Court Denies Motion to Dismiss Counts Against Tax Shelter Lawyer (4/14/17)

In United States v. Levine, 2017 U.S. Dist. LEXIS 54071 (SD NY 2017), here, the court (Judge Rakoff) denied Howard Levine's motion to dismiss.  I had missed the indictment when it was announced last year, so I will first go over the announcement which fairly summarizes the indictment. See USAO SDNY announcement: Tax Attorney And CPA Indicted For Tax Evasion And Diversion Of Tax Shelter Fees From Major Manhattan Law Firm, here, with link to the indictment, here.  The key excerpts are:

HAROLD LEVINE, a tax attorney and former head of the tax department at a major Manhattan Law Firm (the “Law Firm”), schemed with RONALD KATZ, a certified public accountant, to divert from the Law Firm over $3 million in fee income from tax shelter and related transactions that LEVINE worked on while serving as a partner of the New York Law Firm.  In addition, LEVINE failed to report that fee income to the IRS on his personal tax returns during the period 2005-2011.  For his involvement in this scheme, KATZ received and failed to report to the IRS over $1.2 million in fee income.   

As part of the fee diversion scheme, for example, LEVINE caused tax shelter fees paid by a Law Firm client to be routed to a partnership entity he co-owned with KATZ and thereafter used those fees – totaling approximately $500,000 – to be used to purchase a home in Levittown, New York.  LEVINE caused the home to be purchased as a residence for a Law Firm employee (the “Law Firm Employee”) with whom he carried on a close personal relationship.  Although LEVINE allowed the Law Firm Employee to reside in the Levittown house for over five years without paying rent, LEVINE and KATZ prepared tax returns for the entity through which the home was purchased to claim false deductions as a rental property. 

In or about 2013, LEVINE was questioned by IRS agents concerning his involvement in certain tax shelter transactions and the fees received for those transactions.  During that questioning, LEVINE falsely represented that the Law Firm Employee paid him $1,000 per month in rent while living in the Levittown home.  In addition, when the Law Firm Employee was contacted by the IRS and summoned to appear for testimony, LEVINE urged the employee to represent falsely to the IRS that she had paid $1,000 per month in rent to LEVINE.

The charged counts were (the numbering is for the count numbers in the indictment):

1. Tax obstruction, § 7212(a), Levine & Katz, Count 1
2. Conspiracy, 18 USC 371, Levine & Katz, Count 2
3. Tax evasion, § 7201, 2008 Levine, Count 3
4. Tax evasion, § 7201, 2009 Katz, Count 4
5. Tax evasion, § 7201, 2010, Katz, Count 5
6. False statements, 18 USC § 1001 and 1, Levine, Count 6
7. False statements, 18 USC § 1001 and 2, Levine, Count 7
8. Wire Fraud, 18 USC § 1343 and 2, Count 8

The following are the motion documents:

• Motion to Dismiss (Dkt 20), here.
• US Response (Dkt 22), here.
• Reply (Dkt 24), here.
• Docket Entries (as of 4/14/17), here.

The following are the key points from Judge Rakoff's Opinion and Order:

Count One - § 7212(a)

Basically, on this issue, the Court held that the indictment was sufficient.  Levine's defense went well beyond the allegations of the indictment and thus were not properly considered on motion to dismiss.  Judge Rakoff has some good discussion of when and how facts beyond the indictment may be considered on motion to dismiss.  I refer you to the opinion for that discussion.  I will cut and paste Judge Rakoff's discussion about § 7212(a) which I think offers good review for tax crimes lawyers:

Turning to Levine's challenge to Count One of the Indictment, which charges a violation of 26 U.S.C. § 7212(a), that section imposes criminal liability on anyone who "corruptly . . . obstructs or impedes, or endeavors to obstruct or impede, the due administration of" the Internal Revenue Code. 26 U.S.C. § 7212(a). This provision, known as the "omnibus clause" of § 7212(a), "is a catch-all provision that criminalizes 'any other way' of corruptly obstructing or impeding the due administration of the Internal Revenue Code." United States v. Marinello, 839 F.3d 209, 218 (2d Cir. 2016) (quoting § 7212(a)). A corrupt endeavor under § 7212(a) is analyzed much like a mail fraud or wire fraud scheme, or, even more directly, like a conspiracy to defraud the government (though without the requirement that there be an agreement): "[j]ust as an agreement by two or more persons to conceal income [through affirmative acts] constitutes a conspiracy to obstruct the administration of the tax code by the IRS, so an effort by a single individual . . . , not joined by any other individual with criminal intent, to conceal income in the same manner constitutes an 'endeavor[] to obstruct or impede the due administration of [the Internal Revenue Code].'" United States v. Willner, No. 07 Cr. 183 (GEL), 2007 U.S. Dist. LEXIS 75597, 2007 WL 2963711, at *6 (S.D.N.Y. Oct. 11, 2007) (quoting § 7212(a)). 

The statute of limitations applicable to a violation of § 7212(a) is six years. 26 U.S.C. § 6531(6). That period runs from the last act in furtherance of the scheme. See United States v. Dauguerdas, No. S3 09 Cr. 581 (WHP), 2011 U.S. Dist. LEXIS 14912, 2011 WL 666170, at *2 (S.D.N.Y. Feb. 7, 2011) ("Because [the § 7212(a) count] alleges a single continuous scheme, it is not time-barred if any act integral to the scheme occurs within the six year limitations period."); see also United States v. Wilson, 118 F.3d 228, 236 (4th Cir. 1997) ("The limitations period for a violation of § 7212(a) . . . begins to run on the date of the last corrupt act.").

Count Two - Defraud Conspiracy.

The Court rejected Levine's arguments on the same basis.

Count Three - Tax Evasion (Levine)

This is very good and short, so I just copy it:

Levine raises a more conventional statute of limitations challenge to Count Three, which charges Levine with tax evasion for the 2008 tax year, but again the challenge fails. The limitations period for tax evasion is six years. 26 U.S.C. § 6531. The last act alleged in furtherance of this offense, Levine's filing of his return for tax year 2008, occurred on October 15, 2009. Indictment ¶ 34. In accordance with tolling agreements executed by the parties on four occasions in 2015 and 2016, the period from August 3, 2015 through July 29, 2016, or a total of 361 days, is excluded from the statute of limitations calculation. Mem. of Law in Supp. of Def. Harold Levine's Pretrial Mots. ("Def. Br.") 16-17, ECF No. 20. If one were to take only that excluded time into account, Count Three would be barred, because the Indictment was filed 16 days past the six-year limitations period. 

However, tolling provisions exclude from the statute of limitations calculation any time period during which a defendant is "outside of the United States," for whatever reason. Id. ("The time during which the person committing any of the various offenses arising under the internal revenue laws is outside the United States . . . shall not be taken as any part of the time limited by law for the commencement of such proceedings."); see also United States v. Ohle, 678 F. Supp. 2d 215, 230 (S.D.N.Y. 2010) ("The tolling provision is applicable even if the defendant is outside of the country for business or pleasure trips."). Here, the Government asserts that it will prove at trial that Levine was out of the country for at least three weeks in the time since he filed his return for tax year 2008, which, in light of § 6531's tolling provisions, would render the charge timely. While Levine objects that the Indictment contains no such allegation, the Government need not have alleged in the Indictment facts that would defeat an affirmative defense based on the statute of limitations. See Smith v. United States, 133 S. Ct. 714, 720, 184 L. Ed. 2d 570 (2013) ("Commission of the crime within the statute-of-limitations period is not an element of the conspiracy offense. The Government need not allege the time of the offense in the indictment, and it is up to the defendant to raise the limitations defense." (emphasis and internal citations omitted)); see also United States v. Sisson, 399 U.S. 267, 287, 90 S. Ct. 2117, 26 L. Ed. 2d 608 (1970) ("It has never been thought that an indictment, in order to be sufficient, need anticipate affirmative defenses."). Therefore, the Court denies Levine's motion to dismiss Count Three, again without prejudice to being renewed at trial.

Count 8 - Wire Fraud

This too is short, so I copy it:

Finally, Levine contends that Count Eight, which alleges that, "from in or about 2005 through in or about 2012," Levine committed wire fraud in connection with the scheme to divert fees from Herrick, is time-barred as well. Indictment ¶ 44. The limitations period applicable to wire fraud is five years. 18 U.S.C. § 3282; United States v. Abakporo, 959 F. Supp. 2d 382, 387 (S.D.N.Y. 2013). Given the tolling agreements discussed above, the last act in furtherance of the fraud must have taken place in October 2011 or later for the charge to be timely. Levine argues that while Count Eight of the Indictment (which incorporates by reference many of the allegations in the foregoing counts) alleges that he engaged in fraud through 2012, the only specific acts alleged to have occurred between October 2011 and 2012 are his submission of false tax forms for tax years 2010 and 2011, which he claims cannot have been in furtherance of the alleged fraud against Herrick. 

However, "an indictment need do little more than to track the language of the statute charged and state the time and place (in approximate terms) of the alleged crime." United States v. Alfonso, 143 F.3d 772, 776 (2d Cir. 1998) (quoting United States v. Stavroulakis, 952 F.2d 686, 693 (2d Cir. 1992)). In Alfonso, the Second Circuit reviewed the dismissal of a robbery charge on the ground that the indictment did not allege sufficient facts to satisfy the jurisdictional requirement of the Hobbs Act. The court held that the dismissal was inappropriate because the indictment tracked the language of the relevant statute and because, "to the extent that the district court looked beyond the face of the indictment and drew inferences as to the proof that would be introduced by the government at trial . . . such an inquiry into the sufficiency of the evidence was premature," since the Government had not made a full proffer of the evidence it intended to offer at trial. Id. at 776-77. 

Here, Count Eight tracks the language of the statute charged, compare Indictment ¶ 44 with 18 U.S.C. § 1343, and alleges that Levine's fraudulent actions continued into the relevant limitations period. That the Indictment does not specify particular acts in furtherance of the scheme that took place within the limitations period does not indicate that the Government would be unable to prove the occurrence of such acts at trial, since the Government has not made a full proffer of the evidence it intends to put forth. Thus, the Indictment is facially sufficient and the motion to dismiss Count Eight is denied, once again without prejudice. See Alfonso, 143 F.3d at 776-77. n2
   n2 Moreover, to the extent that Levine seeks clarification as to which fraudulent transactions are alleged to have taken place in late 2011 or 2012, that request will likely be satisfied by the Government's provision of a bill of particulars specifying all transactions in which the Government will claim that fees were diverted. See Tr. dated Mar. 30, 2017 at 28.

JAT Comments:

1.  Keep in mind that § 7212(a) and the defraud conspiracy substantially overlap, particularly in the Second Circuit in which the Kassouf limitation does not apply.  See Court Rejects Dismissal of Superseding Indictment and Defraud Conspiracy Count As Substitute for Dismissed Tax Obstruction Count (Federal Tax Crimes Blog 4/13/17), here.  Thus, on the same fact pattern, DOJ Tax can allege either or both tax obstruction (assuming at least two actors) or defraud conspiracy (known in the tax area as a Klein conspiracy).  That is precisely what they did in this case.

2.  The opinion is dated 4/7/17, but was not filed until 4/12/17.

3.  The indictment does not seem to allege illegality with regard to the merits or structuring of the underlying tax shelters producing the outsized fees.  Shelters with outsized fees were often illegal with lawyers role to protect the clients from criminal and civil penalties.  At least some of the tax shelters hawked by Levine appear to have been problematic.

Consider  the following news article:  Chuck Stanley, Real Estate Execs Hit Firms, Atty With $30M Tax Shelter Suit (Law360 2/13/17), here.

Former executives for a New York real estate firm on Friday sued in state court Herrick Feinstein LLP, Moritt Hock & Hamroff LLP and Mazars USA LLP, the former employers of a tax attorney and accountant who allegedly advised the real estate company to employ tax strategies found to be abusive and illegal.  

Stuart J. Boesky and Alan P. Hirmes, former executives for The Related Companies, said accountant Ronald Katz and attorney Harold Levine roped the executives into a “highly risky” tax scheme that wound up costing them at least $20 million in tax penalties, interest and legal fees related to Internal Revenue Service and New York State Department of Taxation and Finance audits of tax shelters set up under the advice of Katz and Levine, which generated significant fees for the attorney and accountant’s respective employers, according to a complaint filed Friday in Manhattan state court.
Boesky and Hirmes claim Katz, whom they knew through his accounting work for Related as a partner for Weiser LLP, claimed to know of a legal loophole that would allow the two men to reduce their tax liability through a series of real estate purchases made through pass-through limited liability companies set up by the two real estate executives. 

On the advice of Katz, Boesky and Hirmes hired Harold Levine, then a partner with Herrick Feinstein, to advise on the remainder interest tax strategy designed by Katz to create inflated-value charity deductions to offset the real estate executives’ tax burden, according to the complaint. 

Katz and Levine helped Boesky and Hirmes form five separate limited liability corporations to execute the remainder interest strategy, generating significant fees for their employers, according to the complaint. 

But even after the New York State Department of Taxation and Finance issued a notice that it intended to challenge the charitable deductions made by the LLCs as part of a tax avoidance scheme, Katz and Levine continued to assure their clients the transactions were legal, the complaint states. 

Boesky and Hirmes claim that, had they been properly advised, they would have immediately sought to settle their dispute with the Taxation and Finance Department in order to avoid additional fees, penalties and interest costs resulting from the audit.
In 2014, the Manhattan U.S. attorney accused Levine, who was then working for Moritt Hock, of participating in at least 90 illegal tax strategies in exchange for more than $5 million in fees. 

And both Katz and Levine were indicted in Manhattan federal court in October for allegedly engaging in a multiyear tax evasion scheme that diverted millions of dollars from a Manhattan law firm’s fees, which they then failed to disclose to the IRS.
Meanwhile, according to the complaint, Levine and Moritt Hock failed to provide Boesky and Hirmes with accurate information regarding the strength of an Internal Revenue Service case against one of the LLCs set up as part of the remainder interest strategy. 

Rather than acting in their clients’ best interest, Boesky and Hirmes claim Levine, Katz and an attorney the latter two chose to represent the LLC in court acted to shield themselves and absolve themselves of any wrongdoing. 

Boesky and Hirmes claim the tax shelter they unwittingly entered into was part of an ongoing conspiracy by Katz and Levine to market unlawful tax schemes in order to generate fees for themselves and their firms.