DOJ Tax Announces Addendum with Category 2 Bank, Bank Lombard & Odier & Co. (7/31/18)

DOJ Tax announced here an Addendum to the nonprosecution agreement ("NPA") with Bank Lombard Odier & Co., Ltd., of Zurich Switzerland.  The bank previously obtained an NPA with an agreement to pay $99.809 million.  See Two More Banks Obtain NPAs under DOJ Swiss Bank Program (Federal Tax Crimes 12/31/15), here.  The Addendum requires the bank to pay an additional $5.3 million.

The key excerpt explaining the supplemental agreement is:

Every bank that signed a non-prosecution agreement in the Swiss Bank Program had represented that it had disclosed all of its U.S.-related accounts that were open at each bank between August 1, 2008, and December 31, 2014.  Each bank also represented that it would, during the term of the non-prosecution agreement, continue to disclose all material information relating to its U.S.-related accounts.  In reaching today’s agreement, Lombard Odier acknowledges that there were certain additional U.S.-related accounts that it knew about, or should have known about, but that were not disclosed to the Department at the time of the signing of the non-prosecution agreement.  Lombard Odier provided early self-disclosure of their unreported U.S.-related accounts and has fully cooperated with the Department. 

Times of Israel Article on the Current State of Israeli Banks and U.S. Tax Evasion (7/31/18)

Simona Weinglass, Why are Israeli banks asking customers where their money comes from? (Times of Israel 7/21/18), here.  Excerpts:

Israelis with business interests abroad report being summoned to their local bank, being asked to explain how they earned their money, and, if unable to provide satisfactory answers, having their bank account closed. 

* * * * 

The reason for these changes, Supervisor of Banks Hedva Ber told a conference in December, is that three of Israel’s major banks have come under criminal investigation over the past seven years by the US Justice Department for allegedly helping thousands of US citizens launder money and evade taxes — a fairly devastating state of affairs that has garnered remarkably little public attention. 

* * * * 

Bank Leumi admitted wrongdoing in 2014, agreeing with the US Justice Department that it had conspired to aid and assist a minimum of 1,500 US taxpayers to prepare and present false tax returns to the US Internal Revenue Service by hiding income and assets in offshore bank accounts in Israel and elsewhere around the world. According to a US Justice Department press release, Bank Leumi’s “criminal activity” spanned over a decade from at least 2000 to 2011, during which time Leumi also provided “hold mail” service for approximately 2,450 US accounts whereby bank statements were held abroad and not sent sent to the customer’s address in the United States. To avoid prosecution, Bank Leumi agreed to pay $400 million in fines to the US and New York State governments. 

Meanewhile, Bank Hapoalim and Bank Mizrahi are still being investigated by the Department of Justice and the numbers of customers involved and size of the fines are expected to be on a similar scale. 

* * * * 

‘Switzerland for Jews’ 

Israeli banks for many years provided essentially the same services as Swiss banks did, minus the banking secrecy laws. 

“Israel has been Switzerland for Jews,” Ronen Bar-El, an economics professor at Israel’s Open University, told The Times of Israel. 

Shuster said that when the investigation is over, the Department of Justice will issue a press release that dryly says something like “the bank agrees that it has violated these statutes of US law and it is agreeing to pay a fine of X million dollars.” 

There will be little drama and it is very unlikely that any of the bank executives will face jail time. Nevertheless, the reason for Israeli banks’ extra caution in vetting customers’ sources of income is so as not to further anger the Department of Justice and to keep the penalty they have to pay to a minimum. 

* * * * 

As of this writing, the US government probe has extended to about 100 banks (most of them Swiss) and about 50 individuals. More than 50,000 people have come forward though the voluntary disclosure program and the IRS has collected more than $11 billion to date, said Shuster.

Another Swiss Asset and Financial Manager Reaches NPA with DOJ Tax (7/28/18)

DOJ Tax issued a press release, here, yesterday that Mirelis Holding, SA (Mirelis), a Swiss Asset and Financial Manager, had reached an NPA regarding its assistance for U.S. taxpayers.  Mirelis will pay an aggregate amount of $10.245 million broken down as follows:

Restitution:  $3.245 million
Disgorgement: $5 million
Other penalties: $2 million.

The press release is lengthy in giving many details.  Much of the typical pattern of Swiss Bank servicing of U.S. taxpayers hiding their income and assets.  The press release links the relevant documents, principally the NPA and Statement of Facts (identified as Download Mirelies (sic) NPA).

The following is an interesting disclosure:

Mirelis submitted a letter of intent to participate as a Category 2 bank in the Department’s Swiss Bank Program in December 2013.  Although it was ultimately determined that Mirelis was not eligible for the Swiss Bank Program due to its structure as both an asset management firm and a bank, Mirelis is required under today’s agreement to fully comply with the obligations imposed under the terms of that program.  Mirelis has fully cooperated with the Department of Justice in this investigation, including undertaking a separate and thorough review of the provision of independent portfolio and asset management services to U.S. taxpayer-clients with accounts maintained at third-party depository financial institutions and encouraging a significant number of its remaining non-compliant U.S. taxpayer-clients to participate, or provide proof of prior participation, in OVDP covering many of the U.S. Related Accounts maintained by Mirelis during the Applicable Period. 

Mirelis will be included on the IRS list of Foreign Financial Institutions or Facilitators, here,  (It was not on that list as of the posting of this blog entry.)  The press release says:

With today’s announcement of this non-prosecution agreement, noncompliant U.S. clients of Mirelis must now pay that 50 percent penalty to the IRS if they wish to enter the IRS Offshore Voluntary Disclosure Program.  The IRS recently announced that the Offshore Voluntary Disclosure Program will close on September 28, 2018.

$10 Million Fine in Tax Crimes Case Affirmed on Appeal (7/28/18)

In United States v. Zukerman, ___ F.3d ___, 2018 U.S. App. LEXIS 20890 (2d Cir. 7/27/18) (per curiam), here, the Second Circuit rejected Zukerman's claim that the fine imposed after he pled guilty to significant tax evasion and tax obstruction was unreasonable.  Zukerman had been sentenced to 70 months in prison and fined $10 million.  Only the fine was in issue on the appeal.  Based on the Sentencing Guidelines calculations, the indicated sentencing range was $25,000 to $250,000.  But, courts can vary from the Guidelines ranges.  The district court did so here.  The Court of Appeals affirmed.

The opinion is relatively short so I will not try address all of its  points here.  I recommend it as a good read for the procedural aspects of sentencing.  I do offer the following excerpts (cleaned up).

First, the district court put significant weight on the nature and circumstances of Zukerman's crimes pursuant to 18 U.S.C. § 3553(a)(1), explaining that tax crimes represent an especially damaging category of criminal offenses, which strike at the foundation of a functioning government. Enjoyment of the privileges of residence in the state and the attendant right to invoke the protection of its laws are inseparable from responsibility for sharing the costs of government. Taxes are what we pay for civilized society. Accordingly, the district court expressed deserved opprobrium for Zukerman's calculated scheme to defraud the government of tens of millions of dollars for the sole purpose of increasing his personal wealth, executed through efforts that spanned fifteen years and involved submitting more than 50 falsified tax forms for at least ten different individuals

[Note that, although I have cleaned up the above quote to exclude case citations, I left in the quotes from the cases; readers will no doubt recognized the quote about taxes being what we pay for a civilized society.  I omitted the case, but thought readers would like to have that case citations: Compania Gen. de Tabacos de Filipinas v. Collector of Internal Revenue, 275 U.S. 87, 100 (1927) (Holmes, J., dissenting).]

Zukerman counters that these factors do not support an upward variance from the recommended fine range because they were already addressed as part of his offense level under the Sentencing Guidelines. But the district court was not bound to conclude that the offense level adequately accounted for the complexity and scope of Zukerman's actions. To the contrary, the historic role of sentencing judges, which continues to be exercised, is to consider he judge's own sense of what is a fair and just sentence under all the circumstances. Moreover, a district court's decision to vary from the Guidelines may attract the greatest respect when the sentencing judge finds a particular case outside the heartland to which the Commission intends individual Guidelines to apply. In particular, the Guidelines related to tax offenses drastically vary as to the recommended sentence based simply on the amount of money involved, such that a district court may find that even after giving weight to the large or small financial impact, there is a wide variety of culpability amongst defendants and, as a result, impose different sentences. Thus sentences varying from the Guidelines in tax matters, if adequately explained, should be reviewed especially deferentially. We therefore accede to the finding that an above-Guidelines fine was necessary to reflect the complexity, scope, and extreme nature of Zukerman's criminal activity. Cf. Scott A. Schumacher, Sentencing in Tax Cases After Booker: Striking the Right Balance Between Uniformity and Discretion, 59 VILL. L. REV. 563, 594 (2014) (noting that the Guidelines provide only a two-point increase for a sophisticated means adjustment, which can be cancelled out by an acceptance of responsibility adjustment, making the defendant's culpability and the manner in which the tax loss was generated virtually irrelevant).

[Note that I did leave in the citation to Professor Schumacher's article,  here, to give him credit.  He is a co-author with Larry Campagna, Steve Johnson and me on our Tax Crimes book, here.]

2018 Townsend on Federal Tax Procedure Books Available on SSRN (7/27/18)

The 2018 editions of my Federal Tax Procedure Book (Student Edition and Practitioner Edition) are available on SSRN.  The SSRN links are available on my Federal Tax Procedure Blog page for the books:  2018 Federal Tax Procedure Book & Supplements (7/17/18). 

District Court Holds that Santander's Arguments to Avoid Penalty for Bullshit Tax Shelter (No Substance) Lack Substance (7/24/18)

In Santander Holdings USA, Inc. v. United States (D. Mass. Dkt. 09-11043-GAO Dkt Entry 344 7/17/18), here, Santander previously lost the merits of its bullshit tax shelter on appeal, with the Court of Appeals holding that the shelter lacked economic substance.  Santander Holdings USA, Inc. v. United States, 844 F.3d 15 (1st Cir. 2016), here, cert. denied sub nom. Santander Holdings USA, Inc., & Subsidiaries v. United States, 137 S. Ct. 2295 (2017).  See my discussion of the Court of Appeals decision, First Circuit, Reversing the District Court, Rejects Santander's Bullshit Tax Shelter (Federal Tax Crimes Blog 12/17/16), here.

Santander argued that, although its tax shelter lacked economic substance -- i.e., was bullshit -- it should be able to avoid the accuracy related penalty.  Well, basically, the district court held that that argument too lacked substance -- was bullshit.  The opinion is short and, I think, predictable, so I forego addressing it further.

However, the district court did include a quote from the Court of Appeals' decision that I had included in my prior write up but was in a larger quote so that I had not focused on it.  The district court did focus on it as follows.  This is the quote (cleaned up):

When a transaction is one designed to produce tax gains not real gains—such as when the challenged transaction has no prospect for pre-tax profit—then it is an act of tax evasion that, even if technically compliant, lies outside of the intent of the Tax Code and so lacks economic substance.

The district corut did not quote the whole paragraph from the Court of Appeals which includes "tax evasion" twice, so I offer the whole paragraph (cleaned up):

The economic substance doctrine is centered on discerning whether the challenged transaction objectively lies outside the plain intent of the relevant statutory regime. A transaction fails the economic substance test if, though it actually occurred and technically complied with the tax code, it was merely a device to avoid tax liability. Courts may disregard the form of transactions that have no business purpose or economic substance beyond tax evasion. In other words, when a transaction is one designed to produce tax gains not real gains -- such as when the challenged transaction has no prospect for pre-tax profit -- then it is an act of tax evasion that, even if technically compliant, lies outside of the intent of the Tax Code and so lacks economic substance.

Readers of this blog will recognize the term "tax evasion."  At least in this blog and in other authorities on criminal tax matters, tax evasion is a term of art.  Narrowly, it means the specific tax evasion crime in § 7201, but is often used to cover the panoply of tax crimes where tax was evaded (e.g., the Sentencing Guidelines require that for a tax loss as the first step in the sentencing calculation).  But, the term usually does connote conduct that is criminal.  See e.g., the Wikipedia entry for Tax Evasion, here.

Attorneys and Summonses -- Some Lessons (7/23/18)

In Presley v. United States, ___ F.3d. ___, 2018 U.S. App. LEXIS 19832 (11th Cir. 2018), here, the court rejected an attempt to duck an IRS summons to a bank.  The parties wishing to avoid the summons were "a lawyer, his law firm and associated parties."  Those parties, let's call them appellants, faced "formidable" odds because of United States v. Miller, 425 U.S. 435 (1976), and United States v. Powell, 379 U.S. 48 (1964).  (Not to mention that the lawyer apparently appeared for himself and the appellants on the appeal; and the court illustrated the long odds with a sports illustration from 1980 that seems more of a detour to tell us that the author is a sports fan than really needed for the opinion.)

Challenging IRS summonses always face daunting odds because of Powell.  The Court said on the merits (cleaned up):

For IRS summonses of bank records, the "gist" of the Fourth Amendment protection is that the disclosure sought "shall not be unreasonable." This baseline requirement emanates from the interest of all citizens "to be free from officious intermeddling." But an IRS summons is not unreasonable, provided the IRS has complied with the Powell requirements. In other words, when it comes to the IRS's issuance of a summons, compliance with the Powell factors satisfies the Fourth Amendment's reasonableness requirement. 

The summonses here satisfy that standard. In fact, as we have mentioned, Plaintiffs do not contest that the summonses satisfy each Powell factor. For example, Plaintiffs do not suggest that the files containing their clients' records are not relevant to the IRS's investigation and that the summonses are not narrowly tailored. By definition, the IRS is not engaged in a "fishing expedition" when it seeks information relevant to a legitimate investigation of a particular taxpayer. In such cases, the incidental effect on the privacy rights of unnamed taxpayers is justified by the IRS's interest in enforcing the tax laws. 

Nor do Plaintiffs contend that the summonses were really just a subterfuge so the IRS could investigate their clients or invade the attorney-client privilege.  If the district court finds in the enforcement proceeding that the IRS does not in fact intend to investigate the summoned party, or that some of the records requested are not relevant to a legitimate investigation of the summoned party, the IRS could not obtain all the information it sought unless it complied with § 7609(f) [John Doe Summons procedure]. We are likewise unable to discern any other reason why the summonses should not be enforced. Because the Powell factors define the reasonableness of the summonses under the Fourth Amendment and Plaintiffs do not contest that the summonses satisfy them, our inquiry should be complete.

The Court also rejected an attempt to invoke the United States v. Gertner, 65 F.3d 963 (1st Cir. 1995), although not mentioned in the opinion by name.  Basically, the claim, such as it was, that the Government was attempting to use the regular IRS administrative summons rather than the more appropriate John Doe Summons.  The problem with that argument, if it had been properly raised, was that the investigate parties were named in the summons and there were not unknown parties the IRS was investigating.

District Court Grants Government Summary Judgment for FBAR Willfulness Civil Penalty (7/23/18)

In United States v. Markus, 2018 U.S. Dist. LEXIS 118871 (D. N.J. 7/17/18) (unpublished), here, the district court granted summary judgment for the Government on willful FBAR penalties.  The docket entries are here.

In summary, Markus was a combat engineer for the U.S. Army in Iraq and then, after leaving the Army, worked for the U.S. Corps of Engineers deployed in Iraq.  He accepted bribes and kickbacks for confidential information for an oil pipeline.  He deposited the proceeds in bank accounts in Egypt and Jordan.  He filed no FBAR at all for 2007 and 2009 and filed an incomplete FBAR for 2008.  He was convicted for the bribery and kickback claims and for failure to file an FBAR for 2009.

The IRS assessed the following FBAR willful civil penalties:

		Account	Account	Penalty
Year	Bank Account	Number	Balance	Assessed	%
2007	Banque Misr	-2393	$299,250	$100,000	33.4%
2007	Housing Bank I	-70220	$744,854	$372,427	50.0%
2007	Housing Bank II	-201	$90,000	$45,000	50.0%
2008	Banque Misr	-2393	$364,950	$100,000	27.4%
2009	Banque Misr	-2393	$400,000	$218,225	54.6%
2009	Housing Bank III	-80220	$680,000	$6,362	0.9%
				$842,014

The Government filed suit within 2 years of assessment.  Markus represents himself in the case.

The Court held that the assessments and the civil suit were made and instituted, respectively, within the applicable the statutes of limitations and that Markus' prior criminal conviction not involving FBARs (years 2007 and 2008) did not give rise to collateral estoppel.  The court then turned to the merits of the willful penalty assessment.

First, the Court cites the FBAR willful penalty as being the greater of $100,000 or 50% of the balance in the account at the time of the violation.  The Court does not say anything about the issue in Colliot and Wadhan that capped the FBAR willful penalty to $100,000.  See District Court Caps IRS Authority to Assess Willful FBAR Penalty at $100,000 (Federal Tax Crimes Blog 5/19/18) (on Colliot), here; and Another District Court Limits IRS Authority for FBAR Willful Penalty to $100,000 (7/18/18) (on Wadhan), here.

Temporary Suspension of Listing of Popular Blog Entries Over Last 7 Days (7/21/18)

I have taken down the last 7 days popular posts listing to the right of the blog.  It will be down just over 7 days. 

The reason I have temporarily suspending that listing is that an old blog entry somehow got to the top of that list some time ago and since then stays on the list, usually at the top, because people coming to the blog click on it.  I presume that they think there is something new and currently useful there because it is at the top of the 7 days popular posts listing.  But in fact, it is at the top simply because people see it at the top and click on it.  So, I am taking down that listing for over 7 days and, hopefully, since it is a 7 day listing, when I put the list back up, that particular blog entry from long ago will never appear again as a currently popular blog entry and the listing will be more accurate as to what is currently trending.

If that doesn't work to get that old blog entry off the list, I will consider just deleting it.  But, for now, I hope the temporary suspension of the list will work.

NPB Neue Privat Bank Enters Nonprosecution Agreement (7/19/18)

As previously rumored, NPB Neue Privat Bank (NPB) entered a nonprosecution agreement (NPA) with DOJ Tax.  See DOJ Tax Press Release here.  (I previously reported that this NPA was expected.  NBP Neue Privat Bank (Category 1 Swiss Bank) Reported Ready to Settle with U.S. Prosecutors (Federal Tax Crimes Blog 7/14/18), here.

The press release summarizes the agreement and statement of facts and has links at the bottom to the following documents:

• NPB Signed Statement of Facts
• NPB Executed NPA
• NPB Signed Resolution of Board of Directors

Comments:

1.  NPB agrees to pay a $5,000,000 penalty.  The NPA does not describe the penalty.

2.  NPB sought to insulate itself generally by dealing with external asset managers rather than the U.S. taxpayers directly.

3.  NPB interpreted the QI Agreement with the IRS as permitting it to "continue to accept and service U.S. account holders, even if it knew or had reason to believe they were engaged in tax evasion, so long as it complied with the QI Agreement, which in NPB’s view did not apply to account holders who were not trading in U.S.-based securities or to accounts that were nominally structured in the name of a non-U.S.-based entity.  NPB formed this view without consulting legal counsel."

4.  NPB saw a business opportunity as U.S. taxpayers exited other Swiss banks feeling the heat from the IRS and DOJ.  As a result:

Prior to 2009, NPB had few U.S. clients. At the close of 2008, U.S. Related Accounts held approximately 8 million Swiss francs in assets.  By the end of 2009, NPB had approximately 450 million Swiss francs under management in accounts owned or beneficially owned by U.S. taxpayers, an influx of approximately 442 million Swiss Francs.  * * * 

NPB’s executives hoped that their U.S. customers would eventually fully declare their accounts and keep their money at the Bank after becoming compliant. However, NPB created no written or formal policies to encourage or mandate tax compliance and, in fact, continued to acquire and service non-compliant U.S. taxpayers. 

According to NPB executives, beginning in August 2010, NPB decided not to open any new accounts for U.S. customers who were not tax-compliant. NPB did not memorialize this decision in any written policy nor in any executive board or management board meeting minutes. NPB knew in August 2010 that some of its existing U.S. customers were not tax-compliant, but continued to service those accounts. 

5.  NPB taxpayers now have increased costs under the OVDP -- being a miscellaneous offshore penalty of 50%.

IRS Counsel Advice on FBAR Willful Penalty Standard and Burden of Proof (11/19/18)

In PMTA 2018-013 (5/23/18), here, an IRS Technical Advisor in Chief Counsel's office provides advice regarding the FBAR willful penalty standard and burden of proof.  This is the party line, so to speak, a distillation of the Government victories in a series of cases that I have discussed in this blog previously.  My comments are as follows:

1.  The standard

The PMTA and some of the loose language in the cases shift the standard, improperly, I believe.

The standard in the statute is willfully.  31 USC § 5321(a)(5)(C) in exactly the same wording as the criminal penalty in 31 USC  § 5322(a).  The only difference is that one penalty is criminal and the other is civil.  The Supreme Court held in Ratzlaf v. United States, 510 U.S. 135, 136-37 (1994) that willfulness in § 5322(a), the criminal statute is voluntary intentional violation of a known legal duty, the same as the Cheek definition of willfulness in the Title 26 criminal penalties. Cheek v. United States, 498 U.S. 192 (1991).

Consistent with Ratzlaf and Cheek, IRM 4.26.16.6.5.1 (11-06-2015), Willful FBAR Violations - Defining Willfulness, here, says:

The test for willfulness is whether there was a voluntary, intentional violation of a known legal duty.

The PMTA, however, suggests that this is not the standard, citing Bedrosian as rejecting the argument "that in order for the government to sustain a civil willful FBAR penalty, it must meet the standard used in the criminal context and show “that the actions amounted to a voluntary, intentional violation of a known legal duty. See Cheek v. United States, 498 U.S. 192, 201 (1991).”

Perhaps my complaint is semantics, but I think the standard is (or should be) the Cheek standard stated in the IRM.  The issue is not whether the standard is articulated differently in criminal and civil FBAR contexts, but whether more relaxed proof is permitted in the civil context to meet the standard.

Example, the criminal tax standard (willfully) and civil fraud standard (fraud).  Although, unlike the FBAR context, the statutory standard is different, as interpreted they are the same.  The difference is in the burden of proof with respect to the conduct -- beyond a reasonable doubt in the criminal tax case and clear and convincing in the civil tax fraud case.

Another District Court Limits IRS Authority for FBAR Willful Penalty to $100,000 (7/18/18)

In United States v. Wadhan (D. Colo. Dkt 17-CV-1287 Dkt Entry 55), here, the Court held that the IRS's discretion to impose FBAR maximum willful penalties is limited to the $100,000 amount in there regulations. The bottom line holding is the same as the Court in United States v. Colliot (W.D. Texas No. AU-16-CA-01281-SS), here.  I discussed Colliot in District Court Caps IRS Authority to Assess Willful FBAR Penalty at $100,000 (Federal Tax Crimes Blog 5/19/18), here.

According to the opinion, "[F]or three violations, the IRS assessed penalties of $1,108,645.41 for 2008, $599,234.54 for 2009, and $599,234.54 for 2010."  Under the opinion, the FBAR willful penalty is limited to a maximum of $100,000 for each of the three years.

The docket entries in Wadhan as of today are here.

Update on Colliot Limitation on Discretion for FBAR Willful Penalty (7/16/18; 7/18/18)

I have written on the Colliot summary judgment limiting the IRS FBAR willful penalty to $100,000.  United States v. Colliot (W.D. Texas No. AU-16-CA-01281-SS), here;  see District Court Caps IRS Authority to Assess Willful FBAR Penalty at $100,000 (Federal Tax Crimes Blog 5/19/18), here.  I have two follow through items.

1.  The Government is asserting in other cases that Colliot was incorrectly decided.  Kimble v. United States (Court Fed. Cl. Dkt. 170521 T, Dkt entry 29), here.

2.  In Colliot, the Government filed an Additional Memorandum dated 6/14/18, here, seeking to mitigate the damage caused by the opinion.  The Government argues that, based on the number and balances in the accounts, even applying the limitation imposed by the court in the opinion, the Government is entitled to most of the penalties assessed.  The key to the claim is that the FBAR willful penalty with the limitation imposed by the court is based per account per year.  Each account could, under the court's opinion, be assessed FBAR willful penalties as follows: (i) $100,000 penalty per account with an amount of $100,000 or more; (ii) the amount in the account when the amount is between $100,000 and $25,000, and (iii) $25,000 when the amount in the account is $25,000 of less.  In Colliot, the defendants had a number of accounts with varying amounts, so the disaggregation of the accounts makes a substantial difference.

The Government argues that the maximum allowed under the Colliot opinion for 14 of the 16 accounts involved would have been $871,300, but that, for those accounts, the Government only assessed $445,314.  (See Table on p. 6.)  The Government thus argues that for those 14 penalties, the assessments “are within the maximum limits set forth in the regulation, and remain unaffected by the Court’s Order” and thus the IRS did not act arbitrarily or capriciously in assessing those penalties.  Further, the Government argues (pp. 7-10), the Court’s order affects only two of the accounts to cap the penalty at $100,000 or $25,000, so that the total penalties assessed for those two accounts is $378,784 and the amount allowed under the court’s order is $125,000.  In net, under the Government’s calculations, the reduction in FBAR willful penalty for those two accounts would be $253,784.

Government Pushes the Envelope on the Meaning of Willfulness in FBAR Willful Civil Penalty (7/15/18)

A colleague called my attention to the Government's motion and brief for summary judgment in Kimble v. United States (CFC Dkt. no. 17-421 T), here.  The case is an FBAR willful civil penalty refund suit.  In the brief, the Government makes bold claims about the standard for what it must prove to establish a persons liability for the FBAR willful civil penalty.  The docket entries are here.  Mrs. Kimble has not yet filed a response.  I offer the following based on the Government's brief.

I start with the statute.  Section 5321(a)(5)(C) authorizes the civil FBAR willful penalty as follows against "any person willfully violating, or willfully causing any violation of, any provision of section 5314."  The latter section is the section imposing the requirement to file an FBAR.

Often where there is a significant civil penalty, there is a corresponding criminal penalty.  (See e.g., the income tax civil fraud penalty in § 6663 and the criminal tax evasion penalty in § 7201, imposing parallel penalties with the only material difference being the level of proof required (clear and convincing in the civil fraud instance and beyond a reasonable doubt in the criminal instance).)  Similarly, there is also a criminal penalty in 31 USC § 5322(a) imposed on "A person willfully violating this subchapter or a regulation prescribed or order issued under this subchapter."

Two things to observe about the criminal FBAR penalty.  First, the penalty is stated in the same words and cut from the same cloth.  By contrast the civil fraud income tax penalty is worded differently and interpreted the same as the criminal penalty for tax evasion. Second, the criminal penalty for tax evasion requires proof beyond a reasonable doubt, but the civil penalty requires proof by clear and convincing evidence.

The consensus of the decided cases for the civil FBAR willfulness penalty hold that the FBAR willful civil penalty requires that the government prove willfulness only by a preponderance of the evidence.  I think that holding is wrong, as I have previously asserted on this blog, but do not address that issue here.

What I want to address is the meaning of willfulness.  In Ratzlaf v. United States, 510 U.S. 135 (1994), the Supreme Court held that the same standard of willfulness applies to the FBAR criminal penalty as applies in federal tax crimes requiring willfulness -- "`voluntary, intentional violation of a known legal duty'" Cheek v. United States, 498 U.S. 192, 201 (1991) (a tax case).  Since the Supreme Court calibrated the definition of willfulness for FBAR criminal purposes to the definition of willfulness for criminal tax purposes, I have found the following explanation from Bryan v. United States, 524 U.S. 184 (1998) to be helpful:

The word “willfully” is sometimes said to be “a word of many meanings” whose construction is often dependent on the context in which it appears.  See, e.g., Spies v. United States, 317 U.S. 492, 497 (1943).  Most obviously it differentiates between deliberate and unwitting conduct, but in the criminal law it also typically refers to a culpable state of mind.  As we explained in United States v. Murdock, 290 U.S. 389 (1933), a variety of phrases have been used to describe that concept.  As a general matter, when used in the criminal context, a “willful” act is one undertaken with a “bad purpose.”  In other words, in order to establish a “willful” violation of a statute, “the Government must prove that the defendant acted with knowledge that his conduct was unlawful.” Ratzlaf v. United States, 510 U.S. 135, 137 (1994). 

* * * * 

In certain cases involving willful violations of the tax laws, we have concluded that the jury must find that the defendant was aware of the specific provision of the tax code that he was charged with violating.  See, e.g., Cheek v. United States, 498 U.S. 192 (1991).  Similarly, in order to satisfy a willful violation in Ratzlaf, we concluded that the jury had to find that the defendant knew that his structuring of cash transactions to avoid a reporting requirement was unlawful.  See 510 U.S. at 138, 149.  Those cases, however, are readily distinguishable.  Both the tax cases and Ratzlaf involved highly technical statutes that presented the danger of ensnaring individuals engaged in apparently innocent conduct.  As a result, we held that these statutes “carve out an exception to the traditional rule” that ignorance of the law is no excuse and require that the defendant have knowledge of the law.  The danger of convicting individuals engaged in apparently innocent activity that motivated our decisions in the tax cases and Ratzlaf is not present here because the jury found that this petitioner knew that his conduct was unlawful.

With that background of what the term willfully means in the parallel criminal FBAR penalty statute, let's turn to willfully in the civil FBAR willful penalty statute.

Tax Obstruction -- Is Marinello's Nexus Requirement Broader than Obstructing or Intending to Obstruct? (7/14/18)

United States v. Lawson, 2018 U.S. Dist. LEXIS 115310 (D. Alaska 2018), here, a U.S. magistrate judge rejected the defendant's claim that, as interpreted in Marinello v. United States, ___ U.S. ___, 138 S. Ct. 1101 (2018), § 7212(a), tax obstruction, requires the defendant's actions must intend to obstruct a pending IRS administrative proceeding.  The Court said that all Marinello requires is that the Government prove a nexus between the obstructive conduct and a pending proceeding.  I am struggling to understand how a person's conduct can have a nexus to a pending proceeding but the actor does not obstruct or intend to obstruct the proceeding.

By order dated 7/10/18, the district court adopted and accepted the magistrate judge's opinion in its entirety.  The docket entries are here.

I quote in full magistrate judge's order on the point (please note that I use the cleaned up procedure to strip out unnecessary portions):

C. The Mens Rea of § 7212(a) Requires Proof that the Defendant Acted with an Intent to Secure an Unlawful Benefit for Himself or Another 

Finally, Lawson argues that count five should be dismissed because the indictment fails to allege that he committed the obstructive acts with the intent to obstruct a specific IRS proceeding. (Doc. 208 at 1, 3). This claim is without merit. 

Prior to Marinello, the Ninth Circuit held that the elements of corruptly endeavoring to obstruct the due administration of the internal revenue code are: "(1) corruption ... and (2) an attempt to obstruct the administration of the IRS." The Ninth Circuit in turn defined "corruptly" under § 7212(a) as performed with the intention to secure an unlawful benefit for oneself or for another. Thus, it is clear that, at least prior to Marinello, that the mens rea of § 7212(a) only required proof that the defendant acted with an intent to secure an unlawful benefit, as opposed to an intent to obstruct an IRS investigation or proceeding. 

Nothing in Marinello suggests that the mens rea of § 7212(a) has changed. Summarizing its prior decision in Aguilar, the Marinello court stated: 

In interpreting that statute, we pointed to earlier cases in which courts had held that the Government must prove an intent to influence judicial or grand jury proceedings.  We noted that some courts had imposed a "'nexus' requirement": that the defendant's act must have a relationship in time, causation, or logic with the judicial proceedings. And we adopted the same requirement. 

Marinello v. United States, 138 S. Ct. 1101, 1106 (2018) (emphasis added). 

That is, the Aguilar court considered the possibility of requiring the government to prove that the defendant intended to obstruct a grand jury proceeding, but instead elected to join those courts holding that obstruction of justice requires proof of a "nexus" between the defendant's obstructive acts and a judicial proceeding. 

As the Supreme Court clearly stated in the conclusion of Marinello, 26 U.S.C. § 7212(a) requires the government to prove a nexus between the defendant's acts and an IRS proceeding that was either pending or reasonably foreseeable at the time of the obstructive acts. As construed in Marinello, § 7212(a) does not require explicit proof that the defendant intended to obstruct an IRS proceeding.

The Government's opposition, here, filed after the magistrate judge's decision (apparently for consideration by the district judge who, by the date of filing, had already adopted the magistrate judge decision.

NBP Neue Privat Bank (Category 1 Swiss Bank) Reported Ready to Settle with U.S. Prosecutors (7/14/18)

Finews reports that U.S. federal prosecutors have offered NBP Neue Privat Bank, Zurich, a nonprosecution agreement for payment of $5 million.  Peter Hody, Swiss Bank to Settle U.S. Tax Probe (Finews.com 7/13/18), here.

The paper reports that a "[a]  dozen Swiss banks are still waiting to settle a U.S. criminal probe into help tax dodgers and cheats."  These banks were in DOJ's category 1.  The paper reports that NBP was not originally in the first category, but moved into the category when U.S. prosecutors opened a criminal probe in 2013.

Also, the other category 1 banks settling -- Credit Suisse and Julius Baer -- have been required to enter deferred prosecution agreements, whereas NBP will get a nonprosecution agreement.

It has been a while since I focused on Category 1 banks.  My list of Category 1 banks (including now NBP) shows 17 in that category.  I include my list below.  My list includes UBS which was resolved before the categories were established, but still I suspect that there may be some error there.  I would appreciate hearing from anyone with the complete definitive list of Category 1 banks.

Financial Institution or Facilitator

Bank Frey & Co. AG

Bank Hapoalim (Switzerland)

Bank Julius Baer

Basler Kantonalbank

Clariden Leu

Credit Suisse AG

HSBC Private Bank (Suisse)

Liechtensteinische Landesbank (Switzerland) Ltd.

Mizrahi-Tefahot (Switzerland)

NBP Neue Privat Bank, Zurich

Neue Privat Bank

Neue Zürcher Bank

Pictet & Cie

Rahn & Bodmer

UBS AG

Wegelin & Co.

Zürcher Kantonalbank

Addendum 10/4/18:  This list includes non-Swiss Banks.  Technically, as I understand it, only Swiss banks are in formal category 1 because it was part of the DOJ Swiss Bank Program.  However, as I became aware of other foreign banks under criminal investigation I just arbitrarily put them in category 1 so that I would have a complete list of banks under criminal investigation.  (I infer that foreign banks under criminal investigation would not be permitted to voluntarily disclose and achieve some type of favorable settlement that the Swiss banks achieved under the other categories.)

Court Affirms Holding Dismissing Damages Claim for IRS Failure to Obtain Court Approval for JDS (7/7/18)

I have previously blogged on the trial proceedings in Hohman v. United States, 2017 U.S. Dist. LEXIS 106439 (ED MI 2017) where the taxpayer sought damages for the IRS's improper use of a John Doe Summons ("JDS") under § 7609(f) without the necessary court approval.  See Court Dismisses Claims Where IRS Issued JDS Without Required Court Approval for JDS (Federal Tax Crimes Blog 7/20/17), here.  The Sixth Circuit has affirmed in Hohman v. Eadie, ___ F.3d ___, 2018 U.S. App. LEXIS 18269 (6th Cir. 2018), here.  Taxpayers have no remedy.

The interesting issue on the appeal is whether the Financial Privacy Act gave a remedy under 12 USC § 3417.  Under 12 USC § 3413, there is an exception for disclosure of records "in accordance with procedures authorized by Title 26." So, if the JDS had been valid, there would be no question that the taxpayers would have no remedy.  Does the IRS's failure to meet the requirements for JDS change the result?  Here is the court's identification of the issue and its decision to duck the issue:

The parties dispute the meaning of the "in accordance with" language. When confronted with this question, the district court stated that from a plain reading, the exception only applies to IRS summonses issued "in accordance with" procedures under the Code. The court reasoned that because the IRS failed to follow the requisite Code procedures by issuing summonses without first obtaining approval in federal district court, it was subject to the provisions of the Act, including damages claims. 

On appeal, Plaintiffs contend that the district court correctly determined that the plain meaning of this language is that the IRS has to act "in accordance with" the Code, or it is subject to the Act. In support, Plaintiffs cite Neece v. IRS, 922 F.2d 573, 577 (10th Cir. 1990). In Neece, the IRS made a similar argument when it asserted that it was allowed to informally review bank records under I.R.C. § 7602. The IRS referenced the same provision of the Act authorizing "disclosure of financial records in accordance with procedures authorized by [the Internal Revenue Code]." 12 U.S.C. § 3413(c). The Tenth Circuit disagreed and determined that while I.R.C. § 7602 permitted the IRS to issue a third-party summons, I.R.C. § 7609 set forth the procedure the IRS was required to follow. Neece, 922 F.2d at 577-78. The IRS had not followed the proper procedure under its own Code, and so the IRS was bound by the Act. Id. at 577. 

In response, the government argues that the Act has no application to any activities carried out under the Code, including the issuance and enforcement of IRS summonses. In support, it cites the legislative history to argue that Congress indicated that this exception was intended to exempt IRS summonses generally because they are governed by their own privacy regime. It also contends that Neece is distinguishable because it involved an instance where the IRS obtained records informally, instead of through the issuance of a summons. 

There are two possible ways to read the phrase "in accordance with." Congress either intended for this language to mean: (1) that the Code and not the Act governs the IRS, or (2) that the IRS must follow the procedures under the Code, or it is subject to the Act. A review of the relevant provision and legislative history indicates that Congress did not give any thought to or explain what it intended to have happen in a case like this. The House Committee Report states that under the exception, because IRS administrative summonses are already subject to the privacy safeguards of I.R.C. § 7609, they are exempted from the procedures of the Act. H.R. Rep. 95-1383, at 226 (1978). 

Because we uphold the district court's ruling on sovereign immunity grounds, however, there is no need for us to resolve this issue.