Thursday, April 30, 2015

Birkenfeld CNBC Interview (4/30/15)

CNBC has this interview of Brad Birkenfeld.  Eamon Javers, Why did the US pay this former Swiss banker $104M? (CNBC 4/30/15), here.

Mr. Birkenfeld was the UBS banker who blew the whistle on UBS and thereafter the other Swiss banks plying the U.S. tax evasion market.  He received a $104 million whistleblower award and a prison sentence.  But what he really wants is some form of vindication in addition to $104 million.
But Birkenfeld, 50, a big man with a brash style and a temper, isn't done with the U.S. Department of Justice. He's on a quest, he said, to force the government to explain why it was so aggressive in prosecuting him, but let nearly everyone else involved in the scam get off with light penalties or none at all. 
Now Birkenfeld is telling his story exclusively to CNBC. Wealthy, out of prison and soon to be removed from federal probation, he says he's now free to explain how he came to be the man who ended the tradition of bank secrecy and got rich in the process.

Hale Sheppard Article on Form 8938 (4/30/15)

Hale Sheppard, here, has published an article titled "Form 8938 and Foreign Financial Assets:  A Comprehensive Analysis of the Reporting Rules after IRS Issues Final Regulations," here.  It is published in the March/April issue of the International Tax Journal.  The article (i) analyzes the new/final regulations for Form 8938, describing both the changes accepted and rejected by the IRS, (ii) divides and organizes the complicated rules into manageable portions, addresses the confusing overlap between Form 8938 and the FBAR, and (iv) incorporates guidance from multiple sources, aiming to be a “one-stop shop” for all things Form 8938.  Here is an excerpt from the beginning:

General Rule and Overview

The general rule in Code Sec. 6038D(a) looks innocuous, but it is loaded with defined terms, conditions and nuances. This tax provision contains the following mandate:
Any individual who, during any taxable year, holds any interest in a specified foreign  financial asset shall attach to such person’s return of tax imposed by subtitle A for such taxable year the information described in subsection (c) with respect to each such asset if the aggregate value of all such assets exceeds $50,000 (or such higher dollar amount as the Secretary may prescribe). 
That statutory language is daunting, even for seasoned tax professionals. When faced with such density and complexity, it helps to separate the language into manageable pieces. Below is a breakdown of rules under Code Sec. 6038D, which might serve as a checklist for those conducting their own Form 8938 evaluation.

  • any specified individual (“SI”)
  • who holds an interest
  • during any portion of a tax year
  • in a specified foreign financial asset (“SFFA”)
  • must attach to his timely Form 1040 or Form 1040NR
  • a complete and accurate Form 8938
  • if the aggregate value of all SFFAs
  • exceeds the applicable filing threshold

Hale then provides some details for navigating the statute and the checklist.

Saturday, April 25, 2015

The Stored Communications Act and Emails: An Overview (4/25/15)

I have just posted a guest blog entry on the Microsoft Appeal in In re Warrant to Search a Certain E-Mail Account, 15 F. Supp. 3d 466 (S.D.N.Y. 2014), here,  appeal docketed, No. 14-2985 (2d Cir. Aug. 12, 2014).  Peter D. Hardy and Carolyn H. Kendall, Guest Blog on Stored Communications Act Reach to Cloud Storage Outside the U.S. (Federal Tax Crimes Blog 4/25/15), here.  The case is very important and the discussion an excellent introduction to the issues presented in the case.

The case arises from the Stored Communications Act (SCA), 18 USC 8 U.S.C. §§ 2701-2712.  I thought I would offer here a broader introduction to the SCA.  The following is from a draft of a larger publication that I recently worked on.  I omit the the footnotes but will provide links to the key cases and statutes in the following discussion.  I also omit the discussion of the issue which Peter and Carolyn discuss in the earlier blog entry:


Emails have played and will continue to play a prominent role in the larger prosecutions for white collar (including tax) crimes. In many cases, they are the mother lode for investigators and prosecutors.

If the Government wants emails stored on a target’s or subject’s computers, it can obtain them from the target or subject voluntarily (often not likely), by subpoena or summons, or by search warrant. Similarly, if the Government wants a target or subject’s emails stored on the systems of an entity with whom the target or subject is related (e.g., by employment relationship), it can obtain them from the entity if the entity cooperates, or, if not, by compulsory process such as subpoena or summons, or by search warrant.  A target or subject may, however, use unrelated third-party electronic communications services, such as Gmail or Hotmail, for email needs.  Emails stored with that third party are available to the target or subject who can provide them to the Government, but the Government may not be able to obtain that cooperation, so the issue is whether and how the Government may gain access to the emails from the provider of the service. Normally, under the Third-Party Doctrine, the Government may obtain records in the hands of a third party (i.e., not the target or subject who is being investigated) by the third party’s voluntary surrender or by compulsory process (subpoena or summons) to the third party without a search warrant.   This doctrine, if applicable, would provide the Government fairly easy access to emails stored with email services such as Gmail and Hotmail.

Recognizing potential privacy concerns with electronic communications, Congress enacted the Stored Communications Act  providing users privacy protections, with sanctions, for electronic communications stored with electronic communications services (“ECS”).   In giving these protections, Congress also provided for Government access under the following rules in § 2703, here:

  • By subpoena (investigative or trial subpoena, including an administrative subpoena (a subset of which is the IRS summons)) to the ECS:   (i) basic subscriber and transactional information;  and (ii) contents of communications in electronic storage with a ECS for more than 180 days.  
  • By § 2703(d) Order  issued by a court when the Government provides “specific and articulable facts showing that there are reasonable grounds to believe” that the records sought “are relevant and material to an ongoing criminal investigation:”(i) all records subject to production by subpoena;  and (ii) any other any other “record or other information” concerning a user other than “the contents of communications,” such as historical logs of the email addresses in contact with the user. 
  • By SCA Warrant issued by a court under the probable cause showing procedures for search warrants under the Federal Rules of Criminal Procedure:  (i) all records subject to production under a § 2703(d) order (and therefore also a subpoena); and (ii) contents of communications in electronic storage with a provider for fewer than 181 days, 

The subpoena and the § 2703(d) Order require prior notice to the subscriber or customer, but the SCA Warrant does not.

Guest Blog on Stored Communications Act Reach to Cloud Storage Outside the U.S. (4/25/15)

This blog entry is an offering by guest authors Peter D. Hardy, here, and Carolyn H Kendall, here, of Post & Schell PC.  Peter and Carolyn practice in the Internal Investigations & White Collar Defense and Data Protection/Breach Practice Groups of the law firm of Post & Schell P.C., in Philadelphia, PA.  Peter, a principal in the firm, is the author of a legal treatise entitled Criminal Tax, Money Laundering, and Bank Secrecy Act Litigation (Bloomberg BNA 2010), and is a former federal prosecutor.  Carolyn, an associate at the firm, co-authored the 2014 Supplement to Criminal Tax, Money Laundering, and Bank Secrecy Act Litigation.

Please note that downloadable copies of the key documents are at the end of the blog and links to the cited cases, statutory sections and procedure rules are at the end of the blog discussion.

Domestic Search Warrants for Emails Stored Abroad:
The Government Seeks to Expand its Ability to Collect Foreign Evidence

An appeal now under consideration by the Second Circuit arising out of a drug investigation may have substantial consequences for the government’s general ability to obtain evidence stored abroad – and such consequences certainly would extend to the continuing efforts by the Department of Justice and the Internal Revenue Service to gather evidence of undisclosed foreign assets held by U.S. taxpayers.  The appeal illustrates how increasingly sophisticated technology may curb the government’s investigative options or, alternatively, how creative and aggressive legal claims by the government may allow it to obtain foreign evidence through domestic courts, including emails generated by individuals who do not reside within the U.S.

In December 2013, the government obtained a warrant in the Southern District of New York for the contents of an email account hosted by Microsoft, which the government alleged had been used in narcotics trafficking.  The warrant, issued pursuant to the Stored Communications Act (SCA), 18 U.S.C. §§ 2701-2712, directed Microsoft “to disclose” the contents of the email account that were within Microsoft’s “possession, custody, or control.”  Microsoft stores its customer data in “the Cloud,” which in this case happened to be Microsoft’s datacenter in Dublin, Ireland.  Microsoft stored the account’s content there based on the account-holder’s representation that he was located outside the U.S.  Realizing that the warrant sought content from Dublin, Microsoft moved to vacate the warrant as an impermissible extraterritorial warrant.  The district court denied the motion, and Microsoft renewed its challenge before the Second Circuit, which is expected to hear argument this summer.  Given the potential ramifications in all kinds of criminal investigations of permitting the government to obtain sensitive information stored offshore by serving an SCA warrant on an entity in the U. S., this case is one to watch.  In this post, we lay out some of the issues currently before the Second Circuit.  A later post will address the Second Circuit’s ruling, once it has been published.

District Court Proceedings 

Search warrants of course represent a powerful investigative tool.  Federal Rule of Criminal Procedure 41(b)(5) allows for the issuance of search warrants only for property located within the U.S., or within a U.S. territory, possession, commonwealth, embassy, or consulate.  Rule 41 simply does not allow for the seizure of property located in a foreign country.

Wednesday, April 22, 2015

Ninth Circuit Reverses Barry Bonds Obstruction Conviction (4/21/15; revised 4/24/15)

The Ninth Circuit, in an en banc decision, just reversed Barry Bonds [Wikiepedia entry here] conviction for obstruction under 18 USC § 1503's omnibus clause, here, for his grand jury testimony.  United States v. Bonds, 2015 U.S. App. LEXIS 6708 (9th Cir. 2015), here. This is an important decision for tax crimes both for the grand jury context for § 1503 obstruction but also because § 7212(a), here, tax obstruction, has the same omnibus clause.  The analysis may further affect other statutory interpretations in the areas of false statements under 18 USC 1001(a), here.

When I posted on the opinion shortly after its release three days ago, I did a substantial amount of cutting and pasting because I did not have time to offer a good summary and synthesis.  So, I am revising the blog entry to delete the substantial quotations and offer more limited quotations with some of my own analysis.

First, the context.  The grand jury was investigating the use of sales enhancing drugs in sports and whether the proceeds from sales of the drugs were being laundered.  The investigation was focused on the persons providing drugs to athletes.  Athletes were not the targets of the investigation, but some were expected to testify to further the investigation.  Hence, a judicial order of immunity -- conferring use and derivative use immunity -- was given Bonds.  The grant of immunity effectively shielded Bonds from being prosecuted except for his own criminal footfaults in giving the immunized testimony.  Pursuant to the order, Bonds testified for about 3 hours.  The Government secured an indictment for false statements and obstruction based upon the testimony.  In the criminal trial, the jury acquitted on the false statement charges and convicted only for the obstruction charge.

The Q&A [referred to in the opinions as Statement C] and follow-through on which the conviction for obstruction was based (this is from Judge Kozinski's concurring opinion):
Q: Did Greg[, your trainer,] ever give you anything that required a syringe to inject yourself with?
A: I've only had one doctor touch me. And that's my only personal doctor. Greg, like I said, we don't get into each others' personal lives. We're friends, but I don't—we don't sit around and talk baseball, because he knows I don't want—don't come to my house talking baseball. If you want to come to my house and talk about fishing, some other stuff, we'll be good friends. You come around talking about baseball, you go on. I don't talk about his business. You know what I mean?
Q: Right.
A: That's what keeps our friendship. You know, I am sorry, but that—you know, that—I was a celebrity child, not just in baseball by my own instincts. I became a celebrity child with a famous father. I just don't get into other people's business because of my father's situation, you see.
Defendant was again asked about injectable steroids immediately following this exchange and a few other times during his testimony. He provided direct responses to the follow-up questions. For example, he was asked whether he ever "injected [him]self with anything that Greg . . . gave [him]." He responded [4]  "I'm not that talented, no." The government believed that those answers were false but, as noted, the jury failed to convict defendant on the false statement counts.
Bonds appealed.  The three Ninth Circuit judges originally hearing the appeal unanimously affirmed the conviction.  United States v. Bonds, 730 F.3d 890 (9th Cir. 2013), here.  The reasoning was that the testimony was evasive and misleading and thus within the scope of 18 USC 1503 even if true.

Bonds then requested en banc review.

The Ninth Circuit granted the en banc review and issued the following per curiam opinion (short enough to quote in full):
During a grand jury proceeding, defendant gave a rambling, non-responsive answer to a simple question. Because there is insufficient evidence that Statement C was material, defendant's conviction for obstruction of justice in violation of 18 U.S.C. § 1503 is not supported by the record. Whatever section 1503's scope may be in other circumstances, defendant's conviction here must be reversed. 
A reversal for insufficient evidence implicates defendant's right under the Double Jeopardy Clause. See United States v. Preston, 751 F.3d 1008, 1028 (9th Cir. 2014) (en banc) (citing Burks v. United States, 437 U.S. 1, 11, 98 S. Ct. 2141, 57 L. Ed. 2d 1 (1978)). His conviction and sentence must therefore be vacated, and he may not be tried again on that count. 

The Economic Rational Actor Model (4/22/15)

I offer today a good, succinct explanation of what is commonly called the standard deterrence model for the economically rational actor for tax obligations.  Kathleen DeLaney Thomas, The Psychic Cost of Tax Evasion, 56 B.C. L. Rev, 618 (2015), here.  I quote her brief explanation (pp. 623-626), omitting all except two footnotes:
A. Standard Deterrence Theory: The Rational Actor Model 
Standard deterrence theory, as applied to tax compliance, assumes that taxpayers are rational actors seeking to maximize their expected utility. Accordingly, a taxpayer who is deciding whether to comply with the tax law will weigh the expected cost of tax evasion against the cost of complying and choose the cheaper option. The cost of complying is simply the amount of tax owed. The cost of evasion, however, is somewhat more complex. If a taxpayer evades and is caught, she will have to pay the tax owed and will also have to pay a penalty, which is usually some fraction of the tax owed (e.g., twenty percent). Together, this penalty added to the tax owed can be thought of as the total fine for evasion (F). There is a chance, however, that the IRS will not detect the taxpayer’s evasion, in which case the taxpayer incurs no cost. Thus, the expected cost of tax evasion is the total fine for evasion discounted by the probability of detection (P): 
Cost of Compliance = Tax Owed
Expected Cost of Evasion = P x F19 
For example, if the probability of detection were one percent (which is the current overall audit rate) and the penalty for evasion were twenty percent of the tax due, the expected cost of evading $100 of tax would be the $100 of tax due plus a $20 penalty (F = $120), discounted by one percent chance of being detected (P). The resulting $1.20 expected cost would be substantially cheaper than the cost of complying (i.e., the $100 of tax owed). In that case, a rational taxpayer would cheat. 
A policymaker seeking to deter a rational taxpayer from evading tax can do so by raising the expected cost of evasion, with the goal of making it more expensive than the cost of compliance. It follows from the model that raising either the probability of detection or the penalty for evasion, or some combination of the two, can increase the expected cost of evasion. In the context of tax compliance, this means higher tax penalties, raising the audit rate, or finding some other method to increase the rate of detection. 
At first glance, raising tax penalties appears to be a simple and potentially cost-effective solution for increasing tax compliance. Current civil tax penalties in the United States range from just twenty percent to seventy-five percent of the tax due, resulting in sub-optimal expected penalties if the risk of detection is small. n22 If Congress increased nominal penalties significantly, it could potentially deter tax evasion without investing more re-sources in ferreting out noncompliant taxpayers.
   n22 In the example in the text above, the expected penalty for evading $100 of tax was just $1.20 when the risk of detection was one percent and the penalty was twenty percent.

Friday, April 17, 2015

More on the Allen Issue - Oral Argument in BASR (4/17/15)

With too much time on my hands, I decided to listen to the oral arguments in the Court of Appeals for the Federal Circuit in  BASR Partnership v. United States, 113 Fed. Cl. 181 (9/30/13 Filed; As Revised 10/29/13), here.  The oral argument may be downloaded here.  For background discussion of the case, see BASR Briefs On Issue of Unlimited Statute of Limitations for NonTaxpayer Fraud (Federal Tax Crimes Blog 8/26/14), here.  I will give some off-the-cuff impressions after the oral argument.

Here is how I slice and dice it (perhaps simplistically):

1.  The issue is whether § 6501(c)(1), here, applies to nontaxpayer fraud.

2.  The plain meaning of § 6501(c)(1) requires fraud but does not textually differentiate between the taxpayer's fraud and any other persons' fraud.  That does not resolve the issue stated in #1, because textual reading does not always control.  I cannot predict whether the Court of Appeals for the Federal Circuit will go outside the bounds of the text.

3.  Much of the oral argument dealt with esoterica of the TEFRA partnership provisions.  I think that is pretty much irrelevant if, as the Government argues and the Court of Federal Claims has already held, Section 6501 is the applicable statute of limitations, then any minimum statute of limitations in § 6229, here, shorter than the § 6501 statute is irrelevant.  But that simply begs the questi§ 6501(c)(1), properly interpreted, applies to nontaxpayer fraud.

4.  I previously thought it relevant that the Government's reading of § 6501(c)(1) might moot § 6229(c)(1)'s prescription of a 6-year statute for fraud on the partnership return not involving the partner committing the fraud.  If § 6501(c)(1) nevertheless prescribes an unlimited statute for a partnership fraudulent item flowing through to the nonfraudulent partner's return, then § 6229(c)(1)'s 6-year statute is irrelevant because it will always be shorter than the § 6501(c)(1) unlimited statute.  On more reflection, this concern seems to be a superficial one. Congress' enactment of a provision that, depending upon the interpretation of an earlier enacted statute, might be rendered irrelevant does not mean that the earlier enacted provision should be interpreted to avoid the irrelevancy.  All the subsequent enactment shows is that Congress in the subsequent enactment either did not think of its interaction with the earlier statute or misconstrued the scope of the earlier statute.  It does not mean that the earlier statute properly interpreted cannot apply as properly interpreted.  Stated alternatively, Congress did not by § 6229(c)(1) amend § 6501(c)(1), so the issue should be how § 6501(c)(1) should be interpreted in the absence of § 6229(c)(1).  And, even if Congress in enacting § 6501(c)(1) had said in the legislative history that it meant to amend § 6501(c)(1) or based its language in § 6229(c)(1) on an assumption that § 6501(c)(1) would not apply, then the enactment would have no effect on the interpretation of § 6501(c)(1).

Swiss Banks Scramble to Mitigate U.S. Penalties (4/17/15)

BloombergBusiness has an article describing the banks actions to mitigate the penalty under the U.S. DOJ Program for Swiss Banks.  Giles Broom and David Voreacos, Swiss Banks Strong-Arm Clients in U.S. Tax-Evasion Endgame (BloombergBusiness 4/14/15), here.  From my perspective, the interesting excerpts are:
Faced with the threat of penalties that could bankrupt some of them, almost 100 of the country’s banks are calling thousands of U.S. clients in an 11th-hour push to get them to disclose any offshore accounts they may be hiding. Customers are being asked to prove they have paid any taxes due, according to a dozen lawyers for banks or their customers. Some have even had their accounts partially blocked to force them to comply, according to the Swiss banking ombudsman. 
As the U.S. government’s largest crackdown on offshore tax evasion enters its final stretch, the banks are trying to reduce any fines they face. Under the amnesty program, if banks can’t show clients paid any taxes owed, the government will assume they didn’t -- and fines will be larger. U.S. prosecutors have already put one bank out of business over tax evasion: Wegelin & Co., Switzerland’s oldest private bank, closed in 2013 after being indicted. 
* *  * * 
Several banks are using tactics clients consider as strong-arming, such as blocking funds or threatening to reveal names, said Thierry Boitelle, a lawyer with Bonnard Lawson in Geneva. He has advised U.S. taxpayers and Swiss private banks involved in the program.
“We have seen banks making withholdings on U.S. client accounts,” he said. “They’re holding back 25 to 30 percent of the funds to compensate for potential fines.” 
Switzerland’s banking ombudsman said it received a “handful” of complaints of accounts being frozen. Banks ascribe such actions to uncertainty over whether a client controlled an account or because he tried to withdraw all holdings in cash instead of making wire transfers, said deputy ombudsman Rolf Wuest. 
Still Resisting 
As clients aren’t legally required to help, many banks have agreed to pay legal costs that sometimes reach tens of thousands of dollars, lawyers say. 
In some cases, customers are still resisting, saying they paid banks high fees for holding money in confidence. 
“Some clients felt that they were misled by the bank as far as secrecy was concerned, and that’s left them with no reason to cooperate,” said Leigh Kessler, a former tax prosecutor now at Rosenberg Martin Greenberg LLP, a Baltimore firm advising some Americans who received calls. 
Customers who are tax compliant can also be uncooperative, said Larry Campagna, tax attorney for Chamberlain, Hrdlicka, White, Williams & Aughtry. The Houston-based firm has represented about 100 clients in connection with the program. 
“They would say, ‘I’m finished with this bank,’” he said. “‘I’m right with my government, I don’t care what happens to the bank. Go jump in the lake and don’t call me again.’”
JAT Comment:  I had thought the window had long passed that the Swiss banks could get the proof required to mitigate the penalties.  But, recently, at least one bank has made inquiries that, while not acknowledging that the bank was seeking penalty mitigation, that seemed to the focus of the inquiries.

Pinkerton and Sentencing for Jointly Undertaken Activity; Proposed Sentencing Guidelines Amendment (4/17/15)

Note to readers:  I posted this entry at the end of a long blog yesterday.  (That blog entry is here.)  I thought that the subject might not get the appropriate attention there and decided to lift it up to a separate blog entry.  In its summary order in United States v. Platt, 2015 U.S. App. LEXIS 6157 (2d Cir. 2015), here, the Court addressed the application of relevant conduct to jointly undertaken activity using the relevant conduct concept of the Sentencing Guidelines.

The trial court sentenced the defendants based on the activities of other persons who implemented the scheme.  The trial court relied on a spreadsheet prepared by the Government and did not make particularized findings to support the inclusions in the spreadsheet.  The Court of Appeals remanded for those findings, but had some interesting comments regarding the process.

The background for the comments is Pinkerton co-conspirator liability.  United States v. Pinkerton, 328 U.S. 640 (1946), here.  (This blog has discussed Pinkerton liability often; for the blog entries sorted by relevance, see here.) For purposes of criminal conviction, one conspirator can be prosecuted for the reasonably foreseeable criminal conduct of co-conspirators within the scope of the conspiracy.  For purposes of sentencing, though, the inclusion of financial loss from other persons' conduct is more restricted (I digress on that issue below, but first offer the analysis if the Second Circuit in the Platt opinion on which this blog entry is based):
Under Section 1B1.3(a)(1)(B) "[a] district court may sentence a defendant based on the reasonably foreseeable acts and omissions of his co-conspirators that were taken in relation to a conspiracy." United States v. Getto, 729 F.3d 221, 234 (2d Cir. 2013). However, to hold a defendant accountable for jointly undertaken criminal activity, a district court must first "make a particularized finding of the scope of the criminal activity agreed upon by the defendant" and, in addition, make a particularized finding that relevant co-conspirator conduct was foreseeable to the defendant. Studley, 47 F.3d at 574. 
At sentencing, the district court committed procedural error by failing to make particularized findings concerning whether the conduct of other gifting table participants fell within the scope of defendants' agreement, and whether this conduct was foreseeable to defendants. The district court relied on a spreadsheet prepared by the government that listed gains to other table participants, but excluded individuals who lacked an "established association"—or "material connection" in the district court's understanding—with defendants. The court further excluded gains to individuals where "it was unclear whether they were operating substantially independently" of defendants, and [17]  only partially including gains where "it was unclear whether part of the[] foreseeable gains [of other table participants] should be excluded." The court thereby eliminated from the loss amount calculation gains to some participants with apparently tenuous connections to defendants but neither explained what constituted a material connection nor clearly indicated whether the gains attributed to defendants were foreseeable. Accordingly, we conclude that the district court's findings did not comply with the requirement of Studley to make particularized findings relating to "the scope of the specific conduct and objectives embraced by the defendant[s'] agreement," Studley, 47 F.3d at 574 (quoting U.S.S.G. § 1B1.3, cmt. n. 2) (emphasis omitted), and "as to whether the activity was foreseeable to the defendant[s]," id.

Thursday, April 16, 2015

Second Circuit Summary Order Covering Batson Issue (Striking Women on Jury), Refusal to Grant Immunity to Defense Witnesses, Relevant Conduct for Co-Conspirators (4/16/15)

The Second Circuit issued a summary order (nonprecedential) that I think is good reading for law students and lawyers (at least lawyers young in their practices).  United States v. Platt, 2015 U.S. App. LEXIS 6157 (2d Cir. 2015), here.

Highly summarized, the defendants, Jill Platt and Donna Bello, organized a pyramid scheme promoted to women using the conceit of "gifts" in table offerings (such as dessert, entree, etc.)  All income is taxable, but gifts are excluded from taxable income.  Hence, the participants in the scheme (including the defendants) claimed that the cash they received were gifts and thus not taxable.  They were wrong.

The defendants were convicted for defraud / Klein conspiracy (18 USC 371, here), tax perjury (§ 7206(1), here), wire fraud (18 USC § 1343, here), and conspiracy to commit wire fraud (18 USC § 1349, here).  All except the conspiracy charges were multiple counts of conviction.

The opinion summarizes the defendants' arguments and its holdings in the following introductory paragraph:
On appeal, defendants contend that the government's use of peremptory strikes to eliminate female members of the venire violated Batson v. Kentucky, 476 U.S. 79 (1986); the district court abused its discretion by admitting the testimony of attorney William O'Connor and by declining to compel immunity for three defense witnesses, thereby also violating defendants' constitutional right to present a defense; and the district court abused its discretion in admitting the expert testimony of Dr. Kenneth Kelly. We find these arguments to be without merit and accordingly affirm the judgments of conviction. However, defendants also challenge their sentences, contending that the district court penalized them for exercising their right to trial and imposed sentences that were otherwise procedurally and substantively unreasonable. We find that the district court erred by failing to make the particularized findings required by United States v. Studley, 47 F.3d 569 (2d Cir. 1995), and remand the case for resentencing.
This disposition is a summary order, hence it is nonprecedential in the Second Circuit.  Still, it is a good presentation of the points it covers.  So, let's take a look at the analysis.

1.  The Batson Claim for Peremptory Challenge of Women.
The Supreme Court has held under Batson [Batson v. Kentucky, 476 U.S. 79 (1986), here] and its progeny that the Equal Protection Clause prohibits the government from using its peremptory challenges to exclude potential jurors for a discriminatory purpose. See 476 U.S. at 89; J.E.B. v. Alabama ex rel. T.B., 511 U.S. 127, 146 (1994) [here] (extending Batson to discrimination in the selection of jurors on the basis of gender). 
Without elaborating on the analysis further, suffice it to say that the district court accepted the prosecutor's gender neutral explanations of its strikes of women.  Finding no abuse of discretion, the Court affirmed the district court's decision.

Great Article on U.S. Indicted Swiss Bankers (4/16/15)

Jesse Drucker has this article today:  America’s Most-Wanted Swiss Bankers Aren’t Hard to Find (BloombergBusiness 4/16/15), here.  The article is very good.  He traveled around Switzerland to find and talk with Swiss bankers who have been indicted by the U.S. for assisting U.S. taxpayers hide their incomes in Swiss banks.  I will include some excerpts just to get you interested, but I strongly encourage readers of this blog to click the link above for the full article.
For decades, Switzerland has occupied an outsize role in the world of shady international finance. The country’s strict secrecy laws have made it the offshore banking destination of choice for U.S. tax evaders, Russian oligarchs, Nigerian kleptocrats, and Brazilian money launderers. According to research by Gabriel Zucman, an assistant professor at the London School of Economics, Swiss banks still hold at least $2 trillion that customers haven’t declared to tax authorities in their home countries. “You’re not a self-respecting Swiss bank if you don’t have some dodgy money floating around your system,” says Martin Kenney, an attorney in the British Virgin Islands who specializes in international fraud. 
* * * * 
Swiss authorities, however, have refused to hand over any bankers—and the U.S. hasn’t asked for them. At least 21 financial advisers in Switzerland under U.S. indictment remain at large, making them fugitives in the eyes of the American government. Their acts aren’t considered crimes under Swiss law, so the country won’t extradite or prosecute them. Several still work in the Swiss financial industry, offering tax advice and other services. Some still have U.S. clients. 
* * * * 
At least four I talked to have decided to face the music: pleading guilty in the U.S. and cooperating with prosecutors. What persists is an indignation about being targeted for just following orders—and a sense that, despite their indictments, the Swiss banking system remains dirty.
For related blog entries, see
  • Article on Swiss Enabler Fugitives Avoiding U.S. Indictments (Federal Tax Crimes Blog 12/26/14), here.
  • Senators Urge Extradition of Indicted Swiss Bank Enablers (Federal Tax Crimes Blog 3/18/14), here.
  • Switzerland as Club Fed for Swiss Enablers of U.S. Tax Crimes (Federal Tax Crimes Blog 10/24/13), here.

Wednesday, April 15, 2015

A Prosecutor's Ethical Obligations to Disclose Exculpatory Evidence Held Broader than Brady Obligation (4/15/15)

In In re Kline, 2015 D.C. App. LEXIS 141 (D.C. Court of Appeals Apr. 9, 2015), here, the D.C. Court of Appeals upheld a finding that, although a failure to disclose potentially exculpatory evidence might not be a Brady violation, it can violate the disclosure requirement for prosecutors under local bar rules.  The opening paragraph lays out the issue and the resolution:
This matter comes before us upon the Report and Recommendation of the Board on Professional Responsibility ("the Board"). The Board recommended that a 30-day suspension be given to Andrew J. Kline ("Kline") after finding that Kline violated Rule 3.8 (e) of the District of Columbia Rules of Professional Conduct ("Rule 3.8 (e)"). Rule 3.8 (e) prohibits a prosecutor in a criminal case from intentionally failing to disclose to the defense any evidence or information that the prosecutor knows or reasonably should know tends to negate the guilt of the accused. Bar Counsel takes no exception to the Report and Recommendation of the Board. Kline argued, inter alia, that he did not violate Rule 3.8 (e) because his ethical duties are coextensive with the duties imposed under Brady v. Maryland, 373 U.S. 83, 83 S. Ct. 1194, 10 L. Ed. 2d 215 (1963). Specifically, Kline relies on the "material-to-outcome" standard recognized by the United States Supreme Court in Brady's progeny to argue that a prosecutor cannot violate Rule 3.8 (e) unless there is a reasonable probability that the information or evidence withheld made a difference in the outcome of the trial. We hold that Kline's interpretation of Rule 3.8 (e), which incorporates a retrospective materiality analysis, is not the appropriate test for determining whether a prosecutor has violated Rule 3.8 (e). We also hold that Bar Counsel proved by clear and convincing evidence that Kline intentionally failed to disclose information in violation of the rule. However, we conclude that given the confusion regarding the correct interpretation of a prosecutor's obligations under the rule, sanctioning Kline would be unwarranted.
The case contains a good discussion of the restricted scope of Brady -- to an ex post facto evaluation of whether the failure to disclose was material to the outcome.  The bar rule, in contrast, is a forward looking prophylactic rule that necessarily cannot be tested by whether it is material to an outcome that has not even occurred:
In short, although significant overlaps exist in a pretrial versus post-trial ethical analysis, it makes little common sense to premise a violation of an ethical rule on the effect compliance with that rule may have on the outcome of the underlying trial, because there can be "no objective, ad hoc way" for a prosecutor "to evaluate before trial whether [evidence or information] will be material to the outcome." See Lewis, 408 A.2d at 307. For that reason, it is important not to use Brady as a "canon of prosecutorial ethics." Commonwealth v. Tuma, 285 Va. 629, 740 S.E.2d 14, 20 n.2 (Va. 2013).
The Court earlier also made this significant comment analysis:
Further, as the Supreme Court recognized in Kyles, "[t]he rule in Bagley (and, hence, in Brady) requires less of the prosecution than the ABA Standards for Criminal Justice, which call generally for prosecutorial disclosures of any evidence tending to exculpate or mitigate." Kyles v. Whitley, 514 U.S. 419, 437, 115 S. Ct. 1555, 131 L. Ed. 2d 490 (1995). The Supreme Court reiterated that basic tenet in Cone, noting that "[a]lthough the Due Process Clause of the Fourteenth Amendment, as interpreted by Brady, only mandates the disclosure of material evidence, the obligation to disclose evidence favorable to the defense may arise more broadly under a prosecutor's ethical or statutory obligations." Cone v. Bell, 556 U.S. 449, 470 n.15, 129 S. Ct. 1769, 173 L. Ed. 2d 701 (2009) (citations omitted).
This violation occurred while Kline was an AUSA working on local prosecutions.  Other jurisdictions have rules that are similar and similarly interpreted.

It might be worth including some type of forward looking request under the local bar rules in addition to requests for Brady disclosures (which under the analysis above is a bit of a non sequitur before trial).  I would think that most prosecutors would not want to take the risk that a retrospective Brady violation may be found and thus would tend, even apart from a bar rule, to err on the side of caution and disclose possibly exculpatory evidence.

Of course, unlike a Brady violation which can give a convicted defendant relief, a bar violation does not per se give the defendant relief.  It merely punishes the prosecutor.

Thanks to the White Collar Crime Prof Blog article:  Solomon Wisenberg, District of Columbia Court of Appeals Makes It Official: Prosecutor's Duty To Disclose Exculpatory Evidence Is Broader Than Brady (White Collar Crime Prof Blog 4/10/15), here.

Must Overt Act Within the Applicable Conspiracy Statute of Limitations Be Alleged in the Indictment? (4/15/15)

The general conspiracy statute, 18 USC 371, here, often deployed in tax crimes prosecutions, requires an overt act in furtherance of the conspiracy and at least one overt act must be in furtherance of the conspiracy.  What is not settled is whether the indictment must allege at least one such overt act within the applicable statute of limitations period for the conspiracy alleged.  All courts agree that the prosecution may prove overt acts not alleged in the indictment in order to meet the requirement that the element of the conspiracy crime is met.  The question is whether at least one of the overt acts within the applicable statute of limitations must be alleged in the indictment to avoid dismissal of the indictment.  And to drill down further, if the allegation requirement is necessary, what if the prosecution does not prove the overt act alleged but proves another unalleged overt act within the statute of limitations?  I don't have the answers to these questions directly, but offer the following from a recent case (United States v. Magalnik, 2015 U.S. Dist. LEXIS 46820 (WD VA 2015)):
The statute of limitations is an affirmative defense that must be raised by a defendant. See Biddinger v. Commissioner of Police of City of New York, 245 U.S. 128, 135, 38 S. Ct. 41, 62 L. Ed. 193 (1917). Once a defendant does so, however, "[t]he government bears the burden of proving that it began its prosecution within the statute of limitations period." United States v. Wilson, 118 F.3d 228, 236 (4th Cir. 1997). It is well-settled that, in order to obtain a § 371 conviction, the government must prove at trial that an overt act in furtherance of the charged conspiracy occurred within the applicable limitations period. Head, 641 F.2d at 177. Disagreement exists, however, as to whether a timely act must be alleged in the indictment itself. Some courts hold that an indictment that fails to allege a timely overt act is subject to dismissal on its face. See United States v. Davis, 533 F.2d 921, 929 (5th Cir. 1976) (error to deny motion to dismiss conspiracy indictment where the indictment failed to allege a overt act within the limitations period, because "for purposes of the statute of limitations the overt acts alleged in the indictment and proved at trial mark the duration of the conspiracy"); United States v. Stoner, 98 F.3d 527, 533 (10th Cir. 1996) ("[A]n indictment must allege that the conduct constituting the conspiracy fell within the statute of limitations, and an indictment that does not contain such allegations is subject to dismissal on its face."). Other courts hold that the government can satisfy the statute of limitations by proving a timely overt act at trial, even where the acts alleged in the indictment are untimely. See United States v. Frank, 156 F.3d 332, 339 (2d Cir. 1998) ("[T]he statute of limitations may be satisfied by proof of an overt act not explicitly listed in the indictment, as long as a defendant has had fair and adequate notice of the charge for which he is being tried, and he is not unduly prejudiced by the asserted variance in the proof."); United States v. Schurr, 794 F.2d 903, 907-908 (3d Cir. 1986) ("[It is well settled that the government can prove overt acts not listed in the indictment, so long as there is no prejudice to the defendants thereby, [and] [t]here would appear to be no reason that the government could not satisfy its requisite showing under the statute of limitations by means of an overt act not listed in the indictment").
See also When Does the Conspiracy End? (Federal Tax Crimes Blog 12/10/13), here.

IRS CI Publishes Annual Report and Some Statistics (4/15/15)

IRS CI has issued its annual report.  IRS Criminal Investigation, Annual Business Report: Fiscal Year 2014 Operations, here.  Many of the key statistics appear also on the IRS CI website here.  For further drill down by program, see here, and the 10-year statistics are here.  The IRS Data Book presents annual statistics in a different but very useful format, here.

I have been keeping data drawn primarily from the IRS statistics.  I attach my latest spreadsheet here (zip file).  I have links in the spreadsheet to show the sources for the data.

The most interesting spreadsheet is Sheet1.  The data in Sheet1 indicate that for legal source prosecutions over the period from 2005 though 2014, the conviction rate is 84.7%.  (That is convictions over indictments for legal source prosecutions.) I won't try to correlate that the DOJ Tax's claims of a 95% (or thereabouts) conviction rate.  I know DOJ Tax's claims relates to all crimes it prosecutes and not just legal source tax crimes and DOJ Tax may prosecute some crimes not accounted for in the IRS data.

The conviction rate substantially increased in 2014, but (i) the single year numbers do not as easily smooth out year to year differences in the components (year of indictment and year of conviction) as do multi-year numbers and (ii), even focusing on 2014, there was a larger number of indictments in 2013 over 2012 and 2014, so the larger number of indictments in 2013 may have disproportionately contributed to the convictions in 2014.

Tuesday, April 14, 2015

DOJ Tax Press Release Warning of Consequences of Not Reporting and Paying Tax (4/14/15)

DOJ Tax issued this press release yesterday.  Justice Department Reminds Taxpayers that No One Is Above the Law or Below the Radar (DOJ Tax 4/13/15), here.  In the press release, DOJ Tax warns taxpayers of the legal risks of not properly reporting and paying taxes and trots out examples of ordinary taxpayers being prosecuted and punished.  This press release is not directed specifically to the offshore account phenomenon, probably since DOJ Tax has proclaimed the offshore initiative often and the overwhelming majority of taxpayers facing the April 15 deadline do not have offshore accounts .  But, of course, the point is that tax evasion is the problem whether ordinary / onshore or through offshore accounts.

Monday, April 13, 2015

IRS Reminder for U.S. Taxpayers Living Outside U.S. and for Special Reporting for All Taxpayers with Certain Foreign Assets (5/13/15)

The IRS has issued a reminder to U.S. taxpayers living abroad or, if living in the U.S.,  have foreign reporting assets.  See IRS Reminds Those with Foreign Assets of U.S. Tax Obligations (IR 2015-70 April 10, 2015), here.

The opening is:
The Internal Revenue Service  today reminded U.S. citizens and resident aliens, including those with dual citizenship who have lived or worked abroad during all or part of 2014, that they may have a U.S. tax liability and a filing requirement in 2015.
Topics Covered:

  • Most People Abroad Need to File
  • Special Reporting for Foreign Accounts and Assets
  • RS Simplifies Reporting for Canadian Retirement Accounts
  • Report in U.S. Dollars
  • Expatriate Reporting
  • Choose Free File or E-File
  • More Information Available

Friday, April 10, 2015

Taxpayer Right to Be Present at Interview of Federally Authorized Practitioner (4/10/15)

In United States v. McEligot, 2015 U.S. Dist. LEXIS 45519 (N.D. Cal. Apr. 6, 2015), here, the third-party witness, the taxpayer's accountant and return preparer, had asserted the Federally Authorized Practitioner Privilege under Section 7525, here, and refused to be interviewed without taxpayer's counsel.  The IRS moved to enforce the summons.  The Court held (1) "a taxpayer does not have an absolute right to be present at a third party IRS summons proceeding concerning the taxpayer's liabilities" and (2) the summons should be enforced.

Taxpayer's Right to Have His Counsel at the Interview

The Court starts off by saying that any implication in Reisman v. Caplin, 375 U.S. 440 (1964) that the taxpayer might be present at the interview was not the "last word on the subject."  In Donaldson v. United States, 400 U.S. 517 (1971), the Court rejected guaranteed right for the taxpayer's counsel to be present and said such presence was permissible only where the taxpayer could show the potential for a significantly protectable interest.  For example, if the taxpayer's attorney were summonsed where the taxpayer might have attorney-client privilege and work-product protection.

The Court noted that subsequent changes to Section 7609, here, which require notice to the taxpayer and a right to move to quash the summons or intervene in a summons enforcement proceeding do not affect the issue of presence at the summons interview.  The Court then reasons and concludes:
The Government additionally notes that "[t]he Fourth Circuit, Tenth Circuit, Fifth Circuit, and a District Court within the Ninth Circuit have held that a taxpayer has no right to be present at the interview of the party being summoned." ECF No. 21 at 4. In United States v. Newman, 441 F.2d 165 (5th Cir. 1971) the Fifth Circuit held that a taxpayer could not intervene or be present at the IRS hearing, noting that United States v. Powell, 379 U.S. 48, 85 S. Ct. 248, 13 L. Ed. 2d 112 (1964) had compared such proceedings to grand jury proceedings. The Newman court noted that the investigatory, non-adversarial nature of the proceedings "would be frustrated by requiring those persons not parties who might be later affected to be allowed to take an active part through private counsel in such proceedings." n1 Newman, 441 F.2d at 174. In United States v. Traynor, 611 F.2d 809, 811 (10th Cir. 1979), the Tenth Circuit rejected a taxpayer's argument that she and "her counsel have the right to be present when the respondents produce the requested records, and to actively participate in such proceedings," noting that "[n]o persuasive authority ha[d] been cited in support of this rather novel suggestion." Similarly, in United States v. Daffin, 653 F.2d 121, 124 (4th Cir. 1981), the Fourth Circuit rejected a taxpayer's argument that he was "entitled to be present and to cross-examine witnesses when questioned by" the IRS agent, noting the Newman and Traynor opinions, as well as what it characterized as the Supreme Court's rejection of similar claims "in the context of other administrative investigatory proceedings" in In re Groban, 352 U.S. 330, 77 S. Ct. 510, 1 L. Ed. 2d 376, 76 Ohio Law Abs. 368 (1957). United States v. Daffin, 653 F.2d 121, 124 (4th Cir. 1981). In United States v. Kershaw, 436 F. Supp. 552 (D. Or. 1977), the District Court for the District of Oregon similarly denied taxpayers' motion to intervene at the interrogation of the accountant who had prepared their tax returns in order to object to questions. Because the accountant's "able counsel announced that he will not permit his client to testify to any matters covering the attorney-client relationship," the court concluded that the taxpayers' privilege was adequately protected at the hearing. Id. at 553.
   n1 Newman was decided in 1971, less than three months after the Supreme Court's Donaldson decision and before the 1976 Congressional reforms spurred by Donaldson.' 
Though not insubstantial in number, all of these decisions are thinly reasoned on the question of taxpayer's rights to intervene before at the IRS hearing. In several of the cases, the taxpayer neither cited any basis for the right to be present nor described the interest to be protected by her presence. None of the cases perform the "balancing of the equities" required by Reisman (as interpreted by Donaldson), or discuss the revisions to Section 7609 that occurred in the wake of Donaldson. Thus, these cases do not fully acknowledge Congress's demonstrated interest in ensuring that taxpayers be provided with "safeguards against improper disclosure of records held by third parties" in summons proceedings. Ip, 205 F.3d at 1172.

Wednesday, April 8, 2015

Mapping HSBC's Contribution to Worldwide Tax Evasion (4/8/15)

The author of this blog provides a conceptualized map of worldwide tax evasion through information disclosed on HSBC.  SwissLeaks: the map of the globalized tax evasion (MartinGrandJean 2/11/15), here.

This is really cool!  (Sorry to have picked this up so late.)

Bullshit Tax Shelter Salesman Avoids Fraud Finding for Investment in Bullshit Tax Shelter (4/8/15)

In Jacoby v. Commissioner, T.C. Memo. 2015-67, here, the Tax Court relieved a bullshit tax shelter salesperson who drank his own poison from liability for the tax and penalties (and, as a result, the interest thereon).  How did / could that happen?  The short answer is - I don't know.  The opinion is quite cryptic.  Which may be the answer -- it may be just a mystery.

So, let's wade into the cryptic opinion.

1.  Jacoby had an accounting degree and a law degree.

2.  He had a short stint with a major accounting firm doing financial audit (not tax) work.  In 1987, he joined Twenty-First Securities Corp., a major player in the sophisticated tax strategy market.  He focused on strategies for high net worth individuals and large companies.  The strategies he sold were developed by others in the firm or outside the firm.  During the 9 years he worked there, he earned between $5 and $6 million.  Obviously, he learned enough about the working of the strategies to sell them to others.  (JAT comment:  One example of a strategy developed by Twenty-First Securities is the strategy blessed blasted by the Tax Court and then blessed by the Fifth Circuit in Compaq Computer Corp. v. Commissioner, 113 T.C. 214 (1999), rev’d 277 F.3d 778 (5th Cir. 2002); I have no idea whether Jacoby worked on that strategy, but that strategy was apparently in-house while he was with First Securities.

3.  In 1996, Jacoby joined Diversified Group Inc. ("DGI"), a tax shelter boutique run by James Haber.  DGI and Haber were major players in the bullshit tax shelter market.  See also e.g., Ironbridge v. Commissioner, T.C. Memo. 2012-158 (noting that, "Although he has not been indicted or tried, the principal of petitioners, James Haber, believes he was one of the persons involved in the criminal investigation.Mr. Haber stated during deposition testimony that he believes he became a potential “target” of the criminal investigation around “2002 or 2003;" lot more history there, but not developed in the Jacoby opinion, so I pass for now).  The Jacoby opinion says that Jacoby was interviewed in the criminal investigation, agreed to extend the statute of limitations for criminal prosecution, but was never prosecuted.  (Haber was never prosecuted either.)

4. Jacoby's arrangement with DGI was a joint venture agreement ("JVA") with Jacoby's company, SMD Capital Corp. ("SMD"), through which he would get 50% of the net profits from business he brought to DGI.

IRS Concludes that Payments in Lieu of Forfeiture Are Not Deductible (4/8/15)

Deferred prosecution agreements ("DPAs") and, their cousin, nonprosecution agreements ("NPAs"), are much the rage in the federal criminal universe.  See e.g., Judge Jed Rakoff Reviews Brandon Garrett's Book on Too Big to Jail: How Prosecutors Compromise with Corporations (Federal Tax Crimes Blog 2/10/15), here (with links to Professor Garrett's web site data on DPAs and NPAs.)  For example, a key component of the DOJ program for Swiss banks is the ability for so-called Category 2 banks to obtain NPAs.  DPAs and NPAs are better solutions for organizations otherwise subject to criminal prosecution than criminal prosecution.

One of the issues addressed in DPAs and NPAs is the monetary consideration imposed on the offending party.  Such monetary consideration might be in lieu of fines, restitution or forfeiture that the offending party might owe of suffer if convicted of the crime.  The question that arises is whether these payments may be deductible.

For deductibility, the usual authority invoked is Section 162, which permits deductions for "ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business."  Section 162(f) provides that: "No deduction shall be allowed under subsection (a) for any fine or similar penalty paid to a government for the violation of any law."  By contrast, depending on the origin of the claim, restitution is not subject to this prohibition and may be deductible if the origin of the claim arises from the party's trade or business.

In LTR 201513003, here, the IRS addressed the question of whether payments in lieu of forfeiture under a DPA are deductible.  In relevant part, the LTR reasons and concludes:
The deferred prosecution agreement (DPA) states that the taxpayer has violated several criminal statutes and provides for a forfeiture payment in lieu of proceedings that would result in criminal and/or civil forfeiture under 18 U.S.C. sections 981 and 982 and 28 U.S.C. section 2461(c). The DPA is a settlement for purposes of the regulation as it is an agreement between the taxpayer and the government that resolves all issues associated with the taxpayer's criminal conduct in exchange for certain consideration outlined in the DPA, including a payment in lieu of forfeiture. It is the Service's longstanding position that a monetary forfeiture under the U.S.C. sections the taxpayer violated, as well as the sections referenced above, is a civil or criminal fine or penalty for purposes of the regulation. As such, the money paid in lieu of forfeiture pursuant to the DPA resolves the taxpayer's actual or potential liability for a civil or criminal fine or penalty and is not deductible under section 162. 
The taxpayer argues that Treas. Reg. sections 1.162-21(b)(1) and (2) do not prohibit it from deducting the forfeiture payment because (1) it has not pled guilty or nolo contendere in any court proceeding and (2) the forfeiture payment is earmarked for restitution to the victims of the fraud. The first argument requiring a plea of guilty or nolo contendere has no merit, as a settlement of the taxpayer's actual or potential liability is included under section 1.162-21(b)(1)(iii). Likewise, the taxpayer's second argument that the forfeited funds will be used to compensate victims has no merit, as the DPA specifically states that the payment is in lieu of criminal and/or civil forfeiture. The DPA is a negotiated settlement between the government and the taxpayer that specifically requires a forfeiture payment rather than requiring that part or all of the payment be allocated as restitution. The Department of Justice has the authority to use forfeited funds at its discretion for various uses including payment to victims. DoJ's stated intention for the use of the funds does not change the character of the payment from a non-deductible forfeiture to a potentially deductible restitution payment.
Of course, this is just the IRS's informal conclusion.  I suspect that the actual taxpayer involved will try to get a more favorable resolution.

Now, focusing back on the payments made by the Category 2 banks under the DOJ program, those banks will in many -- perhaps most -- cases not be concerned with U.S. tax deductions for the payments.  In any event, if they were, the payments are simply described as a penalty without further elaboration.  Since, however, the payment is made to resolve potential criminal exposure (as evidenced by the relevant agreement being a "nonprosecution" agreement), I suspect that the IRS would tkae the position that Section 162(h) applies if it were otherwise applicable.

Tuesday, April 7, 2015

Seventh Circuit Holds that Trial Court Did Not Err in Admitting Other Acts Evidence (4/7/150

In United States v. Curtis, 2015 U.S. App. LEXIS 5176 (7th Cir. 2015), here, the defendant was a lawyer who could not manage his tax debts.  Over the years he was repeatedly delinquent.  The IRS had to spent significant collection resources to try to get him to pay and then stay current.  Finally, after cycling through to the third revenue officer, he was referred for criminal investigation and this prosecution ensued for 3-years of failure to file, § 7203, here.
Prior to trial, the government indicated its intention to offer evidence under Rule 404(b), including evidence of Curtis's history of failing to pay his taxes, his past dealings with the IRS and its efforts to collect back taxes, and his withdrawals of money from his law practice to pay personal expenses. Curtis did not object to any of this evidence, conceding that it was relevant to his intent and knowledge during the charged years. But he did object to the government's proposed evidence that he failed to pay payroll taxes for his law firms's employees for the third and fourth quarters of 2013. The government argued that this evidence was relevant to Curtis's intent and especially relevant to rebut his anticipated defense that he acted in good faith. Curtis objected that any violations of the tax laws subsequent to the charged years did not bear on his state of mind during the time of the charged offenses. Instead, he maintained, the government's use of this evidence demonstrated nothing other than propensity to commit the crime, a forbidden use of such evidence. Curtis also argued that the evidence was not relevant to his intent because payroll taxes are different in kind from income taxes, payroll taxes are often paid by office administrators, and the failure to pay those taxes post-dated the offense conduct by several years. The evidence would also cause undue prejudice, Curtis argued, because it would imply that he was harming his employees as well as the government. In short, he contended that the payroll tax evidence did not meet the standards for admission under Rule 404(b). The district court agreed that the evidence demonstrated propensity, and tentatively granted Curtis's motion to exclude the payroll tax evidence from the trial. 
The court later reversed course and allowed the government to bring in this evidence after Curtis testified during the defense case-in-chief that he was current on his tax obligations for 2010, 2011 and 2012. Curtis declined the court's offer of a limiting instruction on this Rule 404(b) evidence. * * * * The jury convicted on all three counts, and Curtis appeals.
The Seventh Circuit starts by stating the elements of Section 7203, the convicted counts:  "(1) that Curtis was required to pay taxes; (2) that Curtis failed to pay the taxes; and (3) that Curtis acted willfully in failing to pay."  As is often the case, the defense was solely that the Government had not proved willfulness.  Quoting Cheek v. United States, 498 U.S. 192, 201 (1991), willfulness "requires the Government to prove that the law imposed a duty on the defendant, that the defendant knew of this duty, and that he voluntarily and intentionally violated that duty."   Curtis' defense,  as I understand it, was that his years of dealing with the IRS's tolerance for his various tax delinquencies lulled him into believing that his tax delinquencies did not violate the  law.

The Government sought to use 404(b) evidence, including principally his repeated delinquencies after the criminal case was brought against him.  Specifically, the Government sought to show that he failed "to pay payroll taxes for his law business in the third and fourth quarters of 2013."  Curtis objected, arguing that what he did after the years for which he was charged was not evidence as to his willfulness or nonwillfulness for the earlier years for which he was charged.  He did not object to proof as to earlier years' delinquencies in payment.  Further, he testified that he had fully paid his 2010, 2011 and 2012 taxes.  Focusing on the subsequent unpaid payroll taxes, Curtis argued that they were remote from the charged offense of failure to file.
The [trial] court ultimately ruled that Curtis opened the door to admission of the evidence by suggesting to the jury that he had paid in full his recent tax obligations. The government then questioned Curtis about his failure to pay the payroll taxes. R. 51, Tr. at 568-72. Specifically, the government questioned Curtis regarding how he spent money that he withdrew from his law firm and how he decided which bills to pay. The focus of the questioning was that Curtis chose repeatedly to pay other obligations instead of paying taxes, including the payroll taxes.\ 
The government made no further mention of Curtis's failure to pay the payroll taxes in two quarters of 2013.
Curtis argued on appeal that the Court should not have admitted the evidence of the subsequent failure to pay the payroll taxes.

Ooooops! Indictment Is One Day Late! Government Confesses Error (4/7/15)

In United States v. Johnson, 2015 U.S. App. LEXIS 5446 (6th Cir. 2015) (nonprecedential), here, pursuant to a Government concession that the indictment was one day late, the Court dismissed the indictment.  The Government's concession was made in its answering brief on appeal, here.

The facts were (according to the Government's brief):
Defendant filed his 2006 federal individual income return on February 17, 2007. (G.Ex. 1-1.) On April 16, 2013, a grand jury returned an indictment charging defendant with one count of willfully filing a false 2006 federal individual income tax return, in violation of 26 U.S.C. § 7206(1). (R.1: Indictment, #1-2.)
Section 6531, here, provides a six-year statute of limitations for various criminal offenses, including § 7206(1), tax perjury, here.   See § 6531(5).  Tax perjury relates to the filing of the return.  So, the six-year period would, logically, commence on the date the return was filed.

A return filed before the due date for the return is deemed filed on the due date of the return.  § 6513(a), here, for purposes of the six-year statute for tax perjury.  See United States v. Habig, 390 U.S. 222 (1968).  In Johnson, the return was filed on February 17, 2007, thus clearly invoking § 6513(a) and Habig that it was deemed filed on the due date of the return, April 15, 2007.  Focusing only on the due date of the return, the subsequent indictment on April 16, 2013 was untimely.

What confused the Government and the trial court was the application of § 7503, here, which provides that, where the due date falls on a weekend or holiday, a return filed on the next succeeding business day is "considered timely."  In Johnson, April 15, 2007 fell on a Saturday, thus making returns filed on April 17, 2007, a Monday, "considered timely."  But, from a statutory interpretation standpoint, it did not change the statutorily imposed due date for the return.  Accordingly, the Government conceded on appeal that Johnson's early filed return was deemed filed on the due date pursuant to § 6513(a).

That's pretty much it.  The result would be different had § 7503 provided that the due date is extended where the original due date falls on a weekend or a holiday.

So, the bottom line, the defendant walks away from a criminal conviction because of a statute of limitations footfault.  The order of restitution of $531,000 will also be vacated, but the IRS should have the deficiency procedures and the unlimited civil statute of limitations for fraud to collect any tax due.

Schumacher, UBS and Neue Zürcher Bank Enabler, Pleads Guilty (4/7/15)

As expected, Hansruedi Schumacher yesterday pled guilty to one count of defraud / Klein conspiracy.  See Susannah Nesmith and David Voreacos, Ex-UBS Banker Schumacher Pleads Guilty in U.S. Tax Probe (Bloomberg 4/6/15), here.  Schumacher testified as a Government witness in the unsuccessful trial of Raoul Weil.  See Raoul Weil Found Not Guilty (Federal Tax Crimes Blog 11/3/14; 11/6/14), here.

The plea agreement is here.  In the plea agreement, the parties agreed that "the appropriate disposition of this case is, and agree to recommend jointly, that the Court impose a sentence of a term of probation of five (5) years."  That disposition is consistent with the sentences of Andreas Bachmann and Josef Dörig, Swiss enablers sentenced recently.  See Swiss Bank Enablers Get Unsupervised Probation and Relatively Light Fines (Federal Tax Crimes Blog 3/30/15), here.

Last night in the Tax Fraud and Money Laundering class, we covered sentencing.  Within that subject, we covered how plea agreements address sentencing matters, in getting to the "appropriate disposition."  The plea agreement thus addresses the key sentencing calculation factors as follows (with my comments in brackets):

2. The United States and the defendant jointly agree that the appropriate disposition of this case is, and agree to recommend jointly, that the Court impose a sentence of a term of probation of five (5) years.In accordance with Rule 11(c)(1)(B) of the Federal Rules of Criminal Procedure, the United States and the defendant will recommend to the Court that the following provisions of the Sentencing Guidelines apply:

A. Base Offense Level: 26 (U.S.S.G. §§ 2T1.1(a), 2T1.4.1(K)) [Note that the tax loss indicated by the base offense level is between $7,000,000 and $20,000,000.]

B. Sophisticated Means: 2 (U.S.S.G. § 2T1.1(b))(2))

C. Acceptance of Responsibility: - 3 (U.S.S.G. § 3E1.1(a) and (b))

D . Total Offense Level: 25 [The Sentencing range per the Tax Table is 57-71 months.]

3. The parties respectfully submit that they will be making a joint recommendation, pursuant to 18 U.S.C. § 3553(a) and U.S.S.G. § 5K1.1, [Substantial Assistance Departure] that the defendant be sentenced as follows;

A. That the defendant be placed on probation for a period of five years;

B. That the defendant pay a fine of $150,000;

C. That, in addition to the standard terms and conditions of probation, the Defendant be required to (i) abide by all terms and conditions of Paragraph 5, infra, concerning his duty to cooperate under this Plea Agreement, and (ii), to facilitate that cooperation, the defendant be required to return to the United States as requested as part of his requirements under Paragraph 5, infra;

D . That based upon the nature of the tax loss and liabilities in this case, which were personal to each taxpayer, as opposed to the defendant, an order of restitution not be imposed.

Friday, April 3, 2015

Court Approves FBAR NonWillful Penalty Merits But Wants Further Development of APA Issues (4/3/15)

There is a an FBAR nonwillfull penalty opinion entered April 1, 2015 by the US District Court for the Western District of Washington.  The case is Moore v. United States, 2015 U.S. Dist. LEXIS 43979 (W.D. WA 2015).  The opinion on summary judgment opinion is here.  The briefs  on the motion (excluding exhibits) are:
  • US motion for summary judgment, here
  • Moore's Response to the US Motion, here; and 
  • the US Reply to Moore's Response, here.  
The docket entries as of 4/3/15 are here. (Not sure whether the subject is plural, so I rather than slow down to figure it out, I just went with my gut.)

In summary, on opt out from the OVDI/P, the IRS imposed 4 years of maximum nonwillful penalties against the taxpayer (Moore).  The record before the court was inconclusive as to precisely why the IRS chose to impose 4 years of nonwillful penalties and why to max out the nonwillful penalties.  In the de novo proceeding in the district court, the court determined that the taxpayer was liable for the nonwillful penalties.  The caption for that part of the opinion tells the conclusion:  “On De Novo Review, the Court Concludes that Mr. Moore Violated the Law By Not Filing FBARs and is Subject to a Civil Penalty.”

The court then held that it could not determine on the record whether the IRS had followed the proper procedures under the APA.  The Court rejected the taxpayer's arguments on due process and excessive fines.  There will be further submissions on the APA issue; it is unclear where that is going.   (I include below the portion of the opinion dealing with the APA issue.) There might  be a remand to the IRS for further consideration, but presumably the IRS would just clean up the administrative record and impose the same penalty now that the district court has held that he is liable for the penalty.  Alternatively, since the $10,000 per year penalty is an “up to” penalty, the Court may enter the fray on whether the IRS should have imposed the maximum penalty or some lesser penalty.  That same issue applies to the willful penalty in other cases; what is the appropriate court (or jury in jury cases) review of the of the quantum where the penalty is a maximum without any minimum?

Here is the key part of the Court's opinion on the APA issue:
3. The Court Cannot, On the Record Before It, Determine if the IRS Acted Arbitrarily, Capriciously or Abused Its Discretion in Assessing the Penalties. 
                To determine if an agency acted arbitrarily or capriciously or in abuse of its discretion, the court conducts a "thorough, probing, in-depth review." Volpe, 401 U.S. at 415. The court presumes that the agency acted correctly, and is not permitted to substitute its judgment for the agency's. Id. at 415, 417. The court must nonetheless be certain that the agency acted within the scope of its authority, and its must determine whether the "decision was based on a consideration of relevant factors and whether there has been a clear error of judgment." Id. at 415-16; see also Ocean Advocates v. Army Corps of Engineers, 361 F.3d 1108, 1118 (9th Cir. 2004) (explaining review under § 706(2)(A) of the APA). The court's conclusion that Mr. Moore lacked reasonable cause is sufficient to answer any question about the IRS's authority to impose penalties. 
                The court can only guess, however, as to whether the IRS considered relevant factors or made a clear error of judgment. The record before the court contains no administrative explanation of the IRS's decision to impose penalties. The IRS's December 2012 "appeals" letter to Mr. Moore contains three sentences of "explanation" that do nothing to illuminate what the IRS considered or why it arrived at its decision. The letter at least mentions the "reasonable cause" standard; it says nothing at all about why it choose a $40,000 maximum penalty as opposed to a smaller amount. The court looks for a "rational connection between the facts found and the choice [the agency] made." Nat'l Ass'n of Home Builders v. Norton, 340 F.3d 835, 841 (9th Cir. 2003). That connection must, however, come from the administrative record. Id.
                The administrative record is, with one exception, devoid of any explanation of the IRS's reasons for imposing the maximum penalty. Agent Tjoa's 2011 Summary Memo is in the record before the court, but (so far as the court is aware), Mr. Moore did not see the Summary Memo until the IRS produced it in discovery in this case. Even then, the IRS redacted portions of the Summary Memo. The Summary Memo at least arguably provides an explanation of Agent Tjoa's decision to recommend the maximum penalty. Indeed, Agent Tjoa cited the portions of the IRM that are relevant to determining the amount of an FBAR penalty, and explained many other facets of her recommendation. What the Government ignores in its motion, however, is that the Summary Memo is not an explanation of the ultimate decision to impose a penalty. n6 The Summary Memo was, at least on the record before the court, the basis for the IRS to require Mr. Moore to either accept the assessment of penalty or "appeal" it before the assessment. The issue before the court is the basis for the IRS's decision to actually impose the penalties. As to the 2005 penalty, the court can only guess. The IRS disregarded its own promise and assessed the penalty before Mr. Moore could request an "appeal."
   n6 The APA's informal adjudication procedures exempt a decision "affirming a prior denial" from the requirement that an agency provide a "brief statements of the grounds for denial" of a request for relief. 5 U.S.C. § 555(e). The Government invokes that section, but does not acknowledge that there is no "prior denial" in the record in this case. The only denial of Mr. Moore's request that no penalty be imposed came in the December 2012 letter closing the "appeal" process.

Thursday, April 2, 2015

Sentencing Guidelines Calculations Over the Top -- 4800 Months (4/2/15)

In my Tax Fraud and Money Laundering Class at the University of Houston Law School this past Monday evening, we discussed the Sentencing Guidelines.  We discussed the key sentencing driver for financial crimes (such as tax crimes) being the loss involved.  In a tax setting it is called the tax loss.

In a tax setting, with the combination of the tax table having a top offense level under the Tax Table, here, of 36 for tax loss over $400 million and the grouping feature, a tax crime whether charged in multiple counts or not (even with some specific offense additions or Chapter 3 additions and even without an acceptance of responsibility reduction) will likely not draw a sentence of life under the Sentencing Table here.  It is possible, but in terms of number of months, the sentence is likely at the extreme to be 405 months or less (the high end at offense level 42).

So, I was reading a case this week, United States v. Okun, 2015 U.S. Dist. LEXIS 37987, 1-20 (E.D. 2015) (no link provided).  Here is the opening, from which you can surmise it did not go well for Mr. Okun (emphasis supplied by JAT):
On March 17, 2008, a grand jury returned a three-count indictment charging Okun with mail fraud, bulk cash smuggling, and one count of making a false declaration. (ECF No. 1.) On July 10, 2008, a grand jury returned a twenty-seven count Superseding Indictment charging Okun with conspiracy to commit wire fraud and mail fraud, conspiracy to commit money laundering, thirteen counts of wire fraud, and multiple other counts of mail fraud, money laundering, bulk cash smuggling, and making a false declaration. (ECF No. 42.) On February 27, 2009, the Court granted the Government's motion to dismiss one wire fraud count and one mail fraud count (Counts 9 and 18). (ECF No. 207.) 
On March 3, 2009, the jury trial commenced. After the Government rested its case, Okun moved for a judgment of acquittal on all counts pursuant to Federal Rule of Criminal Procedure 29. (ECF No. 232.) The Court granted the motion with respect to the two remaining mail fraud charges (Counts 16 and 17), but denied the motion on the remaining counts. (Id.) Okun put forth no evidence in his defense. After two-days of deliberations, the jury returned its verdict, finding Okun guilty of the remaining twenty-three counts. (ECF No. 243.) 
On August 4, 2009, the Court sentenced Okun to 1200 months of imprisonment, a downward variance from the guidelines range of 4800 months of imprisonment. (J. 3, ECF No. 328.) Okun appealed, and on November 17, 2011, the United States Court of Appeals for the Fourth Circuit affirmed Okun's conviction and sentence. United States v. Okun, 453 F. App'x 364, 374 (4th Cir. 2011). On April 16, 2012, the United States Supreme Court denied a petition for certiorari. Okun v. United States, 132 S. Ct. 1953, 1953 (2012). On March 12, 2012, Okun filed his "MOTION FOR NEW TRIAL or, in the alternative, MOTION FOR SETTING ASIDE THE FINDING OF THE JURY." Since that time, Okun has inundated the Court with frivolous filings. As explained below, both Okun's "MOTION FOR SETTING ASIDE THE FINDING OF THE JURY" ("Rule 29 Motion") and his "MOTION FOR NEW TRIAL" ("Rule 33 Motion") will be denied.
What struck me most was the following sentence:  "On August 4, 2009, the Court sentenced Okun to 1200 months of imprisonment, a downward variance from the guidelines range of 4800 months of imprisonment."  Wow!  That was one helluva Booker variance (assuming the Guidelines calculation was correct; although technically, the 4800 months is not a range as indicated).  The variance was 75%.  The Booker variance was great.  But, the sentence was 1200 months, which I calculate to be 100 years.  At best with good time credit, the sentence would exceed 85 years which is, of course, a life sentence with probation or parole.

US Attorney Declines House Republicans Invitation to Present Lerner Contempt Over Fifth Amendment Claim to Grand Jury (4/2/15)

The US Attorney sent a letter, here, to the House stating that he has determined that Ms. Lerner validly invoked here Fifth Amendment right to remain silent and therefore declining to present the matter to a federal grand jury.

Although other issues are discussed, the core conclusion is that Ms. Lerner did not waive her Fifth Amendment privilege.  The key undisputed facts from the letter are:
Ms. Lerner appeared at the hearing on May 22, 2013, and gave an opening statement that included the following: 
I have not done anything wrong. I have not broken any laws. I have not violated any IRS rules or regulations, and I have not provided false information to this or any other congressional committee. 
And while I would very much like to answer the Committee's questions today, I've been advised by my counsel to assert my constitutional right not to testify or answer questions related to the subject matter of this hearing. After very careful consideration, I have decided to follow my counsel's advice and not testify or answer any of the questions today.
The question is whether Ms. Lerner's general assertions of innocence waived the privilege that she clearly had.  Here is the US Attorney's legal analysis:
B. Ms. Lerner Did Not Waive Her Fifth Amendment Privilege. 
The Supreme Court has made clear that witnesses who testify before Congress are protected by the Fifth Amendment to the Constitution. See Quinn, 349 U.S. at 161. Thus, it is undisputed that Ms. Lerner had the right not to testify at the Committee hearing, given the possibility that her answers could be used against her in a subsequent criminal proceeding. See, e.g., Hoffman v. United States, 341 U.S. 479, 486 (1951); Minnesota v. Murphy, 465 U.S. 420, 426 (1984); United States v. Balsys, 524 U.S. 666, 672 (1998). The only question is whether she waived that right by giving her opening statement on May 22, 2013. 
In finding that Ms. Lerner waived her Fifth Amendment privilege, the Committee focused on her assertions that she had done nothing wrong, had broken no laws, had violated no IRS rules, and had provided no false information to Congress. Citing the Supreme Court's decisions in Brown v. United States, 356 U.S. 148, 154-55 (1958), and Mitchell v. United States, 526 U.S. 314, 321 (1999), the Committee found that these "four specific denials" amounted to voluntary testimony about the subject matter of the hearing, which Ms. Lerner could not then refuse to be questioned about. See Committee Report, at 11, 36-37. 
We respectfully disagree with this conclusion, however, because case law establishes that Ms. Lerner's general denials of wrongdoing did not amount to "testimony" about the actual facts under the Committee's review. In Brown, the defendant in a civil immigration proceeding voluntarily took the stand and gave substantive testimony on direct examination, but refused to answer pertinent questions about that testimony on cross-examination. 356 U.S. at 150-52. The Court upheld the defendant's contempt conviction for that refusal, noting that a party may not put a "'one-sided account of the matters in dispute" before the trier of fact, which could not be tested by adversarial cross-examination. Id at 155. See also Mitchell, 526 U.S. at 321 (noting that "a witness, in a single proceeding, may not testify voluntarily about a subject and then invoke the privilege against self-incrimination when questioned about the details"). 
Where witnesses do not offer substantive testimony, however, and instead merely make general denials or summary assertions, federal courts have been unwilling to infer a waiver of the Fifth Amendment privilege. See, e.g., Isaacs v. United States, 256 F.2d 654. 656-57, 660-61 (8th Cir. 1958) (witness before grand jury who repeatedly stated that he had committed no crime did not waive his Fifth Amendment privilege); Ballantyne v. United States, 237 F.2d 657, 665 (5th Cir. 1956) (concluding that "the United States Attorney could not, by thus skillfully securing from appellant a general claim of innocence, preclude him from thereafter relying upon his constitutional privilege when confronted with specific withdrawals"); United States v. Hoag, 142 F. Supp. 667, 669 (D.D.C. 1956) (witness who generally denied being a spy or saboteur before Congressional committee did not waive Fifth Amendment privilege). 
In her opening statement before the Committee, Ms. Lerner offered no account or explanation of what occurred and revealed no facts about the matters under the Committee's review. Instead, she made general assertions lacking substantive content. She did not purport to explain why she believed she was innocent or why any information she had previously provided was not false. This matter therefore appears materially indistinguishable from cases like Isaacs, Ballantyne, and Hoag, in which defendants were held not to have waived Fifth Amendment protection simply by asserting general innocence or even denying guilt of specific offenses. 
There is likely an additional barrier to finding that Ms. Lerner waived her Fifth Amendment privilege through her general denials of wrongdoing. Unlike the civil defendant in Brown and defendants in criminal cases (who similarly subject themselves to wide-ranging cross-examination if they voluntarily take the stand), Ms. Lerner was an ordinary witness who had been compelled to testify by subpoena. The Supreme Court has held that "where the previous disclosure by an ordinary witness is not an actual admission of guilt or incriminating facts, he is not deprived of the privilege of stopping short in his testimony whenever it may fairly tend to incriminate him." McCarthy v. Arndstein, 262 U.S. 355, 359 (1923); see also, e.g., United States v. Powell, 226 F.2d 269, 276 (D.C. Cir. 1955); accord Rogers v. United States, 340 U.S. 367, 368, 373 (1951). Ms. Lerner did not testify to any incriminatory facts during her opening statement but, to the contrary, asserted her innocence. Thus, like the defendant in Arndstein, she had the right to "stop[ ] short" after making her self-exculpatory statement. 
The Committee found that Ms. Lerner's opening statement was the equivalent of the "voluntary" testimony at issue in Brown, presumably because she did not have to make the statement at all. Although in theory this could render the Arndstein line of cases inapplicable, that conclusion is doubtful. Ms. Lerner was compelled by subpoena to appear before the Committee on May 22, 2013 after she declined an invitation to appear voluntarily and informed the Committee that she would invoke her Fifth Amendment privilege. Courts have not found waiver under such circumstances. See, e.g., Hoag, 142 F. Supp, at 669-71.