Tuesday, June 26, 2018

Dealing with Other Counts of Conviction After Vacating Tax Obstruction Based on Marinello (6/26/18)

I previously reported on United States v. Westbrooks, 858 F.3d 317 (5th Cir. 2017), where the Fifth Circuit joined the majority of circuits holding that tax obstruction, § 7212(a), did not require the Government show that the defendant knew of an IRS investigation that it was foreseeable for the defendant to obstruct.  See Fifth Circuit Joins Majority Decisions that § 7212(a) Requires No Pending Investigation (Federal Tax Crimes Blog 5/28/17), here.  That position was rejected in the subsequent Supreme Court case of Marinello v. United States, ___ U.S. ___, 138 S. Ct. 1101 (2018); see my blog post Supreme Court Holds that Omnibus Clause of the Tax Obstruction Crime (§ 7212(a)) Requires Awareness of Pending Tax-Related Proceeding (Federal Tax Crimes Blog 3/21/18; 3/22/18), here.  In subsequent proceedings in Westbrooks on remand from certiorari, the Government conceded that the tax obstruction must be vacated but that the defendant's other convictions for tax perjury should stand.  The Fifth Circuit agreed, rejecting Westbrooks' argument that the tax obstruction conviction contaminated the tax perjury convictions, thus permitting those convictions to stand.  United States v. Westbrooks, 2018 U.S. App. LEXIS 16943 (5th Cir. 2018) (unpublished), here.  The Court reasoned:
The disagreement between the parties is about what the vacatur of the obstruction conviction means for the three "false return" convictions. Westbrook contends that the improper obstruction count contaminated the false return counts. This same argument about "spillover prejudice" was raised in Governor Edwin Edwards's appeal of his convictions because an intervening Supreme Court decision had invalidated the legal basis for some of the mail fraud counts. United States v. Edwards, 303 F.3d 606, 638-40 (5th Cir. 2002) (citing Cleveland v. United States, 531 U.S. 12, 121 S. Ct. 365, 148 L. Ed. 2d 221 (2000)). We noted that the concept came from cases challenging a failure to grant a pretrial severance, and we had never decided whether "spillover from invalid claims can be a basis for granting a new trial." Id. at 639. We did not resolve that question in Edwards because even assuming the theory applied in this "retroactive misjoinder" situation, the improper taint exists only if the counts the jury should not have heard allowed the introduction of evidence that would not have otherwise been admissible. Id. at 640. That was not the case in Edwards, id., and it is not the case here. Evidence concerning cash payments, shoddy or nonexistent bookkeeping, and prior false returns was admissible even without the obstruction count as either intrinsic to the false return counts or permissible Rule 404(b) evidence that showed Westbrooks' plan, fraudulent intent, and absence of mistake. United States v. Morgan, 117 F.3d 849, 861 (5th Cir. 1997); Fed. R. Evid. 404(b). The testimony about Westbrook's false testimony at the show cause hearing was, as we have already explained, a permissible basis for the obstruction count and, even if not, would have been admissible as probative of Westbrook's intent. Because the now-invalid obstruction count did not allow the jury to consider evidence that would not have been allowed at a trial focused on just the false return counts, the latter will not be vacated. Edwards, 303 F.3d at 640.
The Court then turned to the sentencing and held:
The final question relates to the sentences for those false return convictions we are upholding. The government agrees that we should vacate those sentences and remand for resentencing in light of the vacatur of the obstruction count. That new sentencing will include but not be limited to reconsideration of the restitution amount which the government concedes should be reduced as it included amounts based on returns filed only during the time period covered by the obstruction count.

Monday, June 25, 2018

Quinnipiac University Law School Tax Crimes Conference Materials Available On Line (6/25/18)

Quinnipiac University School of Law held its 2nd Annual Criminal Tax Day on May 17th and has posted materials that readers may download.  The main site (with links) is here.

I could not get the video to work, but that my be my browser issue.  There are links to download the materials from the event.  For an introduction to the events, see the agenda here.  According to the agenda, the topics covered were:

  • What’s New in Criminal Tax?
  • Income Reconstruction: Methods, Approaches, and Defenses
  • Dealing with the Undocumented Worker
  • Taxpayer vs. Preparer: Who to Pursue? 
  • Bringing Your Client in from the Cold
  • The Criminal Prosecution: Strategies, Plea and Sentencing

Monday, June 18, 2018

Updates on Forfeiture and Civil Penalty in Bullshit Tax Shelter Cases (6/18/18)

I write on two unrelated topics today.  Neither are directly related to federal tax crimes, so I write in summary only.

1.  In United States v. Daugerdas, ___ F.3d ___, 2018 U.S. App. LEXIS 15823 (2d Cir. 2018), here, the Second Circuit held that the petitioner-appellant, the wife of Paul Daugerdas who was convicted for bullshit tax shelter activity, could have the opportunity to amend her pleadings in the criminal forfeiture in Paul's case against funds in which she claimed an interest.  I have previously posted a number of blog entries on Paul.  A general search, here, on Daugerdas will show those entries.  Here is the Second Circuit's summary of the case:
Petitioner-appellant Eleanor Daugerdas appeals from an order of the United States District Court for the Southern District of New York (William H. Pauley III, J.), dismissing her petition asserting a third-party interest in certain accounts (the "Accounts") preliminarily forfeited in the underlying criminal proceedings against her husband, Paul M. Daugerdas. The parties agree that Paul initially funded the Accounts, at least in part, with money he was paid by the law firm through which he conducted his fraudulent activities, and that he gratuitously transferred ownership of the Accounts to his wife over a period of years. Eleanor contends that the law firm irreversibly commingled the income it received from Paul's fraudulent-tax-shelter clients with untainted money before it paid Paul, and accordingly the funds in the Accounts cannot easily be traced to her husband's fraud. Eleanor therefore asserts that the Accounts cannot now be taken from her to satisfy her husband's forfeiture obligations; instead, she argues, equivalent amounts must be collected from her husband's own assets in the same manner that a judgment creditor would enforce any personal money judgment. 
We conclude that Eleanor's petition does not currently contain sufficient plausible allegations to sustain her position; however, at oral argument, she claimed to be able to plead additional facts, and such repleading would not necessarily be futile. Because denying Eleanor the ability to assert the argument she raises here could potentially permit the government to deprive her of her own property without due process of law, we VACATE the district court's order and REMAND the case for proceedings consistent with this opinion.
The opinion contains a good discussion of the differences between criminal forfeiture (in personam) and civil forfeiture (in rem).

2.  In Greenberg v. Commissioner, Tax Ct. Memo LEXIS 79, here, the Court rejected Greenberg's bullshit tax shelter claims but held that, although it would otherwise have sustained the 40% accuracy related penalty, it would not do so because the IRS had not met the requirement that it meet a production burden with respect to the written supervisor approval required by § 6751(b).  The Tax Court's opening two paragraphs project the result:
These cases are about a lawyer and a tax accountant who used a series of complex option spreads to generate millions in tax savings for themselves and their clients. The Commissioner says these transactions look too much like Son-of-BOSS deals--a type of deal this Court has consistently said doesn't work. n2 He argues that the taxpayers made a fortune selling tax shelters and tried to shelter their shelter income with the same kind of shelter. He also takes issue with a large tax loss that the taxpayers say was generated when they abandoned their interest in a mysterious partnership--even though there is no paperwork to prove any such abandonment.
   n2 Son-of-BOSS is a variation of a slightly older alleged tax shelter known as BOSS, an acronym for "bond and options sales strategy." There are a number of different types of Son-of-BOSS transactions, but what they all have in common is the transfer of assets encumbered by significant liabilities to a partnership with the goal of increasing basis in that partnership or the assets themselves. The liabilities are usually obligations to buy securities, and are typically not completely fixed at the time of transfer. This may let the partnership treat the liabilities as uncertain, which may let the partnership ignore them in computing basis. If so, the result is that the partners will have a basis in the partnership or the assets themselves so great as to provide for large--but not out-of-pocket--losses on their individual tax returns. We have never found a Son-of-BOSS deal that works. See, e.g., CNT Inv'rs, LLC v. Commissioner, 144 T.C. 161, 169 n.7 (2015); BCP Trading & Invs., LLC v. Commissioner, T.C. Memo. 2017-151, at *2 n.2. 
The Commissioner issued two rounds of notices of deficiency. The first disallowed losses from option spreads claimed through the taxpayers' partnership, GG Capital, as well as the abandonment loss. The second disallowed losses the Commissioner says the taxpayers claimed from another partnership--AD Global-- through the same type of transaction. The taxpayers say they never claimed these losses. They also say the Commissioner got the procedure wrong--he should have issued notices of final partnership administrative adjustment (FPAAs), not notices of deficiency--and that he missed the statute of limitations. If those arguments fail, they say these transactions were legitimate investments, not Son-of-BOSS deals. The Commissioner thinks this sounds too good to be true.

Wednesday, June 6, 2018

Evidentiary Rulings in FBAR Collection Suit (6/6/18)

In United States v. Garrity, 2018 U.S. Dist. LEXIS 92561 (D. Conn. 2018), here, the Court rules on objections to evidence in this FBAR collection action about which I have previously written (blog entries collected at the end of this blog entry).  Because of the number of the exhibits and objections, the Court opens with a general discussion titled "I. General Principles and Observations About the Parties' Objections to Exhibits."  Then in part II, titled "II. The Court's Rulings on Specific Proposed Exhibits," the Court addresses the specific exhibits and objections in chart form.  I address here only the general discussion.  Readers may, however, find the specific discussion useful.

The particular part of the general discussion I found interesting is:
1. Authenticity 
Finally, courts have held that the fact that the records were produced by a party in response to a discovery request, "while not dispositive of the issue of authentication, is surely probative." McQueeney, 779 F.2d at 929. See also Burgess v. Premier Corp., 727 F.2d 826, 835-36 (9th Cir. 1984) (holding that "the district court could properly have found that all of the exhibits were adequately authenticated by the fact of being found in [defendant's] warehouse"). 
In this case, as noted below in the specific rulings, the documents whose authenticity defendants challenge include records bearing the signature and/or initials of Mr. Garrity, Sr., and/or his sons—and those signatures, which appear to be by the same person(s), are also contained in other records to which Defendants do not object. See, e.g., Exs. 25 (signed by Kevin Garrity, and to which Defendants do not object), 61 (will signed by Mr. Garrity and submitted to the Court at ECF No. 115-13), and 99 (promissory notes signed by Mr. Garrity and submitted to the Court at ECF No. 115-11). Other documents include the same bank account number and appear to be records of the same bank as to which Defendants have made judicial admissions in their answer; appear to be records of the same foundation, and bear the same dates, about which Defendants have made judicial admissions in their answer; and provide evidence of the same "shared signature authority" about which defendants have made judicial admissions in their answer. See ECF No. 9 ¶¶ 7, 8, and 21. Further, Plaintiff has represented that all of these documents were produced by Defendants after the documents were obtained from the foundation or "after Defendants' counsel travelled to Liechtenstein and obtained it directly from" the bank that served as the foundation's agent. See ECF No. 155 at 1-2. Defendants have not contested this representation.
In addition, for some related context of the above, I picked up two recently filed documents related to specific requests for jury instructions on specific subjects requested by the Court.  The item  of particular interest is both sides' proposed instructions on "Judicial Admissions from Answer" (Gov't description) and "Uncontested Facts" (Defendant's description).
  • Government Instructions, here.
  • Defendant's Instructions, here.

Tax Attorney's Conviction and Sentencing Affirmed on Appeal (6/6/18)

In United States v. Lynch, 2018 U.S. App. LEXIS 14085 (3rd Cir. 2018) (nonprecedential), here, the Third Circuit affirmed the conviction and sentencing of Steven J. Lynch, a tax attorney, whose criminal conviction and sentencing I have written before.  See Tax Attorney Convicted of Employment Tax Fraud (Federal Tax Crimes Blog 9/8/16; 9/10/16), here, and Tax Attorney Sentenced to 48 Months of § 7202 Convictions (Federal Tax Crimes Blog 1/14/17), here.  The decision is nonprecedential and covers no new ground.  It  does cover a lot of points, albeit in some cases not in great detail.  I will just point out some of the points as reminders to readers.

1.  As a defense to the criminal charge and as a  means to lower his tax loss for sentencing, Lynch argued that the subsequent delinquent payment of the Trust Fund tax should be considered.  The Court's rejections of those arguments were as follows:
Lynch argues that § 7202 does not contain within it any language specifying a due date and so argues that his late payments do not alone suffice to establish that he failed to pay over the taxes. This argument fails on its face. Section 7202 applies to taxes "imposed by this title," and § 6151 makes clear that "when a return of tax is required under this title or regulations, the person required to make such return . . . shall pay such tax at the time and place fixed for filing the return." See, e.g., United States v. Quinn, No. 09-cv20075 (JWL), 2011 U.S. Dist. LEXIS 10506, 2011 WL 382369, at *1 (D. Kan. Feb. 3, 2011) ("[A] 'failure to pay over' necessarily incorporates the concept of a deadline, as the failure must be measured as of some particular time."), aff'd, 566 F. App'x 659 (10th Cir. 2014). Thus, where a payment is late, the responsible person has by definition failed to pay it over and if that failure was willful, that person has violated § 7202. 
* * * * 
Lynch next argues that the tax loss should actually have been zero, given that he always intended to pay the taxes, or alternatively should have been reduced by the amount of his late payments. As we already explained, § 7202 is violated when the taxes are willfully not paid as of the time that the filing is due. The Guidelines, for their part, are clear that for willful failure-to-pay offenses, "the tax loss is the amount of tax that the taxpayer owed and did not pay" and furthermore that "[t]he tax loss is not reduced by any payment of the tax subsequent to the commission of the offense." § 2T1.1(c)(3) & (c)(5). Accordingly, the tax loss is properly calculated based on whatever Lynch owed and willfully did not pay when the applicable filings were due, at which point the offense had been committed. Subsequent payments cannot retroactively reduce that tax loss.
2.  Lynch argued that the prosecutor had improperly asserted to the jury that the taxes were his taxes when, in fact, they were employer taxes.  The Court rejected the argument as follows:

Sunday, June 3, 2018

Court Rejects Defense Expert Testimony as to State of Law and Duty in Government FBAR Willful Penalty Case (6/3/2018)

In United States v. Garrity, 2018 U.S. Dist. LEXIS 91665 (D. Conn. 2018), here, a Government suit to obtain judgment on an FBAR willful penalty, the Court granted the Government's motion in limine to preclude the testimony of the defense's expert witness.  The Court described the testimony thus excluded:
According to Defendants' expert disclosure, Mr. Epstein is a certified public accountant with over 25 years of experience. (Report of Howard B. Epstein, CPA, ECF No. 114-2 at 2.) His practice focuses on international tax planning and compliance for individual taxpayers and multi-national companies. (Id.) Defendants propose that Mr.  Epstein will testify at trial on the following general subjects: 
• "general reporting requirements as they related to Foreign Financial Accounts and Foreign Trusts"; and
• "general guidance published by the Internal Revenue Service, the Department of Treasury, and FinCen explaining the rules and reporting requirements to taxpayers and practitioners relating to such vehicles for the year the subject penalty is assessed (2005), as compared to years before and after." (ECF No. 114-2 at 2.) 
More specifically, Mr. Epstein's proposed testimony includes opinions on: 
• "the state of published guidance and public awareness of [foreign account] reporting requirements so as to provide an objective backdrop or perspective . . . .";
• "how such guidance evolved in the years before and after the subject year [i.e., 2005], and how, in that climate, international tax compliance has been viewed and understood by practitioners and taxpayers . . . ."; and
• "whether an individual taxpayer could have been unaware of his filing foreign income and asset reporting requirements." (ECF No. 114-2 at 3.) 
Mr. Epstein's proposed testimony purports to answer the question, "Should Paul Garrity Sr. have known of his requirements to report the Stiftung [a Liechtenstein entity]?" (ECF No. 114-2 at 9.) He opines that "the IRS should not and does not determine—without specific supporting evidence—that a taxpayer should have known of his foreign bank account reporting requirements." (Id. at 10.)
The Court excluded the testimony for three reasons:  First, it found that "it will not assist the jury to understand the evidence or to determine a fact in issue."  Second, it found the proffered testimony to be "is irrelevant to the question of willfulness."  Third, even if relevant, the Court invoked Rule 403 "because allowing Mr. Epstein to testify on the proposed subjects would risk jury confusion and invade the province of the Court.

The opinion is very short, so I encourage readers interest in this subject to read the opinion.  Basically, I think the reasoning is as follows:

1.  The issue in the case is whether the taxpayer (the deceased parent) was willful in not reporting the foreign accounts.  Willfully, the court says, means "knowingly or recklessly" failing to file.  Significantly, the court said:
Actual knowledge encompasses "willful blindness" to the obvious or known consequences of one's actions. McBride, 908 F. Supp. 2d at 1205 (citing Global-Tech Appliances, Inc. v. SEB S.A., 563 U.S. 754, 767 (2011)). The government may prove willful blindness with evidence that Mr. Garrity, Sr. made a "conscious effort to avoid learning about reporting requirements." Williams, 489 Fed. Appx. at 659. Evidence of a taxpayer's negligence, however, is insufficient to prove willfulness. See, e.g., Bedrosian, 2017 WL 4946433, at *6 (finding that the defendant was not liable for willful failure to file an FBAR because his actions amounted to, at most, negligence).
2.  On the issue the jury will resolve, the expert's report:
does not, and does not purport to, address the subjective standard at issue here. Instead, Mr. Epstein speaks only to an objective standard—whether Mr. Garrity, Sr. "should have known" of the reporting obligation in light of the IRS's public education on the issue at the relevant time. What Mr. Garrity, Sr. should have known—i.e., whether Mr. Garrity, Sr. was negligent in his failure to file an FBAR—is not the issue in this case. 
What Mr. Garrity, Sr. actually knew (or consciously chose to avoid learning) is the key issue, and there is no evidence linking that issue with Mr. Epstein's proposed testimony.
JAT Comments: