Former Business Professor Pleads Guilty to Tax Related Crimes; In Addition, Will Pay $100 Million FBAR Penalty (11/4/16; 11/9/16)

DOJ Tax issued the following press release:  "Emeritus Professor Pleads Guilty to Conspiring to Defraud the United States and to Submitting False Expatriation Statement; Hid Account Containing $200 Million Also Paying $100 Million Civil FBAR Penalty" (11/4/16), here.

Key Excerpts:

According to documents filed with the court and statements made during the plea hearing, Dan Horsky, 71, is a citizen of the United States, the United Kingdom and Israel and was employed for more than 30 years as a professor of business administration at a university located in New York.  Beginning in approximately 1995, Horsky began investing in numerous start-up businesses through financial accounts at various offshore banks, including one bank in Zurich, Switzerland.  Horsky created “Horsky Holdings,” a nominee entity, to hold some of the investments and he used the Horsky Holdings account, and later, other accounts at the Zurich-based bank, to conceal his financial transactions and financial accounts from the IRS and the U.S. Treasury Department.  

Horsky made investments in Company A through the Horsky Holdings account using his own money, money provided by his father and sister, and margin loans from the Zurich-based bank.  Eventually, Horsky amassed a four percent interest in Company A’s stock. In 2008, Company A was purchased by Company B for $1.8 billion in an all cash transaction.  Horsky received approximately $80 million in net proceeds from the sale of Company A’s stock, but disclosed to the IRS only approximately $7 million of his gain from that sale and paid taxes on just that fraction of his share of the proceeds.  In 2008, and in subsequent years, Horsky invested in Company B’s stock using funds from his accounts at the Zurich-based bank and by 2013, his investments in Company B, combined with other unreported offshore assets, reached approximately $200 million.

* * * * 

Horsky directed the activities in his Horsky Holdings and other accounts maintained at the Zurich-based bank, despite the fact that it was readily apparent, in communications with employees of the bank, that Horsky was a resident of the United States.  Bank representatives routinely sent emails to Horsky recognizing that he was residing in the United States.  Beginning in at least 2011, Horsky caused another individual to have signature authority over his Zurich-based bank accounts, and this individual assumed the responsibility of providing instructions as to the management of the accounts at Horsky’s direction.  This arrangement was intended to conceal Horsky’s interest in and control over these accounts from the IRS.  

In 2013, the individual who had nominal control over Horsky’s accounts at the Zurich-based bank conspired with Horsky to relinquish the individual’s U.S. citizenship, in part to ensure that Horsky’s control of the offshore accounts would not be reported to the IRS.  In 2014, this individual filed with the IRS a false Form 8854 (Initial Annual Expatriation Statement) that failed to disclose his net worth on the date of expatriation, failed to disclose his ownership of foreign assets, and falsely certified under penalties of perjury that he was in compliance with his tax obligations for the five preceding tax years.  

Horsky also willfully filed false 2008 through 2014 individual income tax returns which failed to disclose his income from, and beneficial interest in and control over, his Zurich-based bank accounts.  Horsky agreed that for purposes of sentencing, his criminal conduct resulted in a tax loss of at least $10 million.  In addition, Horsky failed to file Reports of Foreign Bank and Financial Accounts (FBARs) up and through 2011, and also filed false FBARs for 2012 and 2013.

JAT Comments (revised as of 11/9/16 6:15am:

The key documents are:\

• Criminal Information, here.
• Plea Agreement, here.
• Statement of Facts ("SOF"), here.

1.  The information charges as a single count -- Count 1 -- both a defraud / Klein conspiracy to conceal offshore financial accounts from the IRS and an offense conspiracy to commit tax perjury by "willfully mak[ing] and subscrib[ing] an IRS Form 8854 Initial and Annual Expatriation Statement ("Form 8854")" filed with the IRS under penalties of perjury.  As noted previously, the Form 8854 was with respect to Individual A whose role in filing the form was to help further hide Horsky's identity and relationship to offshore accounts.  Horsky agrees to plead and admits the relevant facts.  (See SOF ¶ 2; as to the role of Individual A, see SOF ¶ 12.)

2.  Individual A -- the enabler on Form 8854 -- has been given a NonProsecution Agreement ("NPA").  (Plea Agreement, ¶ 9.)  I have not seen the NPA and do not know if it will be made public.  I presume that, at some point, the identity of Individual A will be made public.  Question to readers:  Why would the Government give an NPA to Individual A?  (If any reader has anything beyond speculation, please post a comment or email me.)

3. The plea agreement provides only the following sentencing factors:  (i) a tax loss of at least $10 million, but the "parties are free to argue at sentencing the exact amount of tax loss above $10 million" (2) a sophisticated means increase of 2 levels; (3) acceptance of responsibility decrease of 3, with the parties then free to argue for other Guidelines factors and general 18 USC 3553(a) factors.  (Plea Agreement ¶ 4.)  The Government to move, in its sole discretion, for a downward departure in the Guidelines calculations under SG 5K1.1 or a reduction under Rule 35(b), FRCrP.  (Plea Agreement ¶ 14.)

4.  The Base Offense Level for the indicated tax loss is 26.  See the Tax Table, here.  Since the loss range for BOL of 26 is from $9.5 million to $25 million is 26, it would appear unlikely that a higher (or lower) BOL could be achieved and trying to fine-tune the number would be a moot exercise. On the factors noted, the sentencing range is 57-71 months.  Based on past sentencings, it may be unlikely that a court would go even to the bottom end of the range.  And, Horsky could get an additional 2 level increase for Aggravating Role - other organizer, leader, etc., which would increase the sentencing level to 27 and sentencing range to 70-87 months.  In addition, just off the wall, if one of his goals in the secrecy were also to escape estate and gift tax, might that intended tax loss could be included in the guidelines tax loss calculations?  (But still, going from $10 million to $25 million might be a stretch even if the estate and gift tax were included.)

5.  As to the monetary costs involved directly or indirectly, the big one is the $100 million FBAR penalty.  (Plea Agreement ¶ 16.)   In addition, Horsky agrees to file amended returns for 2008 -2014 and pay the taxes, interest and penalties, including the 75% civil fraud penalty under § 6663.  (Plea Agreement ¶ 15; see also SOF ¶ 10.)  The period for the income tax years seem to be consistent with the general criminal statute of limitations (although, theoretically, the other conduct might have refreshed the criminal statute of limitations).  The amount, when determined, will be subject to restitution and assessed as a tax under § 6201 without further ado.  But, although not addressed in the agreement, the income taxes, penalties and interest for other years would still be in play because of the unlimited civil statute of limitations.

6.  Horsky waives certain rights, including venue in ND NY and rights under FOIA and the Privacy Act.  (Plea Agreement ¶ 5.)

7.  Horsky waives protections under the proffer agreement (presumably Queen for a Day) and consent to a Government motion for release of grand jury information to the IRS and to DOJ for civil forfeiture under Rule 6(e)(3)(E), FRCrP, the grand jury secrecy rule.  (Plea Agreement ¶¶ 10 & 15.)

8.  Horsky agrees to cooperate in further investigation, but any truthful information provided cannot be used to determine the applicable Guidelines range.  (Plea Agreement ¶ 12 & 13, citing SG 1B1.8, here.)

9.  It is not clear which Swiss bank or banks were involved.  Unless he were part of the original UBS disclosures who did not qualify under the initial OVDP program (not likely at this late date), he could have gotten off with just a $40 million (approximate) miscellaneous offshore penalty in lieu of the FBAR penalty.  Incredibly dumb.  Of course, had the gambit worked and he could have continued to hide the assets, he could have avoided further income tax and estate and gift tax as well.