U.S. Senators on Senate Finance Committee Probe the Tax Aspects of the Volkswagen Debacle (10/7/15)

U.S. Senators Hatch and Wyden, invoking the Senate Finance Committee's authority to investigate "fraud and abuse related to federal tax credits," have notified Volkswagen by letter to the president and CEO that they are investigating its activities.  Diane Bartz and Richard Cowan, UPDATE 1-U.S. senators probe tax credit related to VW "clean-burning" cars (Reuters 10/7/15), here. From the article:

In order for consumers to get the tax credit, car manufacturers had to certify that their vehicles met certain fuel economy requirements and complied with emissions standards. 

* * * * 

Hatch and Wyden noted that in 2008, VW certified to the Internal Revenue Service that its 2009 Volkswagen Jetta TDI Sedan and SportWagen qualified for $1,300 in tax credits per vehicle sale. 

Other models were later certified and the senators said VW sold at least 60,000 of these vehicles by July 1, 2010. "Well over $50 million in tax subsidies went to purchasers of these vehicles, depending on the number of purchasers who claimed the credit," Hatch and Wyden wrote.

Possible tax crimes in the scenario are:

1. Tax evasion, § 7201, here.  A five-year felony offense.  One can commit tax evasion as an enabler for otherwise innocent taxpayers receiving the bogus tax credit.

2.  Tax perjury, § 7206(1), here.  A three-year felony offense.  The certification, a tax certification, was signed under penalty of perjury.  Under aiding and abetting in 18 USC § 2(a), the persons aiding and betting the actual signer under penalty of perjury could be convicted as a principal in the crime of tax perjury.

3. Aiding and assisting, § 7206(2), here.  A three-year felony offense.  This is not the same as aiding and abetting which requires a guilty principal being aided and abetted.  The tax offense of aiding and assisting, however, can be prosecuted with an innocent taxpayer.  But presumably two or more aiders and assisters who are enablers can be guilty of the crime via aider and abettor liability.

4. Fraudulent returns, statements or other documents, § 7207, here.  A one-year misdemeanor offense.  DOJ Tax does not usually authorize prosecute for misdemeanor offenses, but might as to some of the lower level players who could provide valuable assistance in prosecutor people closer to or at the center of the skullduggery.

5.  Tax obstruction, § 7212(a), here.  A three-year felony offense.

6.  Conspiracy, 18 USC § 371, here. A five-year felony offense.  The conspiracy may be either the offense conspiracy (to violate a substantive provision of the law, including those above) or a defraud / Klein conspiracy to impair or impede the lawful functions of the IRS.  This charge could be made for the tax certifications and any supporting documents or with respect to the EPA submissions.

7.  False Statements, 18 USC 1001, here. A five-year felony offense.  The prosecution could be under one or more of the subparts.  Of course, this charge could be fielded with respect to the EPA documents as well as the tax certifications.

These are just a few of the more obvious tax-related charges that can be deployed against culpable Volkswagen employees or agents.  As often in tax-related and other potential criminal settings, the prosecutor has a panoply of provisions to choose from.  But, looking toward the sentencing, whichever provisions are charged, the sentencing is likely to be driven by the same sentencing factors and Booker discretion, regardless of the charges charged or not charged.

I would suspect that conspiracy will be one of the charges in any or most of resulting indictments.  As I have said in a footnote an earlier publication on conspiracy (footnote omitted):

Conspiracy charges are frequent “add-ons” in charging traditional tax crimes to permit the Government to increase its chances of obtaining a conviction.  Even beyond the considerable elasticity of the conspiracy concept from a substantive perspective, the conspiracy charge offers the Government great advantages.  The mere charge of “conspiracy” connotes something sinister, and the law treats a conspiracy as a serious criminal act independent of any offense which might be the object of the conspiracy.  Moreover, herding a gaggle of defendants into a single case with an overarching conspiracy charge may make it difficult for the jury to assess independently the guilt or innocence of each defendant and invite a finding of guilt by association.  Conspiracy cases tend to be more complex as the Government mounts extensive evidence to connect the dots – real or imagined – among the alleged conspirators, particularly in allegedly large conspiracies such as some of the tax shelter recent tax shelter, with the poster child being Stein.  Furthermore, the Government gets vicarious Pinkerton liability for offenses committed by others in furtherance of the conspiracy, ability to admit statements that would otherwise be inadmissible hearsay, relaxed standard of proof and relevancy, tolling or refreshing of the statute of limitations by remote participants, and venue in remote judicial forums of the Government’s choosing.  With all of these benefits and more, Judge Learned Hand long ago noted, correctly, that conspiracy is “the darling of the modern prosecutor's nursery.” 

And here is one of the footnotes I omitted:

In United States v . Reynolds, 919 F.2d 435, 439 (7th Cir. 1990), Judge Easterbrook lamented that the conspiracy add-ons are “inevitable because prosecutors seem to have conspiracy on their word processors as Count I; rare is the case omitting such a charge.”  See also Kathleen F. Brickey, In Enron's Wake: Corporate Executives on Trial, 96 J. Crim. L. & Criminology 397, 401 & 420-423 (2006) (empirical research that, in federal corporate crime cases during the period 2002 through 2006), over 2/3s of the cases had multiple defendants and all of those had at least one conspiracy count).  Judge Easterbrook proceeds to discount the value of piling on this charge, calling it “pointless” because of the way the Sentencing Guidelines work; although, “once a formidable weapon in the prosecutor's arsenal, has become a distraction, useful only to obtain an extra $50 special assessment and to generate complex issues for appeal.”  Over my many years of practice, I find that disagreeing with Judge Easterbrook carries considerable risk of error, but in this case I do disagree for the reasons noted in the text.  Prosecutors perceive the conspiracy charge as a conviction enhancer, even if not a sentencing enhancer; otherwise, if it were only a mere distraction, prosecutors would not encourage – perhaps a euphemism for direct – grand juries to add the charge to the indictment.  Moreover, I have observed that in complex, multi-defendant white collar (including tax) crime cases, the Government is not indifferent as to which counts a pleading defendant admits guilt; rather, Government wants the conspiracy plea for the benefits it will bring – psychological, publicity wise, and trial wise – in the trial of the remaining defendants.  That pleading defendant will mount the stand and admit that he is guilty of the loosey-goosey conspiracy charge the Government is attempting to prove beyond a reasonable doubt, thus giving that Government’s claim a credibility that it might not otherwise have.  With regard to defendants pleading to achieve a deal – a common phenomenon of our system so heavily dependent upon pleas, this ability to offer a deal to a co--conspirator is itself a powerful tool to incentivize access to information to ferret out and punish the bad guys.  See Katyal, supra, pp. 1328-1333.  Finally, by piling on this or some other obstruction count along with substantive counts, the prosecutor further increases the pressure for a plea for the risk averse facing a potential long sentence.  Julie O'Sullivan, The Changing Face of White-Collar Crime: The Federal Criminal “Code” is a Disgrace: Obstruction Statutes as a Case Study, 96 J. Crim. L. & Criminology 643, 673 (2006).

These quotes are, in some respects, substantially parallel to similar materials in Ch. 12, the Tax Crimes Chapter), in Michael Saltzman and Leslie Book, IRS Practice and Procedure (Thomsen Reuters 2015), for which I was the principal author.