Wednesday, March 27, 2019

9th Circuit Affirms Convictions for Tax Perjury, § 7206(1) (3/27/19)

In United States v. Hardy, 2019 U.S. App. LEXIS 8336 (9th Cir. 2019) (unpublished), here and here, the Court affirmed the Hardy's conviction for three counts of tax perjury, § 7206(1).  The opinion is short and to the point (just over 3 pages).  Students and new tax crimes enthusiasts likely would enjoy the read, because it is informative as to some basic points.

I just pick two to cut and paste:
1. "Good faith reliance on a qualified accountant has long been a defense to willfulness in cases of tax fraud and evasion." United States v. Bishop, 291 F.3d 1100, 1106 (9th Cir. 2002). We have made clear, however, that if "the trial court adequately instructs on specific intent, the failure to give an additional instruction on good faith reliance upon expert advice is not reversible error." United States v. Dorotich, 900 F.2d 192, 194 (9th Cir. 1990) (internal quotation marks and citation omitted). The district court adequately instructed the jury on specific intent, telling it that the government was required to prove both specific intent and that Hardy did not have a good faith belief that he was complying with the law. The district court therefore did not abuse its discretion by declining to give Hardy's requested instruction about reliance on the advice of an accountant. 
* * * * 
5. The district court did not abuse its discretion in denying a new trial after its post-verdict dismissal, at the government's request, of Hardy's conviction for one count of corruptly endeavoring to obstruct the due administration of the internal revenue laws, in violation of 26 U.S.C. § 7212(a). The court appropriately rejected Hardy's argument that "spillover" evidence from the dismissed count tainted the convictions on the false tax return counts. See United States v. Lazarenko, 564 F.3d 1026, 1043-44 (9th Cir. 2009) (listing relevant factors). The court's instructions—a "critical factor," id. at 1043—delineated the different elements of each charged offense. And, the jury, although returning guilty verdicts on four of the counts in the indictment, acquitted on the remaining count. "The fact that the jury rendered selective verdicts is highly indicative of its ability to compartmentalize the evidence." United States v. Cuozzo, 962 F.2d 945, 950 (9th Cir. 1992).
 I presume that the dismissal of the tax obstruction, § 7212(a), discussed in paragraph 5 was because of the lack of proof of nexus to an investigation.

11th Circuit Affirms Convictions of Promoters of Insurance Premium Scam Bullshit Tax Shelter (3/27/19)

In United States v. Donaldson, 2019 U.S. App. LEXIS 8684 (11th Cir. 2019) (unpublished), here and here, the Tenth Circuit affirmed the district court's convictions of Dionaldson and Crithfield for conspiring to defraud the United States, 18 U.S.C. § 371, and willfully aiding the submission of false and fraudulent income tax returns, 26 U.S.C § 7206(2).  Basically, they sold their clients bullshit tax shelters in the guise of a Business Protection Plan (BPP). Essentially, the customers would pay purported business insurance premiums, purportedly deductible for tax purposes, for a plan that was not insurance but returned most of the "premiums" to the clients, less the promoter's rake off.  I have previously written on the prosecutions and convictions.  Bench Trial Convictions on Offshore Business Insurance Scams (Federal Tax Crimes Blog 7/13/17), here.  That prior blog entry contains much of the detail for better understanding the scam.

The Court of Appeals held:

1. The evidence was sufficient to support the convictions, going through the facts and the elements of the crimes of conviction. The essential holding on appeal was that the BPP was a substantive sham and the defendants were willful in promoting the sham, thus supporting the conviction for the defraud conspiracy (18 USC § 371)  and aiding and assisting (§ 7206(2)).

2.  The District Court did not improperly deny the motion for acquittal or new trial.  The claim asserted on this basis related to Donaldson.  Donaldson claimed that the district court had improperly "persuaded" him not to call a witness, a lawyer who gave an opinion supporting the BPP, who might have supported his reliance on counsel defense.  The actual opinion was in evidence.  The judge simply stated, after admitting the opinion, what the lawyer's testimony would add.  Donaldson's lawyer then made a strategy decision not to call the lawyer as a witness.  No error there.  The Court of Appeals discussion includes this:
Moreover, the district court did not find, as Donaldson suggests, that the coverages offered within the BPP were superfluous for all purposes. Rather, the district court found that the coverages were superfluous for the specific customers who bought them, including one doctor's office that purchased wholly unnecessary insurance for protection against international kidnapping.
3.  The District Court properly rejected the appellants' motion to suppress evidence seized by search warrant.

JAT Comment: All in all, a fairly routine case which is why, I suppose, the opinion is nonprecedential.  However, for those wanting more about the case, please go to the prior blog linked above discussing the bench opinion convicting the defendants/appellants.

Thursday, March 21, 2019

TRAC Report on Sentencing Discretion and Disparity (3/21/19)

Transactional Records Access Clearinghouse ("TRAC"), a great resource for information about the federal government (see here), has this offering, here, from yesterday, titled Seeing Justice Done: The Impact of the Judge on Sentencing.  Key excerpt:
The recent sentencing of Paul Manafort by federal judges in two different district courts has renewed interest in the sentencing practices of individual judges. Countless studies over the years have documented a basic fact: while decisions should be determined by the law and the facts, in reality there is a third very important force at work. This ingredient is the identity of the judge assigned to a given case. Again and again, court records show that the particular predilections of individual judges influence the legal decisions that they reach, including those involving sentences.
The posting has further analysis for sentencing and some good lengths.

I do want to emphasize that "particular predilections of individual judges" do affect the range of legal decisions judges reach.  Judges do not simply call balls and strikes within a well-defined strike zone (as Justice Roberts famously claimed).  Judges often, with little review, define the strike zones in ways to permit them to call balls and strikes as they wish.

I do not mean this as an indictment of the judiciary.  I think it is inevitable that giving the judge the leeway to do justice rather than simply call balls and strikes within well previously defined strike zones will also give judges some ability to do great mischief.

As to sentencing in particular, the Sentencing Guidelines were intended to narrow the range of a judge's discretion and bring some nationwide uniformity in sentencing.  The TRAC posting says:
The existence of judge-to-judge differences in sentences of course is not synonymous with finding unwarranted disparity in sentencing practices. A key requirement for achieving justice is that the judges in a court system have sufficient discretion to consider the totality of circumstances in deciding that a sentence in a specific case is just. No set of rules, including the Federal Sentencing Guidelines, can substitute for this necessary flexibility. 
But a fair court system always seeks to provide equal justice under the law, working to ensure that  sentencing patterns of judges not be widely different when they are handling similar kinds of cases.
After Booker, though, we are essentially back in the pre-Guidelines world where a judge can do what he or she wants so long the Guidelines calculation is correct and the judge states rather minimal reasons for variance from the Guidelines sufficient to avoid abuse of discretion review on appeal (if appealed).  I think that there should be some strengthening of the role of the Guidelines because, simply, justice should not depend upon which judge imposes the sentence.

And, of course that does not address the predilections that affect the outcome of the other decisions a judge makes in a case.

Wednesday, March 20, 2019

Eighth Circuit Affirms Tax Obstruction Conviction without Proper Marinello Jury Instructions (3/20/19)

In United States v. Beckham, ___ F.3d ___, 2019 U.S. App. LEXIS 6964 (8th Cir. 2019), here, the Court affirmed Beckham's conviction for tax obstruction, § 7212(a).  Beckham had been charged also with three counts of aiding and assisting, § 7206(2), but was acquitted of those counts.  So the only count of conviction was tax obstruction.

The facts in chronological order are:
  • Beckham allegedly induced a taxpayer (Horseman) to participate in a tax loss scheme to offset the taxpayer's taxes.  Basically, the scheme was to generate false deductions by appearing to have a large investment in a business entity producing losses and to claim those losses as nonpassive losses despite not materially participating in the business.  The IRS began an audit.  Beckham filed power of attorney to represent the taxapyer, representing that he was a licensed  CPA but in fact he was not licensed because of a mail fraud conviction.
  • The agent asked Beckham for documents supporting the taxpayer's material participation in the business.  Beckham responded with the taxpayer's day planner showing hundred of hours work in the business. 
  • The agent then discovered that Beckham was not a licensed CPA as he had represented.  Beckham said that he was in the process of getting his license renewed.
  • The agent then discovered that the taxpayer had not made the claimed large investment in the business generating the losses that he claimed on the returns.
  • Suspecting fraud, the agent referred the taxpayer to IRS CI.  IRS CI then added Beckham as a target.  Beckham was then indicted for tax obstruction and aiding and assisting.
  • The Supreme Court granted certiorari in the Marinello case to resolve a circuit conflict as to whether tax obstruction required that, in committing alleged obstructive acts, the defendant know of nexus to a pending IRS investigation.
  • The case went to trial before the Supreme Court's decision in Marinello.  So, the jury instructions were framed without that decision.  But, at the Government's request, the trial court decided to use a special verdict form asking the jury whether the defendant had committed a corrupt act after becoming aware of the audit.  Here is the description of the instruction conference:
At the instruction conference, Beckham objected to Jury Instruction 9—the instruction on the § 7212(a) offense—because it did not require the jury to find that he knew about the IRS audit at the time that he committed a corrupt act. He also argued that the special verdict form—which directed the jurors, if they found Beckham guilty of that offense, to indicate whether Beckham committed "at least one corrupt act after becoming aware of the existence of an Internal Revenue Service audit or proceeding[,]" see Proposed Jury Instructions 25, Dist. Ct. Dkt. 96, and, if so, to identify which corrupt act they unanimously agreed Beckham committed after learning of the proceeding—did not cure the faulty instruction. Beckham did not, however, specifically object to the language of the special verdict form. The district court overruled his objection.
  • The instructions thus did not include the key element later required by Marinello.
  • The jury convicted of tax obstruction.  "On the special verdict form, the jury indicated that it found Beckham committed at least one corrupt act after learning of the audit and that it unanimously agreed Beckham committed the acts alleged in paragraph 10 of the Superseding Indictment—submitting Horseman's day planner to the IRS—after learning of the audit."
  • The Supreme Court then decided Marinello, holding, as described by the Court.  
Six months after Beckham's trial, the Supreme Court decided Marinello v. United States, 138 S. Ct. 1101, 200 L. Ed. 2d 356 (2018). The Court held that, for a § 7212(a) offense, "the Government must show . . . that there is a 'nexus' between the defendant's conduct and a particular administrative proceeding[.]" Marinello, 138 S. Ct. at 1109. Further, that proceeding must be "reasonably foreseeable by the defendant" at the time he acted. Id. at 1110. Because "[i]t is not enough for the Government to claim that the defendant knew the IRS may catch on to his unlawful scheme eventually[,]" if the proceeding is currently pending, the defendant must be aware of that proceeding. Id.
Based on Marinello, the Government conceded that the jury instruction omitting the element of nexus to a known audit was error, but "that the district court cured the instructional error through the use of a special verdict form and that, even if the special verdict form did not cure the error, the error was harmless."

Tuesday, March 19, 2019

Bank Hapaolim Increases Its Reserve for U.S. DOJ Tax Investigation (3/19/19)

Israel's Bank Hapoalim Q4 net profit sinks on U.S. tax probe provision (Reuters 3/18/19), here.  Excerpt:
The bank said earlier this month it would set aside an additional $246 million in the quarter to cover a possible future settlement regarding an investigation of the bank’s business with U.S. clients. This provision will bring its total provisions to $611 million.
The excerpt does not state specifically that the $611 million relates to the  investigation, but that is the inference.  (See also the relative numbers reported Bank Hapoalim 2018 results: profits dip on US probe provision (Retail Banker International 3/18/19), here.)

Thursday, March 14, 2019

DOJ Tax and Mizrahi-Tefahot Bank Ltd. (Israel) Reach DPA (3/13/19)

DOJ Tax announced here the DPA with Mizrahi-Tefahot Bank Ltd., (Mizrahi-Tefahot) and its subsidiaries.  I have not been able to find the underlying documents, but from the Press Release, I think the following are the key items:
  • "In the DPA and related court documents, Mizrahi-Tefahot admitted that from 2002 until 2012 the actions of its bankers, relationship managers, and other employees defrauded the United States and specifically the Internal Revenue Service (IRS) with respect to taxes by conspiring with U.S. taxpayer-customers and others. Mizrahi-Tefahot employees’ acts of opening and maintaining bank accounts in Israel and elsewhere around the world and violating Mizrahi-Tefahot’s Qualified Intermediary Agreement (QI Agreement) with the IRS enabled U.S. taxpayers to hide income and assets from the IRS."  [This apparently is the defraud / Klein conspiracy.]
  • Mizrahi admits the standard range of conduct by foreign banks playing in this field.
  • "The DPA also requires Mizrahi-Tefahot and its subsidiaries affirmatively to disclose certain material information it may later uncover regarding U.S.-related accounts, as well as to disclose certain information consistent with the Department’s Swiss Bank Program with respect to accounts closed between Jan. 1, 2009, and October 2017."  [For that reason, I have included Mizrahi in the Category 1 for the DOJ Swiss Bank Program; Mizrahi is not technically within the program but did have a Swiss subsidiary.]
  • Mizrahi will pay $195 million total, consisting of "1) restitution in the amount of $53 million, representing the approximate unpaid pecuniary loss to the United States as a result of the criminal conduct; 2) disgorgement in the amount of $24 million, representing the approximate gross fees paid to the bank by U.S. taxpayers with undeclared accounts at the bank from 2002 through 2012; and 3) a fine of $118 million."
DOJ Tax had previously offered $342 Million to settle:  Mizrahi-Tefahot Bank Rejects DOJ $342 Million Settlement Offer for NPA (Federal Tax Crimes Blog 8/10/18), here.

US DOJ Swiss Bank Program
Total Costs
   U.S. / Swiss Bank Initiative Category 1 (Criminal Inv.) *
   U.S. / Swiss Bank Initiative Category 2
   U.S. / Swiss Bank Initiative Category 3
   U.S. / Swiss Bank Initiative Category 4
Swiss Bank Program Results
* Number and Number Resolved may not be same as DOJ and IRS numbers because of how related entities were counted; the Total Costs Column should be consistent.
Recoveries from Swiss Financial and Related Institutions (per above)
Recoveries from NonSwiss Offshore Financial and Related Institutions
Recoveries from All Offshore Financial and Related Institutions

Wednesday, March 13, 2019

On the Manafort Sentences and Tax Crimes Sentencing (3/13/19)

I have hesitated to write on the Manafort sentencing principally because, although Manafort was convicted of tax crimes and FBAR crime that may related somewhat to tax crimes, the gravamen of the cases against him involved nontax offenses that most would consider more serious than the tax offenses.  His sentences in both cases reflected the more serious offenses.  So, I am not sure what I could  offer readers interested in criminal tax sentencing. 

I think both judges likely acted within the scope of their considerable discretion to sentence outside the advisory Sentencing Guidelines range. 

I post below some of the better discussions of which I am  aware:

  • Douglas A. Berman, Rounding up some of many thoughts about Paul Manafort's (first) federal sentence (Sentencing Law and Policy Blog 3/10/19), here.  (This posting has further links.)
  • Douglas A. Berman, Paul Manafort given (only?) 47 months in prison at first federal sentencing ((Sentencing Law and Policy Blog 3/7/19), here.

Now, on Tax Crimes sentencing specifically, I recommend Robert Horwitz's blog entry analyzing tax sentencing statistics:

  • Robert S. Horwitz, Sentencing in Criminal Tax Cases: It’s Not What You Think ( Blog 2/26/19), here.

Thursday, March 7, 2019

Court Affirms Defraud Conspiracy Conviction; Rejects Lesser Included Offense Argument (3/7/19)

In United States v. Bradley, 917 F. 3d 493 (6th Cir. 2019), CA6 here and GS here, the court affirmed Bradley's defraud conspiracy conviction.  Bradley made three arguments on appeal: (i) constructive amendment or variance to the indictment; (ii) improper argument by the prosecutor that misstated the Government's burden to prove guilt beyond a reasonable doubt; and (iii) failure to give a lesser included offense instruction.

I will not discuss the first two issues, but those with the time might want to look particularly at the improper argument issue where the Court found the arguments improper but not prejudicial.  The Court's discussion (including quotes from the argument) is on Slip Op. 12-16.

Now, looking at the lesser included offense issue, Bradley was convicted of the defraud conspiracy which, under the conspiracy statute (18 USC 371) is a felony.  Remember that the conspiracy statute has two types of conspiracy -- the offense conspiracy to commit a specific offense otherwise criminalize and the defraud conspiracy (also called Klein conspiracy) to impair or impede the functions of the IRS through fraud or deceit.  Bradley was charged with the felony defraud conspiracy.  He wanted an instruction on the offense conspiracy to commit a misdemeanor offense (§§ 7203 and 7204).  The felony statute says that a conspiracy to commit a misdemeanor is a misdemeanor rather than a felony.

The Sixth Circuit stated its lesser included offense requirements as requiring (p. 508):
(1) a proper request is made; (2) the elements of the lesser offense are identical to part of the elements of the greater offense; (3) the evidence would support a conviction on the lesser offense; and (4) the proof on the element or elements differentiating the two crimes is sufficiently disputed so that a jury could consistently acquit on the greater offense and convict on the lesser.
The Court analyzed the 2d requirement (Slip. Op. 17, cleaned up; 917 F3d at 508-509):
The second criterion of the lesser-included offense analysis requires us to determine whether the elements of the lesser offense are identical to part of the elements of the greater offense. Bradley was charged and convicted for conspiring to defraud the United States—the proposed greater offense. The elements of conspiracy to defraud the United States that the district court charged to the jury are: (1) that two or more persons conspired, or agreed, to defraud the United States, or one of its agencies or departments, by dishonest means, (2) that the defendant knowingly and voluntarily joined the conspiracy, and (3) that a member of the conspiracy did one of the overt acts described in the indictment for the purpose of advancing or helping the conspiracy. The elements of the proposed lesser offense of conspiracy to fail to file W-2s would presumably be: (1) an agreement to fail to file W-2s; (2) one or more overt acts in furtherance of that illegal purpose; and (3) the intent to fail to file W-2s. Similarly, the elements of the lesser offense of conspiracy to fail to issue Form 1099s would be (1) an agreement to fail to issue Form 1099s; (2) one or more overt acts in furtherance of that illegal purpose; and (3) the intent to fail to issue Form 1099s.
Ultimately, though, the Court did not resolve the issue on the merits because Bradley had forfeited the argument because he had not properly presented or preserved the issue.

I think that this is a good reminder that when the Government charges a felony conspiracy (I don't recall it charging a misdemeanor conspiracy), counsel should think creatively about a lesser included offense charge that will permit a jury a way to compromise if the binary choice of guilty or not guilty is not palatable to the jury.  Of course, if the jury with only a binary choice would tilt toward not guilty, a defendant would not want the lesser included offense charge.  But, if the jury would tilt toward guilt, the defendant would want the charge to mitigate the damage.  And, reading the jury's mind on that can be vexing.

District Court Rejects Argument that Marinello Applies to Defraud / Klein Conspiracy (3/7/19)

In United States v. Parlato, 2019 U.S. Dist. LEXIS 33035 (W.D. NY 2019), here, the Court rejected Parato's argument that the Supreme Court's decision in Marinello v. United States, ___ U.S. ___, 138 S. Ct. 1101 (2018), limiting tax obstruction (§ 7212(a)) could similarly limit the defraud / Klein conspiracy.  The opinion is short so I do not further attempt to summarize it.  The underlying Magistrate report and recommendation is here.

Prior blog entries on this issue include the following (reverse chronological order):

  • Two Cases Involving Marinello (Federal Tax Crimes Blog 1/15/19), here.
  • What Are the Implications for Marinello on the Defraud / Klein Conspiracy? (Federal Tax Crimes Blog 3/24/18), here.
  • More on the Marinello Transcript of Oral Argument (Federal Tax Crimes Blog 12/9/17), here.
  • First Comments on the Marinello Oral Argument Transcript (Federal Tax Crimes Blog 12/6/17), here.

District Court Approves FBAR Willful Penalties Under Post 2004 Law; Rejects Colliot and Wadhan (3/7/19)

In United States v. Garrity, 2019 U.S. Dist. LEXIS 32404 (D. Conn. 2019), here, the Court rejected the argument that the FBAR willful penalty was subject to the pre-2004 statutory amendment maximum amount of $100,000 because the IRS had not changed the regulations.  In effect, the Court rejected the district court holdings in Colliot and Wadhan as have courts since those cases.  The Garrity opinion cites the decided cases in footnote 2 on page 2.

Other Comments:

1.  Judge Shea rejects the argument that the FBAR willful penalty was an excessive fine violating the Eighth Amendment (Slip Op. 11-20).  Judge Shea offers a very thoughtful and persuasive analysis, one of the better that I have seen.

2.  The only other parts of the opinion that particularly attracted my attention were the following:
Slip Op. p. 7 n. 4 
   n4 Thus, one of the premises of the decision in Colliot, on which the Defendants rely, is incorrect.  There, the court emphasized that Treasury was bound by the 1987 regulation because it had been promulgated through notice and comment and could only be repealed through notice and comment. Colliot, 2018 WL 2271381, at *2–3 (W.D. Tex. May 16, 2018). As noted above, the August 1986 notice of proposed rulemaking in the Federal Register makes no reference to  the civil penalty provision for account holders, which was not authorized by Congress until two months later. The penalty provision was added to the final rule without notice and comment procedures. The civil penalty provision in the 1987 regulation was at most an interpretive rule based on a now-obsolete version of the statute. 
Slip Op. 10-11: 
Ultimately, the Defendants' reliance on these regulatory actions (or inactions) is misplaced. As noted above, the civil FBAR penalty provision in the 1987 regulation was an interpretive rule that lacked the "force and effect of law." See Perez, 135 S. Ct. at 1203-04. It did not create or expand account holders' rights, and it merely parroted a statute that has now been amended. No amount of "reaffirming" references of the sort Defendants point to can make it an operative limit on the Secretary's current authority. If the Secretary wanted to categorically limit his discretion to impose FBAR penalties above $100,000 after Congress conferred such authority on him by statute, he could do so, if at all, only through notice and comment rulemaking under the Administrative Procedure Act, clearly indicating his intent to surrender by regulation some of the authority Congress has bestowed on him. See id. ("Rules issued through the notice-and-comment process are often referred to as legislative rules because they have the force and effect of law."); 5 U.S.C. § 553(b) (requiring notice of proposed rulemaking to include "either the terms or substance of the proposed rule or a description of the subjects and issues involved."). It is undisputed that he has not taken such a step.

Tenth Circuit Affirms Summons Enforcement Against Medical Marijuana Business Regarding Section 280E (3/7/19)

Section 280E, here, denies a deduction for expenses of a trade or business which "consists of trafficking in controlled substances (within the meaning of schedule I and II of the Controlled Substances Act) which is prohibited by Federal law or the law of any State in which such trade or business is conducted."  I wrote recently about the denial of such expenses in Feinberg v. Commissioner, 2019 U.S. App. LEXIS 5618 (10th Cir. 2019), here.  See Taxpayers Fail to Prove Expenses of Medical Marijuana Business Deductible; Burden of Proof Does Not Violate Fifth Amendment Privilege (Federal Tax Crimes Blog 3/2/19), here.

The Tenth Circuit has another significant opinion related to Section 280E.  In High Desert Relief v. United States, 2019 U.S. App. LEXIS 6609 (10th Cir. 2019), here, the Court addressed the issue in a contentious summons enforcement proceeding where HDR tried to thread the needle to duck the consequences of Section 280E.  The Court provides a good summary in the opening paragraphs:
This case arises out of the efforts of the Internal Revenue Service (“IRS”) to investigate the tax liability of High Desert Relief, Inc. (“HDR”), a medical marijuana dispensary in New Mexico. The IRS began an investigation into whether HDR had improperly paid its taxes, and specifically whether it had improperly taken deductions for business expenses that arose from a “trade or business” that “consists of trafficking in controlled substances.” 26 U.S.C. § 280E. Because HDR refused to furnish the IRS with requested audit information, the IRS issued four summonses to third parties in an attempt to obtain the relevant materials by other means. 
HDR filed separate petitions to quash these third-party summonses in federal district court in the District of New Mexico, and the government filed corresponding counterclaims seeking enforcement of the summonses. HDR argued that the summonses were issued for an improper purpose—specifically, that the IRS, in seeking to determine the applicability of 26 U.S.C. § 280E, was mounting a de facto criminal investigation pursuant to the Controlled Substances Act (“CSA”), 21 U.S.C. § 801, et seq.  
HDR also asserted that enforcement of § 280E was improper because an “official [federal] policy of non-enforcement” of the CSA against medical marijuana dispensaries had rendered that statute’s proscription on marijuana trafficking a “dead letter” incapable of engendering adverse tax consequences for HDR. Aplt.’s Opening Br. at 30. The petitions were resolved in proceedings before two different district court judges. Both judges ruled in favor of the United States on the petitions to quash, and separately granted the United States’ motions to enforce the summonses. HDR challenges these rulings on appeal. 
Exercising jurisdiction under 28 U.S.C. § 1291, we affirm.
As readers know, the IRS's summons power to investigate tax matters is very broad.  United States v. Powell, 379 U.S. 48 (1964).  So, most contests in summons cases are resolved in favor of the IRS.  (One recent victory for the taxpayers was in J.B. v. United States, --- F.3d ----, 2019 WL 923717 at *1 (9th Cir. 2019), here, dealing with the IRS's failure to satisfy the notice requirement for third party contacts.  See Leslie Book, Ninth Circuit Rejects IRS’s Approach to Notifying Taxpayers of Third Party Contacts (Procedurally Taxing Blog 3/4/19), here; in HDR, the Tenth Circuit rejects (Slip Op. pp. 46-47) HDR's similar argument that the IRS did not give the required notice.)

Key points in getting to the bottom line:

Saturday, March 2, 2019

Taxpayers Fail to Prove Expenses of Medical Marijuana Business Deductible; Burden of Proof Does Not Violate Fifth Amendment Privilege (3/2/19)

In Feinberg v. Commissioner, 2019 U.S. App. LEXIS 5618 (10th Cir. 2019), here, the taxpayers were shareholders in an LLC selling medical marijuana.  Their sales were legal under state law, but illegal under federal law.  The issue was whether they bore the burden of proving that they were entitled to deductions related to the business.  Section 280E provides:
No deduction or credit shall be allowed for any amount paid or incurred during the taxable year in carrying on any trade or business if such trade or business (or the activities which comprise such trade or business) consists of trafficking in controlled substances (within the meaning of schedule I and II of the Controlled Substances Act) which is prohibited by Federal law or the law of any State in which such trade or business is conducted.
The Court held that the taxpayers bore the burden of establish their entitlement to the deductions over the taxpayers objection that the assignment of the burden violated their Fifth Amendment privilege.  (There were some other procedures discussed such as substantiation burden shifted to the IRS because new matter, but this is the point I want to address.)

Here is the key part of the opinion (cleaned up and footnotes omitted)
The Taxpayers fail to explain how requiring them to bear the burden of proving the IRS erred in applying § 280E to calculate their civil tax liability is a form of compulsion equivalent to a statute that imposes criminal liability for failing to provide information subjecting the party to liability under another criminal statute. Here, the Taxpayers must choose between providing evidence that they are not engaged in the trafficking of a controlled substance or forgoing the tax deductions available by the grace of Congress. In the cases cited by the Taxpayers, the petitioners were faced with a choice of whether to be prosecuted criminally because they did not provide the information, or to be prosecuted criminally because they did. The circumstances are easily distinguishable. 
Nor can we adopt the Taxpayers' position without running afoul of Supreme Court precedent squarely rejecting the notion that a possible failure of proof on an issue where the defendant had the burden of proof is a form of compulsion which requires that the burden be shifted from the defendant's shoulders to that of the government. Such a concept would convert the Fifth Amendment privilege from the shield against compulsory self-incrimination which it was intended to be into a sword whereby a claimant asserting the privilege would be freed from adducing proof in support of a burden which would otherwise have been his. The Fifth Amendment privilege has never been thought to be in itself a substitute for evidence that would assist in meeting a burden of production.
To be sure, "by invoking the privilege and refusing to produce the materials that might support their deductions the Taxpayers no doubt made their task of proving the IRS erred in denying their deductions that much harder. But "a party who asserts the privilege against self-incrimination must bear the consequences of the lack of evidence. Rylander [United States v. Rylander, 460 U.S. 752 (1983)] teaches that the Taxpayers' possible failure of proof on an issue on which they bear the burden is not compulsion for purposes of the Fifth Amendment. Therefore, we reject the Taxpayers' contention that bearing the burden of proving the IRS erred in rejecting THC's business deduction under § 280E violated the Taxpayers' Fifth Amendment privilege.
The Court held that, since the taxpayers bore the burden of proof without the cover of the Fifth Amendment, the failure of proof required that they lose.

Tenth Circuit Affirms Tax Crimes Convictions and Sentencing (3/2/19)

In United States v. Stubbs (10th Cir. 2019), here, a nonprecedential decision, the Court affirmed Stubbs' convictions and sentencing for two counts of tax evasion and six counts of failure to file.

The activity giving rise to the tax obligations involved was a rebate program, run by his company National Energy Rebate Fund, Inc.  Basically, the scheme was to sell home-improvement companies the opportunity to market a potential 50% rebate to their customers, but the rebate was well into the future and very difficult to qualify for.  Here is the description:
NRF's profit allegedly came from the "slippage" between the total number of customers eligible for rebates and the much smaller number who successfully completed the requirements. The rebate opportunity carried extremely stringent rules: customers had to register the rebate within 17 days of receiving the form; they had to send forms by registered mail only; they had to claim the rebate within the 30 days after the 47th month from the purchase; and the rebate offer would be invalid if anyone other than NRF, such as the company from which they got the rebate forms, reminded them about the deadlines. NRF set aside only a small portion of the revenues it received to pay rebates. And although the rebate program ostensibly was administered by an independent third party, that administration company actually was connected to Stubbs. Apparently, some customers received rebates, but numerous customers who failed to strictly satisfy each and every condition were denied rebates. NRF and its activities were the subject of civil lawsuits brought by Wisconsin and Colorado on behalf of their citizens, which resulted in multi-million-dollar default judgments against Stubbs.
Stubbs failed to file returns at the S-corporation level and at the individual level.  He also failed to pay the tax that would have been due.

Indictments were obtained for tax evasion and failure to file.  Convictions were obtained.  Stubbs fled to Costa Rica, was arrested and returned to U.S.  He was sentenced to 88 months.  He appealed.  He lost..

The issues resolved against Stubbs on appeal were:

1.  The evidence was sufficient to convict for tax evasion.

2.  The district court did not plainly err in admitting evidence of prior acts.

3.  In its sentencing calculation, the district court did not err in applying the criminal activity and sophisticated means enhancements.

This is a nonprecedential case so there is nothing of major significance in the opinion.  The following, however, did catch my eye.