taxes and withdraw “bricks” of cash without question. 

HSBC faces 10 separate inquiries around the world into the scandal. The US Department of Justice is considering criminal charges against the bank and its clients and the bank is under investigation in Brazil, India, Belgium and other jurisdictions.

The article notes that one Swiss prominent French citizen, her daughter and an accountant have already been tried in "a special new Paris court to deal with tax fraud."  The trial has been held and the prosecutor has recommend that the prominent French citizen be sentenced to two years in prison.  (I wonder whether inmates in French prisons or other incarceration facilities can get the occasional glass of wine.)

Thanks to gottaloveUStax1 for calling the article to our attention.

Please note that I have used a tag called offshore evasion.  That was meaningful when the Swiss bank brouhaha erupted in the U.S., the first to bring the force of justice to banks which were then offshore.  Perhaps a better description now that other countries aggrieved by Swiss bank (and other country bank) misbehavior have joined the fray would be cross-border evasion that might even include too aggressive transfer pricing.

Judge Posner Confronts a Crackpot in a Tax Crimes Case (3/12/15)

Those who have paid close attention to my writings know that I like to cite Judge Posner of the Seventh Circuit Court of Appeals, not because I always agree with him, but he is, shall we say, interesting and, when he speaks, he at least says it well.  The Federal Tax Crimes Blog entries mentioning Judge Posner are here; the Federal Tax Procedure Blog entries mentioning Judge Posner are here.

Judge Posner sometimes sits as a trial judge.  He is currently sitting as a trial judge in United States v. Hakeem El Bey (ND Ill. 14 CR 447).  The defendant was indicted for defrauding and attempting to defraud the Internal Revenue Service in violation of Title 18 of the federal code."  On February 15, 2015, Judge Posner entered a pre-trial order, here, admonishing the defendant to restrain himself from making a melange of worn out tax protestor/defier/denier-style arguments.

Above the Law has an entertaining blog, here, on the Judge Posner's Order, noting (as observers know):  "The point is, Judge Posner entertains."  Here are some excerpts from the Above the Law presentation (which add flavor to, if not enlightenment) the Order:

Judge Posner landed himself the trial of a pro se so-called “sovereign citizen.” You know, those bats**t looneys who think FEMA is going to build concentration camps as part of the War on Christmas or that the whole judicial system is an elaborately disguised admiralty court (because there’s fringe on American flags or something). Imagine Judge Posner having to deal with this guy. 

* * * * 

[In a previous order] El Bey got his slap on the wrist, but a good crackpot theory doesn’t go down that easy.  He fired right back with a couple of motions flouting the earlier order and Judge Posner is irked: 

He also asserts “Lack of Jurisdiction over the Person (contracted Artificial Subject vs Natural Borne)” — whatever that means. He also asserts that “Queen of England, entered into a Treaty with the Federal Government For the Taxing of Alcoholic beverages and cigarettes sold in America. The Treaty is called—The Stamp Act and in this Act, the Queen ordained that her Subject, the American people, are Exonerated of all other Federal Taxes. So the Federal Income Tax and the State Income Taxes Levied against all Americans is Contrary to an International Treaty and against the Sovereign Orders of the Queen.”

And so forth.

One comment, though.  In the order, Judge Posner says that the defendant "indicted by the federal government."  The grand jury brought the indictment.  I suppose that the grand jury is part of the federal government.  But the grand jury occupies a unique role in the system, so I prefer saying that the grand jury indicted.  See United States v. Williams, 504 U.S. 36, 47 (1992). here, for good discussion of the grand jury, including (citations omitted):

Rooted in long centuries of Anglo-American history, the grand jury is mentioned in the Bill of Rights, but not in the body of the Constitution. It has not been textually assigned, therefore, to any of the branches described in the first three Articles. It is a constitutional fixture in its own right. In fact the whole theory of its function is that it belongs to no branch of the institutional Government, serving as a kind of buffer or referee between the Government and the people.  Although the grand jury normally operates, of course, in the courthouse and under judicial auspices, its institutional relationship with the Judicial Branch has traditionally been, so to speak, at arm’s length. Judges’ direct involvement in the functioning of the grand jury has generally been confined to the constitutive one of calling the grand jurors together and administering their oaths of office.

Sentencing of Ex-Casino Owner, Nevada Businessman and Former NFL Player for Fraudulent Tax Scheme (3/12/15)

DOJ Tax has announced, here, the sentencing of an Ex-Casino Owner, Nevada Businessman and Former NFL Player for marketing a fraudulent tax scheme.  Key excerpts are:

A former casino owner from Henderson, Nevada, a former businessman from Las Vegas and a former NFL punter from Upland, California, were sentenced yesterday in U.S. District Court in Las Vegas to serve prison time and ordered to pay more than $35 million in restitution for conspiracy and fraud related to their promotion of a fraudulent tax product through the now-defunct National Audit Defense Network (NADN), announced Acting Assistant Attorney General Caroline D. Ciraolo of the Justice Department’s Tax Division. 

Alan Rodrigues, NADN’s former general manager and executive vice president, was sentenced to serve 72 months in prison to be followed by three years of supervised release and to pay a $2,000 special assessment by U.S. District Court Judge Miranda Du of the District of Nevada.  Rodrigues was ordered to pay restitution of more than $35 million to customers of NADN who purchased the fraudulent tax product.  Weston Coolidge, a businessman who previously served as NADN’s president, was sentenced by Judge Du to serve 70 months in prison followed by three years of supervised release, and to pay a $2,000 special assessment for his part in the fraud.  Coolidge was also ordered to pay restitution of more than $35 million to victims of the fraud.  Joseph Prokop, who previously served as the National Marketing Director for Oryan Management and Financial Services, a company affiliated with NADN, was sentenced to serve 18 months in prison to be followed by 30 months home confinement and three years of supervised release.  Prokop was also ordered to pay a $1,800 special assessment and restitution to victims of more than $35 million.  At sentencing, Judge Du found that the defendants were responsible for fraud losses of more than $36 million and an intended tax loss of more than $60 million.
On May 27, 2014, after a six-week jury trial, the three defendants were convicted of one count of conspiracy to defraud the United States, 13 counts of aiding and assisting in the preparation of false income tax returns and four counts of mail fraud.  Rodrigues and Coolidge were each convicted of an additional two counts of aiding and assisting in the preparation of false income tax returns. 

* * * * 

The evidence at trial established that through NADN, the defendants promoted and sold a product called Tax Break 2000 to customers throughout the United States.  NADN began to promote and sell Tax Break 2000 in early 2001.  Tax Break 2000 purported to be an online shopping website.  The defendants falsely and fraudulently told customers that buying the product would allow them to claim legitimate income tax credits and deductions under the Americans with Disabilities Act (ADA) by modifying the website each customer was provided to make it accessible to the disabled.  NADN charged $10,475 for the product to maximize the fraudulent income tax credits and deductions that individuals would claim on their tax returns.  Although the price of the product that was claimed on the tax returns was $10,475, the customers only paid between $2,000 and $2,695 out-of-pocket.  The remainder of the cost was covered by a promissory note that customers were not expected to repay.  

The defendants knew that the websites provided to customers made little, if any, money from sales commissions and that they did not entitle the purchaser to either a tax credit or any deductions.  The defendants nonetheless taught and directed the tax return preparers working for NADN to prepare thousands of tax returns for customers that claimed the fraudulent tax credit and deductions.  When special agents of the Internal Revenue Service (IRS) began to investigate Tax Break 2000 and NADN, the evidence showed that the defendants sought to cover up the fraud by creating false IRS Forms 1099 that reported fictitious income to make it appear that the websites were in fact earning money. 

From 2001 through approximately May 2004, NADN sold the Tax Break 2000 product more than 18,000 times to thousands of customers located throughout the United States.  As a result of the defendants’ fraud, thousands of NADN customers were audited by the IRS.  On April 13, 2004, the Tax Division filed a civil complaint seeking to enjoin, among others, NADN, Rodrigues, Coolidge and Prokop from selling fraudulent tax schemes, including Tax Break 2000.  NADN ceased operations in May 2004.

JAT Comments:

Shareholder Brings Shareholder Derivative Suit Against Bank Leumi and Related Parties for U.S. Tax Shenanigans (3/11/15)

Tax Notes Today reports on a shareholder derivative suit against Bank Leumi and some of its affiliates, officers, employees and agents for the damages shareholders incurred because of Bank Leumi's assistance to U.S. tax evasion.  See William Hoke,  Shareholder Sues Bank Leumi for Helping Clients Evade U.S. Taxes, 2015 TNT 47-5 (3/11/15), no link available.  The suit is Porat v. The Bank Leumi Le-Israel Trust Co., No. 650645-2015 (N.Y. Sup. Ct.  2015).  The suit recounts the actions of Bank Leumi employees to assist in tax evasion and the consequences of a deferred prosecution agreement with DOJ Tax  including a fine of $270 million and a consent order with the New York Department of Financial Services which included a civil penalty of $130 million and various other requirements.

The article says that Bank Leumi, like many Swiss banks, tried to capitalize on UBS's woes beginning in 2008, seeing a "golden opportunity" to service U.S. customers lost first by UBS and then other Swiss banks.

The article further recounts allegations of misbehavior as follows:

Porat said Bank Leumi helped U.S. clients conceal undeclared accounts through the use of a "hold mail" service for 2,450 accounts, meaning that the bank did not send statements or other documents to its customers in the U.S. Porat said Bank Leumi charged a total of $1.5 million for the service. He claimed that the bank provided assumed-name and numbered accounts to U.S. taxpayers until at least 2008. Porat also alleged that Bank Leumi referred U.S. clients to outside lawyers and consultants who established and maintained offshore corporations in the British Virgin Islands, Panama, and Belize as the nominal owners of the undeclared accounts. 

Other arrangements marketed by Bank Leumi involved "participation loans" and standby letters of credit, which Porat said allowed the bank's U.S. customers to effectively access their funds without drawing the attention of U.S. authorities. 

Porat's filing included an excerpt from an e-mail, cited in the New York state consent order [citation omitted] , in which an unidentified Bank Leumi manager provided instructions to employees about handling customer accounts: "Remember the bottom line -- I don't want to know who the customer is, what the account number or the conditions are for credit or securities. All I want to know is what we need to know on this side of the ocean." 

Another e-mail quoted an unidentified Bank Leumi private banker who wrote to a supervisor in 2011 that "nearly every client who has an account with us has used the bank as a tax haven, and is aware that by not declaring his account in the US is committing an offense, [and] we have by virtue of the services we provided assisted the clients with what they wished to achieve."

TRAC Publishes Statistics on Tax and Tax-Related Prosecutions (3/10/15)

Transactional Records Access Clearinghouse ("TRAC"), a major collator and analyzer of Government data regarding criminal and civil enforcement efforts, has posted a web page titled The IRS and the April Surprise, here.  Here are key excerpts (with bold face supplied by me):

Analysis of the latest government case-by-case data obtained by the Transactional Records Access Clearinghouse (TRAC) at Syracuse University shows that during January 2015 a total of 131 taxpayers were prosecuted as a result of IRS investigations.
The data tracking trends also show that many IRS prosecutions are timed to coincide with tax filing season, presumably to help remind taxpayers of their legal obligations to avoid underreporting taxes owed on the returns they file. 

Year after year, April consistently has the greatest number of criminal prosecutions as a result of IRS investigations — two-thirds or more higher than those seen in January. Figure 1 and Table 1 show both the 10-year average as well as prosecution figures from January through December 2014. 

[Table 1. Number of Criminal Prosecutions from IRS Investigations omitted]
[Figure 1. IRS Criminal Prosecutions by Month omitted] 

The odds of criminal prosecution have also varied over time. The long term trend in prosecutions for these matters going back to FY 1994 is shown more clearly in Figure 2. The vertical bars in Figure 2 represent the number of prosecutions of this type recorded each fiscal year. Each presidential administration is distinguished by the color of the bars. While the numbers were highest during the early Clinton administration, the trend was downward and was substantially lower during the Bush administration. After President Obama assumed office, they began rising again. They climbed to 2,010 prosecutions during FY 2013 before falling by 16 percent to 1,689 during FY 2014. 

[Figure 2. IRS Criminal Prosecutions Over The Past 20 Years omitted] 

Top Ranked Lead Charges 

Table 2 shows the top lead charges recorded in the prosecutions of matters filed in U.S. District Court during FY 2014. 

[Table 2. Top Charges Filed omitted, but the ranking at the top is tax perjury (7206(1)), false statement conspiracy (18 USC 286), and tax evasion (7201)]

Relevant Conduct Raised by the Probation Officer and Used by the Sentencing Judge in Calculating the Guidelines (3/10/15)

Readers of this blog -- and afficionados of the Sentencing Guidelines in tax cases -- will know how critical the tax loss to the final Guidelines sentencing range.  One of the most important drills for defense attorneys in tax crimes prosecutions is to get the tax loss number down.  A concern often addressed arises when an acceptable tax loss number is agreed upon with the prosecutor and incorporated into the plea agreement.  The concern is that it is generally thought that neither the Probation Office which prepares a PSR for the sentencing judge nor the sentencing judge is bound to the tax loss the parties stipulate in the plea agreement.

Of course, both the assigned probation officer nor the sentencing judge are very busy on other matters, usually not tax experts, and usually will not have information to go behind the parties' agreement as to the tax loss.  Hence, usually, the tax loss agreed upon the defendant and the prosecutor will not be questioned by the probation officer or the sentencing judge.  Sentencing will thus proceed based on the stipulated tax loss.

To highlight the risk, though, assume that the taxpayer had a pattern of conduct where she underpaid tax in years 01 through 10 by $100,000, an aggregate of $1,000,000.  In the IRS CI investigation, the IRS investigates only the years 07 through 10, not desiring to investigate the years for which the statute of limitations would expire by the time of prosecution.  The investigation therefore comes up with a criminal tax loss (the tax loss for an evasion count in the Government's case in chief to show a tax due and owing) of $400,000.   That is the amount that the Government believes that, in the case in chief, it can show to be the tax due and owing.

The risk lies in which is called relevant conduct for sentencing  purposes.  See S.G. §1B1.3, here, The earlier years underpayments would be relevant conduct and thus could be included in the tax loss for sentencing purposes even if not for the Government's case in chief on the evasion charge.  Of course, in the assumed fact pattern, the IRS and the Government may suspect that there was the same pattern of conduct in the earlier years but neither the IRS nor the prosecutor ever investigated it nor quantified it.  In this fact pattern, the probation officer probably would not investigate it either, although the probation officer could (e.g., the defendant is supposed to cooperate in the probation officer's examination and could be queried about the relevant conduct).  Counsel worry about this often but I have never observed it being done.

But, it is not uncommon for the IRS's CI investigation or an earlier civil investigation to cover years earlier than those for the years of prosecution.  Thus, using the above example, by the time the case is charged the IRS could have examined all of the years.  Say it is a fairly simple fact pattern and could be relatively easily investigated, so the IRS does that.  Now the prosecutor has the information for all relevant conduct years and knows that the tax loss is $1,000,000 rather than the $400,000 used for the case in chief.  What to do at the plea negotiation stage if the defendant, whose counsel has advised him of the higher Guideline resulting from the aggregate $1,000,000 being included, will plea only if a tax loss of $400,000 is used?  Can the parties nevertheless, in order to reach a plea agreement, stipulate that the tax loss is $400,000?  What happens if the probation officer learns about the larger tax loss, perhaps even is learns the larger number from documents submitted to the probation officer by the prosecutor (who is supposed to advise the probation officer of relevant sentencing factors)?

Certifying Non-Willflness for Streamlined - The Risk (3/7/15)

Tax Notes Today has an article summarizing some events at the Federal Bar Association annual conference.  Nathan J. Richman,  Tax Division Official Offers Insight Into Non-willfulness, 2015 TNT 45-17 (3/9/15) (no link available).  The parts I found relevant for my readers are was a quote from Caroline Ciraolo (now acting Assistant Attorney General pending approval of the nomination of Cono Namororato to be AAG):

We are taking particular interest if we find evidence of an account holder claiming non-willful conduct in a streamlined compliance filing or delinquent submission only to find that evidence produced by the Category 2 banks suggests otherwise. We are using information gleaned from the program to open new investigations, pursue new targets around the globe, and we will continue to do so as the information is developed.

For previous blogs on the certification process:

• IRS and Practitioner Comments on the Streamlined NonWillful Certification (Federal Tax Crimes Blog 11/1/14), here.
• It's So Easy to Say No -- The IRS Often Gets to No for Streamlined Transition Relief in OVDP (Federal Tax Crimes Blog 8/7/14; 8/11/14), here.
• Article on Risks of Certifying NonWillfulness (Federal Tax Crimes Blog 7/26/14), here.

More on Light Sentencing for Offshore Account Tax Crimes (3/5/15)

I wrote yesterday on an offshore conviction (Another UBS Client Sentenced Lightly (Federal Tax Crimes 3/4/15), here).  I commented that offshore tax crimes get punished lighter than ordinary tax crimes.  Today, I was going through some cases I had shelved and found one recent case that offers a contrast.

In United States v. Jones, ___  F.3d ___, 2015 U.S. App. LEXIS 3263 (8th Cir. 2015), here. the defendant was an ordinary tax cheat convicted under Section 7201, here, of evasion of payment.  Owing tax, he took numerous acts to avoid the IRS learning of and seizing his assets to pay the tax liability.  He was indicted for tax evasion.  He pled guilty.  His base offense level was 20 which means that the tax loss was more than $400,000.  See SG §2T4.1. Tax Table, here.   He received the sophisticated means 2 level increase.  See SG §2T1.1.(b)(2), here.  He then received the 3 level reduction for acceptance of responsibility.  See SG §3E1.1, here.   His offense level for the range calculations in the SG 5, Part A, here, was 19, producing a sentencing range of 30-37 months.  The sentencing judge used his Booker variance discretion to vary downward to 24 months imprisonment.  That sentence is 80% of the bottom of the Guidelines range.

Yesterday, I blogged on the sentencing of Gregg A. Kaminsky, an offshore tax evader.  Another UBS Client Sentenced Lightly (Federal Tax Crimes 3/4/15), here.  Although, I have not reviewed the underlying sentencing documents, I can construct his Guidelines calculations from the press release. Prior to doing so, I note that he pled guilty to an FBAR crime but the FBAR crime related to tax evasion.  Hence, his Sentencing Guideline calculations were apparently determined under the tax Guidelines.  I am not sure that this is correct for FBAR violations, but that seems to be the mainstream way of calculating the Guidelines for FBAR violations.  According to the press release, the tax loss was approximately $125,000, thus making his base offense level 16 under §2T4.1, here.  He would be subject to the sophisticated means enhancement under SG §2T1.1.(b)(2), here,  thus making  his offense level 18.  He would then qualify for the acceptance of responsibility 3 level reduction.  See SG §3E1.1, here.  His offense level for the sentencing table was thus 15, making his Guidelines range 18-24 months.  See SG 5, Part A, here.  The sentencing judge sentenced Kaminsky to 4 months in prison.  That sentence is about 22% of the bottom of the Guidelines range.

I am not sure that the conduct each undertook to effect their objective of tax evasion is materially different to explain the differences in their sentences.  Both behaved very badly.  Yet, the offshore tax evader got a relatively lighter sentence compare to their respect Guidelines ranges.

Many offshore violators receive no incarceration.  One explanation for some of the light sentences could be demographics.  Persons who amass the type of wealth that is likely to draw prosecutorial discretion to prosecute are older and thus not ideal candidates for incarceration.  See also §5H1.1. Age (Policy Statement), here, providing that " may be relevant in determining whether a departure is warranted, if considerations based on age, individually or in combination with other offender characteristics, are present to an unusual degree and distinguish the case from the typical cases covered by the guidelines."  Since age is recognized for potential departure in the Guidelines, I am sure it is considered also in exercise Booker discretion.  But, of course, that does not explain Kaminsky's light sentence and its seeming discrepancy compared to Jones' relatively heavier sentence.

Finally, these two instances are anecdotal.  Standing alone, they are not the basis for conclusions as to the universe of tax crimes sentenced.  Nevertheless, there is sufficient data from which a fair inference can be drawn that offshore tax cheating  is the preferred tax cheating based on sentences imposed.  (See my spreadsheet here which is long overdue for an update.)  Lighter sentencing for offshore tax crimes is the fact.  I ask whether that is right.

Another UBS Client Sentenced Lightly (3/4/15)

According to a press release from the USA for ND GA, here, a former UBS client, Gregg A. Kaminsky, has been sentenced for four months incarceration and two years supervised release for an FBAR violation.  My blog report on his guilty plea is here:  Another UBS Depositor Pleads Guilty (Federal Tax Crimes Blog 12/19/14), here.  The key excerpts from the press release are:

FORMER UBS CLIENT SENTENCED TO FEDERAL PRISON FOR HIDING INCOME AND ASSETS IN FOREIGN BANK ACCOUNTS

ATLANTA - Gregg A. Kaminsky has been sentenced for wilfully failing to file a Foreign Bank Account Report with the U.S. Department of Treasury in connection with his concealment of income and assets in accounts in Switzerland, Hong Kong, and Thailand over several years, as well as his failure to report certain income earned in the virtual world, “Second Life.” 

* * * * 

            Kaminsky is an Internet entrepreneur who serves as the Chief Executive Officer of Circlenet LLC, based in Atlanta, Georgia.  From 2000 through mid-2009, Kaminsky owned and controlled a foreign bank account with Union Bank of Switzerland AG (“UBS”), one of the biggest banks in Switzerland and largest wealth managers in the world.  By 2006, Kaminsky’s UBS account held approximately $1.1 million.  From time to time between 2002 and 2009, Kaminsky caused funds to be wire-transferred from his UBS account in Switzerland to other foreign bank accounts controlled by him in Thailand and Hong Kong.  Also during that time, Kaminsky caused his income from at least two different U.S. companies to be direct-deposited into his UBS account in Switzerland. 

             Yet, over this period, Kaminsky did not disclose his UBS account or other foreign financial accounts to the U. S. Treasury Department as required, and thereby concealed several hundred thousand dollars in taxable income, interest, and dividends from the U.S. Internal Revenue Service (IRS).

            In addition, in 2007 and 2008, Kaminsky omitted his UBS account and associated income from Free Applications for Federal Student Aid (FAFSA) that he electronically filed with the U.S. Department of Education in order to qualify for need-based federal financial aid to fund his tuition for an Executive MBA program at Emory University.  At the time of the FAFSA applications, Kaminsky controlled over a half million dollars in his UBS account, which would have made him ineligible for federal student loan assistance. 

             On June 30, 2008, the U.S. Department of Justice sought court approval to compel UBS to disclose the identities of U.S. account holders who may be using UBS accounts to hide assets overseas and thereby evade U.S. taxes.  The request and the order authorizing it were widely reported by the media throughout the United States, and this coverage continued throughout 2008 and 2009 as the U.S., UBS, and Switzerland negotiated a resolution and UBS began disclosing U.S. account holders to the IRS. 

             Following this news, Kaminsky closed his UBS account and transferred the balance of his UBS account to an account that he controlled at HSBC Bank in Hong Kong.  Further, in spring 2010, Kaminsky filed FBARs for his Swiss and Hong Kong accounts for the very first time, also filing amended individual income tax returns for 2007 and 2008 that disclosed the previously unreported income in his UBS account.  However, in his amended 2007 and 2008 returns, and in his subsequently filed returns for 2009 through 2012, Kaminsky still failed to report nearly $150,000 in taxable income earned from his business activities in the virtual world, “Second Life.”   

             Participants in Second Life, referred to as “residents,” can engage in a wide variety of business activities, including buying, renting, and sub-leasing virtual land and buying and selling other virtual goods, services, and experiences for their “avatars.”  Transactions are conducted using a virtual currency, “Linden Dollars.”  Linden Dollars can be bought and traded on the “Linden Exchange,” and are redeemable for cash.   

             Including his virtual world income, Kaminsky failed to report over $400,000 in income to the IRS between 2000 and 2012, resulting in a loss to the IRS of approximately $125,000. 

             Kaminsky, 46, of Atlanta, Georgia, was sentenced today to serve four months in federal prison to be followed by two years of supervised release, two months of home confinement, and 200 hours of community service.  Kaminsky was also ordered to pay restitution to the IRS in the amount of $91,983.  Kaminsky was convicted on these charges on December 18, 2014, after he pleaded guilty.  As part of his plea agreement with the United States, Kaminsky was also required to pay a civil penalty to the IRS in the amount of $250,635.20, which is equivalent to fifty percent of the value of the balance in Kaminsky’s HSBC account in Hong Kong as of June 30, 2009.    

 * * * * 

Today’s announcement is part of efforts underway by President Obama’s Financial Fraud Enforcement Task Force (FFETF) which was created in November 2009 to wage an aggressive, coordinated and proactive effort to investigate and prosecute financial crimes. With more than 20 federal agencies, 94 U.S. Attorneys’ offices and state and local partners, it’s the broadest coalition of law enforcement, investigatory and regulatory agencies ever assembled to combat fraud. Since its formation, the task force has made great strides in facilitating increased investigation and prosecution of financial crimes; enhancing coordination and cooperation among federal, state and local authorities; addressing discrimination in the lending and financial markets and conducting outreach to the public, victims, financial institutions and other organizations. Over the past three fiscal years, the Justice Department has filed more than 10,000 financial fraud cases against nearly 15,000 defendants including more than 2,700 mortgage fraud defendants. For more information on the task force, visit www.stopfraud.gov.

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Kostelanetz & Fink Publication on Criminal Tax Topics (3/3/15)

Kostelanetz & Fink has published its Semi-Annual Publication, here.  Readers of this blog will know that the firm and its practitioners are at the forefront of tax controversy practice, including criminal tax practice and OVDP related practice.  Their publications are worth notice.  The key articles for the subject of this blog are:

Tax Planning on the Edge Part II: Ethical Standards in the International Tax Arena, by Bryan C. Skarlatos.  Bryan's bio is here.

Be sure and go to page 16 which appears to be a continuation of the article and discusses United States practitioners evading foreign taxes and foreign practitioners evading U.S. taxes.

Déjà vu All Over Again: Re-Trial After Conviction,  by Sharon L. McCarthy.  Sharon's bio is here.

I particularly found Sharon's article interesting.  The article recounts her representation of Dinis Field, a co-defendant in the Daugerdas case which involved tax shelters of the bullshit category.  Readers of this blog will recall that the Daugerdas defendants were convicted in what proved to be the first trial of Daugerdas and related defendants,  including Field.  But, because of jury misconduct, the case was re-tried.  On the re-trial, Mr. Field was acquitted.  Sharon recounts particular stratgies that she believes contributed to the successful representation of Mr. Field.   The reason I found all of the major tax shelter criminal cases in NYC particularly interesting was that I represented one of the defendants in the first of those cases brought against 19 KPMG related defendants.  We did not have a first or second trial for my client and 12 others who were dismissed for prosecutorial abuse.  Still, every lawyer who has a first trial end in conviction would always love the opportunity for a re-do.  Sometimes the outcome is the same, but sometimes not.  It was not for Mr. Field and his lawyer, Sharon.

The subtopics in Sharon's article should give an idea of the article.

Motion Practice and Subpoenas

[As an aside, I just read today in Bryan Garner's periodic email that the word subpoena has an alternative spelling, subpena.  See LawProse Lesson #201: "Subpoena" vs. "subpena" [which I think will  appear shortly on his blog, here].  Bottom-line, spellings sometimes come into fashion and go out.  There was a time when subpena was fashionable and was oft-used, for example, in federal statutes.  It is less popular nowadays, with the spelling subpoena being the preferred spelling.]

Limiting Instructions.

Although it is not said specifically, apparently at Sharon and her co-counsel moved early and often that limiting instructions be given to the jury that certain potentially negative evidence about certain acronymed tax shelters was irrelevant to the cases involving their clients.  Then, "in summation, [] we were able to explain to the jury that significant portions of the government’s case, and the testimony of 14 witnesses, were completely irrelevant to Denis Field."