Saturday, September 19, 2020

District Court Grants Government Summary Judgment on FBAR Civil Willful Penalty (9/19/20)

In United States v. Toth, 2020 U.S. Dist. LEXIS 169173 (D. Mass. 2020), CL here, the Court granted the Government’s motion for summary judgment that Toth was liable for the FBAR civil willful penalty.  The holdings break no new ground, so I just list the holdings:

1. The maximum penalty is the greater 50% of the account(s) that should have been reported or  $100,000, rather than being capped at $100,000.  This is the mainstream holding (after a couple of early aberrations).  (Slip Op. 7-10.)

2. The submissions on the motion satisfied the Government’s burden to prove Toth’s failure to file FBAR for 2007 was willful.  (Slip Op. 10-12.)

3. Lenity does not apply to reduce the amount of the willful penalty.  (Slip Op. 12-13.)

4. The Eighth Amendment’s excessive fines prohibition does not apply. (Slip Op. 13-18.)

5. The penalty does not violate Due Process. (Slip Op. 18-19.)

The CL docket entries are here.

Prior blog entries on the Toth case (in reverse chronological order) are:

  • In Willful FBAR Collection Suit, District Court Rejects Reconsideration of Finding of FBAR Willfulness As Discovery Sanction (Federal Tax Crimes Blog 12/28/19), here.
  • Government FBAR Willful Penalty Suit Survives Motion to Dismiss (Federal Tax Crimes Blog 5/9/17), here.




Friday, September 18, 2020

District Court Holds Failure to Properly Report Foreign Accounts on a Fifth Amendment FBAR Is Subject to FBAR Willful Penalty (9/18/20)

In United States v. Bernstein, 2020 U.S. Dist. LEXIS 167278 (E.D. N.Y. 2020), CL here, the Court granted the Government’s motion for summary judgment determining that the defendants, husband and wife (“Bernsteins”), were each subject to the willful FBAR penalty.  Those interested in the motions (and commotions) can find it in the Court Listener docket entries, here, where the motions are available free.

The key facts are;  For many years prior to 2010, the year for which the willful FBAR penalties were assessed, the Bernsteins had foreign accounts.  For the per-2010 years, they did not file FBARs, answered “no” to the Form 1040 Schedule B question about the foreign accounts, and did not report the income from the foreign accounts.  Over the years, they did not tell their accountant about the foreign accounts because they wanted to keep the accounts secret. That conduct, the Court found on summary judgment, was to cheat on their U.S. taxes.

They had the misfortune of having selected UBS as their foreign bank (although they moved the accounts into a single account at Bank Sal Oppenheim after they realized that UBS was caving to Government pressure as readers of this blog already know).  The following series of events then occurred:

Daniel Bernstein later consulted with a U.S. tax attorney, who told him that it was "nothing serious" because the account held "only a million dollars" and therefore the Government would not likely pursue it. Furthermore, Nemirovski, who consulted with a Swiss attorney, conveyed to Mr. Bernstein that the attorney had assured him that their account information had not been turned over to the IRS. Thus, the Bernsteins decided not to take any action in response to the letter and, specifically, not to participate in the Government's voluntary disclosure program.

In April 2011, the Government advised the Bernsteins that it was auditing their 2007 tax return. By that time, the Bernsteins were aware of publicity about the Government's prosecution of UBS account holders. They returned to the U.S. tax attorney who had told them not to worry two years earlier, but this time he told them, "I can't help you; you need a white-collar criminal attorney." He referred them to Lawrence S. Feld, Esq., who is known for his white-collar practice with a specialty in tax prosecutions, and the Bernsteins retained him.

Attorney Feld effectively disagreed with the prior decision not to participate in the voluntary disclosure program. He found the facts as presented to him "deeply disturbing" and believed that there was a "substantial risk" of criminal prosecution. He advised the Bernsteins to file an FBAR for the 2010 tax year in which they would invoke their privilege against self-incrimination under the Fifth Amendment of the U.S. Constitution. He prepared an addendum to the FBAR describing the basis for the privilege in which the Bernsteins offered to make more detailed disclosures if they received use immunity from criminal prosecution. In addition, the Bernstein's 2010 tax return and Schedule B invoked the Fifth Amendment with regard to any questions about foreign accounts.

Attorney Feld believed that this would protect the Bernsteins from criminal prosecution, although they still might be required "to pay [a] fine." The Bernsteins followed his advice and filed an FBAR for the year 2010 in which they did not provide information about the accounts, instead, in the spaces calling for account information, inserting "Fifth Amendment" in answer to each question. At their depositions, the Bernsteins testified as to their belief, based on the advice from Attorney Feld, that by submitting the FBAR in this manner, they had complied with the disclosure requirements for 2010.

The advice given by Attorney Feld appears to have been sound as there is no suggestion in the record that the Bernsteins are subjects or targets of a criminal investigation. However, in May 2017, the IRS assessed a penalty in the amount of $262,288.50 each for the 2010 tax year. 

The Government brought this collection suit  for the FBAR willful penalties.

Mr. Feld, the attorney advising the Bernsteins to file Fifth Amendment FBARs, is a prominent tax lawyer practicing in the criminal tax arena and is  a co-author of Ian Comisky,  Lawrence Feld,  Steven Harris, Tax Fraud and Evasion (Thomson Reuters), here.

Thursday, September 17, 2020

Updated CTM Chapter on Tax Related Conspiracies (9/17/20)

DOJ Tax has updated its Criminal Tax Manual (“CTM”) chapter 23.00 titled Conspiracy to Commit Offense or to Defraud the United States (Revised September 2020), here.  I have reviewed the chapter very cursorily.  Although I did not compare the old and new versions, except in two instances noted below, I don’t think much has changed except to add some recent cases in chain citations or in examples.  In identifying items of interest, I leaved through the whole chapter (60 pages) and did searched for year from 2012 through 2010.  Here are my quick comments.:

1. 23.04[2][a] Limitation on Naming Unindicted Co-conspirators, p. 5.  Prosecutors should not name in the indictment unindicted co-conspirators, citing Justice Manual 9-11.30 (April 2018). “The recommended practice in such cases is to merely allege that the defendant ‘conspired with another  person or persons known’ and supply the identity, if requested, in a bill of particulars.”

2. 23.07[2][c] Overbreadth Concerns, pp. 42-43. Not sure if this is new but it is a subject I have been interested in).  Discusses the interpretation of the defraud clause which, in United States v. Coplan, 703 F.3d 46, (2d Cir. 2012), cert. denied 571 U.S. 819 (2013), the Second Circuit expressed “skepticism” about the correctness as an original matter of the Supreme Court’s statutory interpretation of the defraud clause in Haas v. Henkel, 216 U.S. 462 (1910), and Hammerschmidt v. United States, 265 U.S. 182, 188 (1924).  I discussed that aspect of Coplan in Coplan #1 - Panel Questions Validity of Klein Conspiracy (Federal Tax Crimes Blog12/1/12), here.

3. 23.07[2][d] Precedent Governing Different Statutes, pp. 43-44.  This is new, generated by the holding in Marinello v. United States, 138 S. Ct. 1101 (2018)  that tax obstruction, § 7212(a), requires knowledge of a pending proceeding.  Some defendants argued that, because of potential overlapping and overbreadth concerns, Marinello’s pending proceeding required should apply to the defraud / Klein conspiracy.  The position of the Government is that that element of § 7212(a) does not apply to defraud / Klein conspiracies.  The Government’s position has been sustained in the cases.  The section discusses two 2020 cases:  United States v. Atilla, 966 F. 3d 118 (2d Cir. 2020); and Marinello v. United States, 138 S. Ct. 1101 (2018).  I discussed the Flynn case Eighth Circuit Holds that Marinello Pending Proceeding Nexus in § 7212(a) Does Not Apply to Defraud / Klein Conspiracy (Federal Tax Crimes Blog 8/17/20), here


Tuesday, September 15, 2020

Second Circuit Applies the Foregone Conclusion Doctrine to Overcome the Fifth Amendment's Act of Production Doctrine (9/15/20)

In United States v. Fridman, ___ F.3d ___ 2020 U.S. App. LEXIS 28449 (2d Cir. 2020), CA2 here and GS here, the Court held that the Government had overcome Fridman’s claim of Fifth Amendment privilege (via Act of Production doctrine) under the foregone conclusion doctrine which requires “the Government must establish with reasonable particularity its knowledge as to (1) existence of the documents, (2) the taxpayer's possession or control of the documents and (3) the authenticity of the documents.” Fridman, Slip Op. 13.  The Court also held that a “traditional trust” is a collective entity that could not assert a Fifth Amendment privilege.

I focus here on the Act of Production Doctrine under which production can be testimonial and the exception known as the foregone conclusion doctrine.  The Court discusses and applies these concepts at Slip Op. 13-29.  Readers can study the opinion for the particular application of the law to the facts.  I thought that it would be most helpful to most readers to excerpt the general discussion of the applicable law.  I do caution that the Court calls it the Act of Production Privilege; the privilege involved is the Fifth Amendment privilege; Act of Production is is not a separate privilege but a doctrine as to a particular application of the Fifth Amendment privilege.   In this excerpt, I have substantially cleaned up for easier readability (footnotes omitted):

The Fifth Amendment provides that no person shall be compelled in a criminal case to be a witness against himself. U.S. Const. amend. V. In Fisher v. United States, 425 U.S. 391, 409-11 (1976), the Supreme Court defined the contours of the Fifth Amendment as it applies to document requests. The Court held that documents voluntarily prepared prior to the issuance of a summons were not compelled testimony, so there was no Fifth Amendment protection for the contents of these records. At the same time, however, the Court recognized a narrow privilege against the act of production. Because producing documents tacitly concedes the existence of the papers demanded and their possession or control by the taxpayer as well as the taxpayer's belief that the papers are those described in the subpoena, the Court concluded that the act of production could, in some cases, communicate incriminatory statements and thus may fall under the Fifth Amendment's protection against self-incrimination; but the Court hinted that such a determination would be conditioned on the facts and circumstances of particular cases. Similarly, when a defendant must make extensive use of the contents of his own mind in identifying the hundreds of documents responsive to the requests in the subpoena, he or she contributes to a "link in the chain" of their prosecution in violation of the Fifth Amendment privilege. United States v. Hubbell, 530 U.S. 27, 42-43 (2000).

The act-of-production privilege is not an absolute one. Fridman challenges the district court's ruling that two exceptions to the act-of-production privilege permitted enforcement of the requests at issue in this case.

I. The Foregone Conclusion Doctrine

IRS Continues Efforts to Crack Cryptocurrency (9/15/20)

The IRS is offering to pay private contractors who can ““reliably produce useful results on a variety of real-world CI cryptocurrency investigations involving Monero and/or Lightning.”  Kelly Phillips Erb, IRS Will Pay Up To $625,000 If You Can Crack Monero, Other Privacy Coins (Forbes 9/14/20), here.  I don’t expect readers of this blog to jump at the opportunity, but readers of this blog should be aware of this and related developments that constrict taxpayers’ ability to hide untaxed income in cryptocurrency.  

Key excerpts:

The IRS has made no secret that it believes that taxpayers are not correctly reporting cryptocurrency transactions. An IRS dive into the data showed that for the 2013 through 2015 tax years, when IRS matched data collected from forms 8949, Sales and Other Dispositions of Capital Assets, which were filed electronically, they found that just 807 individuals reported a transaction using a property description likely related to bitcoin in 2013; in 2014, that number was only 893; and in 2015, the number fell to 802.

Cryptocurrency Compliance Efforts

A new cryptocurrency compliance measure for taxpayers was introduced in 2019 in the form of a checkbox on the top of Schedule 1, Additional Income and Adjustments to Income (Schedule 1 is used to report income or adjustments to income that can't be entered directly on the front page of form 1040). And in 2020, the IRS noted that it will post a cryptocurrency question right on the front page of your Form 1040.

In 2019, the IRS also announced that it was sending letters to taxpayers who might have failed to report income and pay the resulting tax from virtual currency transactions or did not report their transactions properly. The names of these taxpayers were obtained through various ongoing IRS compliance efforts.

* * * *

About Privacy Coins

Tuesday, September 8, 2020

Tax Travails of the Rich (Perhaps Famous) Enablers of the Rich (Perhaps Famous) (9/8/20)

USAO D NJ issues a press release, Former Luxury Car CEO and Luxury Watch Dealer Admit Tax Charges in Connection with Scheme to Misallocate Limited Edition Sports Cars, here.

Excerpts:

The former chief executive officer [Maurizio Parlato, 58] of a New Jersey-based importer of Italian luxury cars admitted today that he failed to report to the IRS as income kickback payments he received for misallocating limited edition sports cars, Attorney for the United States Rachael Honig announced.

A luxury watch dealer [Gigi Knowle, 69] also admitted failing to report to the IRS commission he received for helping facilitate the unauthorized sale of one of those limited edition sports cars.    

* * * *

Parlato was a resident of Florida and served as the CEO of a company (Company B) based in Englewood Cliffs, New Jersey, from 2002 to 2009. Company B was responsible for distributing automobiles that were produced by a luxury automobile manufacturer (Company A) based in Maranello, Italy. Company B distributed Company A’s luxury automobiles in the Western Hemisphere through dealers based in the Americas.

Company A produced several highly desired automobile models in small quantities. Parlato had some measure of authority over the allocations of those limited edition automobiles.  In 2013, Company A announced it was creating its most exclusive model to date: a “supercar,” limited to only 500 units and carrying a manufacturer’s suggested retail price (MSRP) of approximately $1.4 million. Company A and Company B established a formula to determine which customers would be placed on the approved list to buy a supercar. 

After resigning as CEO of Company B, Parlato assisted Company B dealers and supercar purchasers in misallocating supercars in exchange for kickback payments. Between 2015 and 2017, Parlato received approximately $2.8 million from Company B dealers and supercar purchasers in exchange for, among other things, assisting them in misallocating supercars to customers who were not on the list of approved purchasers. Parlato admitted that he failed to report the $2.8 million in kickback payments he received as income on his federal individual income tax returns. Parlato also admitted that he attempted to hide some of these funds from the IRS by depositing them in a bank account in Spain and failing to disclose the existence of that bank account.  Parlato admitted that he avoided paying more than $1.1 million in taxes.

Knowle also received payments in connection with his role in misallocating a supercar.  In 2015, Knowle lived in Florida and worked as a luxury watch dealer. That year, Knowle assisted Parlato in facilitating the sale of a supercar to another individual who was not on the approved list. Knowle received approximately $560,000 as commission for his role in the sale, some of which Knowle distributed to Parlato and others who were also involved in misallocating the supercar to the unapproved purchaser. Knowle failed to disclose the commission on his personal income tax returns. Knowle admitted that he avoided paying approximately $175,000 in taxes. 

Tuesday, September 1, 2020

District Court Sustains FBAR Willful Penalty But Rejects Fraudulent Failure to File Penalty for Income Tax (9/1/20)

In United States v. DeMauro (D. N.H. Dkt. 17-cv-640-JL Order and Verdict After Bench Trial dtd. 8/28/20), CL here, the Court sustained the FBAR willful penalty but rejected the fraudulent failure to file penalty.  In both cases, in broad strokes the conduct penalized is the same.  If that statement is correct, the difference in outcome is based on the differing burdens of persuasion.  The Government must prove application of the FBAR willful penalty by a preponderance of the evidence; the Government must application of the fraudulent failure to file penalty by clear and convincing evidence.

The willful FBAR penalty requires that the conduct penalized (failure to report) be willful.  In the FBAR civil penalty context, the Courts have held willfulness is (i) specific knowing failure to file (more or less the Cheek standard) or (ii) willful blindness or reckless disregard of the obligation to report.

The fraudulent failure to file penalty, like the civil fraud penalty for filed returns companion in § 6663, requires fraud.  The following is from my Federal Tax Procedure Book in discussing civil fraud under § 6663, but the same applies for the fraudulent failure to file:

The Code does not define fraud, but it may be viewed as the civil counterpart of criminal tax evasion in § 7201. n1 Examples of how courts have stated civil fraud under § 6663 are:  (i)  civil fraud requires “intentional commission of an act or acts for the specific purpose of evading tax believed to be due and owing”; n2 and (ii) civil fraud requires that “the taxpayer have intended to evade taxes known to be due and owing by conduct intended to conceal, mislead or otherwise prevent the collection of taxes and that is an underpayment.”n3  In making the determination, as with criminal cases, courts will often look to certain common patterns indicating fraud–referred to as badges of fraud, such as unreported income, failure to keep adequate books, dealing in cash, etc.n4  The key differences between the two is that § 6663 is a civil penalty and has a lower burden of proof (clear and convincing rather than beyond a reasonable doubt) as I note later.
   n1 Anderson v. Commissioner, 698 F.3d 160, 164 (3d Cir. 2012), cert. denied 133 S. Ct. 2797, 133 S. Ct. 2797 (2013) (“the elements of evasion under 26 U.S.C. § 7201 and fraud under 26 U.S.C. § 6663 are identical.”).
   n2 Erikson v. Commissioner, T.C. Memo. 2012-194.
   n3 Nelson v. Commissioner, T.C. Memo. 1997-49; Zell v. Commissioner, 763 F. 2d 1139, 1142-1143 (3rd Cir. 1985) (“Fraud means "actual, intentional wrongdoing, and the intent required is the specific purpose to evade a tax believed to be owing.”); and Fiore v. Commissioner, T.C. Memo. 2013-21 (“Fraud is the ‘willful attempt to evade tax’” and using the criminal law concept of willful blindness to find the presence of civil fraud; note that, in the criminal law, the concept of willful blindness goes by several names.)
   n4 E.g., Kosinski v. Commissioner, 541 F.3d 671, 679-80 (6th Cir. 2008).  For use of a negative inference from assertion of the Fifth Amendment privilege in concluding that the IRS had met its burden of proving civil fraud by clear and convincing evidence, see Loren-Maltese v. Commissioner, T.C. Memo. 2012-214.

Saturday, August 29, 2020

Article on U.S. as World's Banking Policeman (8/29/20)

I refer readers to this article in Q&A format from the Washington Post, Henry Farrell, The U.S. has become the world’s banking policeman. How did it happen? (WAPO 8/27/20), here.   The Q&A is with Pierre-Hugues Verdier is the John A. Ewald Jr. Research Professor of Law at the University of Virgnia School of Law, here, and author of “Global Banks on Trial: U.S. Prosecutions and the Remaking of International Finance” (Oxford University Press 2020), which “explains the dramatic increase in U.S. criminal enforcement actions against global banks.”  The link on Amazon to the book is here.

The Q&A is short, so I don’t attempt to excerpt it here.  The article summarizes certain levers of power that the U.S. has to encourage compliance from financial institutions that misbehave by assisting U.S. tax evasion. The article also notes, following the U.S. lead, “Eventually, the OECD adopted a multilateral automatic tax information exchange system that has become operational and expanded quickly — something almost no one thought possible a decade before.”  Finally, the article notes that, although corporate prosecutions are down in the Trump administration, they are likely to increase in the Biden administration (if there is a Biden administration).

Wednesday, August 26, 2020

District Court Sustains Tax Convictions but Grants Acquittal on Wire Fraud Convictions Because No Fraud (8/26/20)

In United States v. Barringer (W.D. VA Dkt No. 1:19CR00051 Order Dated 8/21/20), CL here, Barringer “convicted by a jury of three counts of willfully failing to pay over payroll taxes, two counts of wire fraud, and three counts of making false statements to federal agents.”  Broadly speaking, the gravamen of the conduct charged was an attempt to keep a business afloat by not paying over the employee’s withheld tax.  That pattern of behavior is not uncommon.  Also, it appears that Barringer’s conduct was to help her keep a good paying job.  That pattern also is not uncommon.  The interesting twist in this case is the wire fraud counts under 18 U.S.C. § 1343, and conviction on those counts.  The district court entered judgment of acquittal on the two wire fraud counts.

The factual background for the wire fraud convictions was Barringer’s effort to withdraw funds from her 401(k) plan to use the funds, perhaps in part, to keep the employer afloat.  Barringer first asked the provider of the account, a financial company, for guidance on withdrawing funds she needed to keep the employer in operation.  The provider said that that was not a permitted reason to withdraw from the account.  Barringer then applied for the withdrawal to prevent foreclosure on her primary residence, which was among the permitted reasons to withdraw.  In fact, though, Barringer was ahead on her residence payments and was not under threat of foreclosure.  The provider made the distribution.  Barringer used some of the money to pay the employer’s creditors without paying to the IRS on the withholding tax obligations and used some for her own purposes.  Then, in an interview with the IRS she repeated the lie as to her reason for withdrawal from the 401(k) account.  These facts are the basis for the wire fraud counts and for one of the false statement counts (17 U.S.C. § 1001).

The Court held that, on the record, the Government did not prove the critical element of fraud.  Although it was clear that Barringer misrepresented her reason for the withdrawal in order to fit one of the permitted reasons for withdrawal, the question was whether she thereby sought to and did commit a fraud against another person.  She was, after all, withdrawing her own money.  Here is what the Court said about that (Slip Op. 9-:

            The defendant’s main challenge is directed towards her wire fraud convictions. I agree that the government failed to prove that the defendant’s deceit deprived another of a property interest. To obtain a conviction for wire fraud, in violation of 18 U.S.C. § 1343, the government must show that the defendant “(1) devised or intended to devise a scheme to defraud and (2) used the mail or wire communications in furtherance of the scheme.” United States v. Wynn, 684 F.3d 473, 477 (4th Cir. 2012). The element “to defraud” has “the common understanding of wronging one in his property rights by dishonest methods or schemes, and usually signify the deprivation of something of value by trick, deceit, chicane, or overreaching.” Carpenter v. United States, 484 U.S. 19, 27 (1987).

            The defendant’s sufficiency challenge is that the government did not present evidence that she deprived, or intended to deprive, another of something of value because the government did not present evidence of who or what might have been deprived of their property interest by her deception and that she believed she was the sole owner of her 401(k) plan assets. * * * *

Monday, August 24, 2020

Report that Prominent Billionaires Are Subject to Criminal Investigation (8/24/20)

This is a fascinating report of a tax investigation in process against two very prominent billionaires, Robert Brockman and David Smith.  David Voreacos & Neil Weinberg, Billionaire Robert Smith Fighting U.S. Criminal Tax Inquiry (1) (BloombergLaw 8/21/20), here.  This is an ongoing investigation, so charges may never be brought and, if they are, the  shape of the charges are uncertain.

What caught my eye and, I think may be of interest to readers of this blog is the following discussing divorce proceedings between Smith and his estranged wife:

            Experts on both sides of the divorce pored over the family finances. In 2014, Smith approached the IRS seeking amnesty from prosecution under a program used by more than 56,000 Americans who failed to report offshore assets, according to two of the people familiar with the matter. Through the program, the IRS collected more than $11 billion in back taxes, fines and penalties, while learning who enabled offshore tax evaders.

            But the IRS rejected Smith, according to people familiar with the matter. The agency typically turned down taxpayers if it already knew they had undeclared offshore accounts.

Now, I don’t know but assume that, because of the specificity (although limited), the investigators are correct about his attempt to go into the voluntary disclosure program and being rejected.  The article does not state whether Smith attempted the OVDP or Streamlined or OVDP with Streamline transition.  The Streamlined Procedures were adopted in 2014 the year that the article indicates he approached the IRS.  Of course, if Smith’s tax underpayment and FBAR failure to file (or file correctly) are the subject of a criminal investigation, the IRS must now think him willful which would have in 2014 disqualified for the Streamlined Procedures (even the Transition).  But, if the IRS already had Smith on the radar screen knew when he attempted to join OVDP, he would have been disqualified as the article notes. 

We don’t know whether he was disqualified from OVDP because of already being on the radar screen or he attempted Streamlined (either direct or through transition from OVDP) and was rejected because his nonwillful certification was inadequate.  Of course, if he attempted Streamlined via OVDP transition and was rejected, he still could have solved his criminal problem by staying in OVDP and not opting out.

Some unanswered questions and surely there must be more questions.  And the statutes of limitations may be an issue since one would assume that the targets of the investigation have kept their income tax filings current and, within a range, proper, at least in the case of Smith who knew when he was rejected (in 2014) that he had potential criminal issues.


Taxpayers Who Entered OVDP Closing Agreement Seek Their Money Bank Under the APA (8/24/20)

In Harrison v. IRS (D. D.C. Dkt. 1:20-cv-00828) (key pleadings at CourtListener here), the taxpayers, husband and wife, joined the IRS OVDP at a time when the miscellaneous (or in lieu of penalty) was 27 1/2% of the high amount in the account(s) over the covered years.  While taxpayers were in process on the OVDP, the IRS announced the Streamlined Process which would permit nonwillful taxpayers to obtain the same relief with a 5% miscellaneous penalty.  The IRS announced also that qualifying taxpayers in OVDP process could transition to the Streamlined Process.  The key qualification for the Streamlined Process was that taxpayers be nonwillful.  The taxpayers attempted to transition into the Streamline Process but were denied transition by the IRS committee that must approve the transition.  (Taxpayers refer to this process as governed by Transition Rules.)  At that point, their options were to either accept the OVDP civil penalty result or opt out and hope to achieve a lesser costs (principally the FBAR nonwillful penalty or no penalty at all).  The taxpayers did not opt out and entered a Closing Agreement under the OVDP penalty structure (notably 27 1/2% miscellaneous penalty as noted).

One would think that the Closing Agreement put the matter behind the taxpayers and the IRS.  But, the taxpayers had another trick (real or imagined) up their sleeves.  

In this case, taxpayers seek their money back and have packaged the request in APA clothing (rather than refund clothing), urging that the IRS had failed to provide guidance for when the request for transition relief would be approved and failed to provide guidance as to willfulness.  Moreover, they assert, the IRS did not adopt the rules (whatever they were) by informal rulemaking procedure (notice and comment), which would have given interested parties an opportunity to comment.  I presume that the claim is that the transition process and whatever unpublished guidance governed it were legislative rules (with force and effect of law) under the APA, for only legislative rules require notice and comment; interpretive and procedural rules do not require notice and comment.  The claim also is that the Transition Rules denying them transition (whatever those Rules are) are arbitrary and capricious.  Further they allege that the Transition Rules violate Due Process.  Finally, they reallege all of the foregoing and assert that the Closing Agreement is invalid.  They seek declaratory relief and a "refund of all money that Plaintiffs paid to Defendant through their participation in OVDP's penalty structure.

DOJ moved for summary judgment.  Taxpayers responded.  No decision o the motion to date.  These motion documents can be retrieved from the Court Listener docket sheet linked above.

JAT Comments:

Monday, August 17, 2020

Eighth Circuit Holds that Marinello Pending Proceeding Nexus in § 7212(a) Does Not Apply to Defraud / Klein Conspiracy (8/17/20)

In United States v. Flynn, 969 F.3d 873 (8th Cir. 2020), here, the Court opens as follows:

Scott Phillip Flynn pleaded guilty to conspiracy to defraud the United States and filing a false tax return. See 18 U.S.C. § 371; 26 U.S.C. § 7206(1). He tried to withdraw his plea before sentencing, but the district court 1  denied his motion and sentenced him to 87 months in prison—60 months for the conspiracy charge and 27 months for the false return—and ordered him to pay roughly $5.4 million in restitution. Flynn appeals, arguing that he should have been allowed to withdraw his guilty plea, his conspiracy conviction is void for vagueness, the restitution order was procedurally improper and clearly erroneous, and the district court wrongly applied an organizer or leader enhancement when it calculated his sentence. We find no error and affirm. 

The issue in the case that I think is interesting is the argument that the defraud / Klein conspiracy charge (18 USC 371) should have the same pending proceeding nexus element for tax obstruction, § 7212(a).  See Marinello v. United States, 584 U.S. ___, 138 S. Ct. 1101 (2018).  I have written on this issue before.  Basically, the issue is whether, although the defraud / Klein conspiracy statute and the tax obstruction statute are differently worded, because the interpretation of the defraud / Klein conspiracy parallels the tax obstruction statute the elements should be the same.  See What Are the Implications for Marinello on the Defraud / Klein Conspiracy? (Federal Tax Crimes Blog 3/24/18), here.  I have posted subsequent blog entries on that issue as courts have addressed the claim.  The gravamen of the case authority to date is that the tax obstruction pending proceeding nexus element does not apply to the defraud / Klein conspiracy.  The Flynn case so holds.

Flynn made the Marinello argument in the context of attempting to withdraw his guilty plea (see Slip Op. 5-6) and the argument that allegedly missing element made charge void for vagueness (see Slip Op. 8 n. 4).  The Court rejected both arguments.

The briefing in the case is quite good, so I offer here a zip file with the briefs and other submissions relevant to the Marinello issue.

One point, I omitted in my earlier discussion of the issue is the following from my most recent (now discontinued) Federal Tax Crimes Book (p. 123 n. 231, here):

In a prior version of the CTM, DOJ Tax asserted that tax obstruction may be charged where the Klein conspiracy is “unavailable due to insufficient evidence of conspiracy.”  CTM 17.02 (2001 ed.).  The 2008 version of the general subject is in § 17.00 and refers to Directive 129 which superseded Directive 77. The language quoted in the text from the 2001 version incorporating Directive 77 is omitted from the superseding Directive 129. I don't think that omission is a concession of the point, however.

The point is that, at least at one time, DOJ felt that the two crimes substantially overlapped with the critical difference being that the defraud / Klein conspiracy required more than one actor / conspirator.

Wednesday, August 12, 2020

A Bit of History: Andrew Mellon and Tax Fraud (8/12/20; 8/14/20)

Andrew Mellon is a name well-known to historians and, probably, most tax lawyers.  See Wikipedia page, here.  He was very wealthy and powerful and served as Secretary of Treasury in Republican administrations from 1921 to 1932.  Among his prominent legacies was the seeding of the National Gallery of Art in Washington, D.C.

A Mellon anecdote that I previously had not focused on was his tax travails where, after he left his Treasury Secretary position on Roosevelt’s election to the Presidency, the Government attempted unsuccessfully to indict him for tax evasion (11-10 vote in grand jury) and then issued a notice of deficiency seeking large deficiencies; somehow fraud was in issue (presumably either because of the civil fraud penalty or the statute of limitations).  Mellon v. Commissioner, 36 B.T.A. 977 (1937), here.  Robert Jackson, Wikipedia here, who later became Supreme Court Justice and chief prosecutor at the Nuremberg Trials, led the BTA case for the IRS.  The BTA rejected the IRS claim of fraud (36 B.T.A., at 1054-1055.

I picked subject up from the following blog posting today:  Andrew Mellon's Tax Trial (Tax Prof Blog 8/11/20), here, which links to Andrew Mellon's Tax Trial (PrawfsBlawg 7/18/20), here.  Both posts note the PrawfsBlawg’s suggestion that “A tax scholar and a con law scholar should get together and write this paper.”  It seems to me to be a subject for such an article, so I post it for readers of this blog to pursue if they wish. (I’m not sure I fit either description; in any event, I do not plan to pursue it.)

The PrawfsBlawg offers the following very interesting links:

  • A page on the Robert H. Jackson Center’s site:  The Andrew Mellon Case: 1934-1937, here, that seems to be a teaching exercise for high school studentsdescribed as follows:

This lesson addresses the content understanding:

PROSPERITY AND DEPRESSION (1920-1939): *The 1920s and 1930s were a time of cultural and economic changes in the nation.  During this period the nation faced significant domestic challenges including the Great Depression. *Taken from:  New York State K-12 Social Studies Framework (New York State Education Department, 2014), p. 39

Students will examine:-The background reasons for the tax fraud case brought against Andrew Mellon-Robert H. Jackson’s role in the Andrew Mellon tax case-The results and consequences of the Andrew Mellon tax case-Andrew Mellon’s role in founding the National Gallery of Art in Washington, DC

Friday, August 7, 2020

Houston Attorney Sentenced to 24 Months for Conspiracy and Tax Evasion (8/7/20)

DOJ Tax has this press release:  Houston Attorney Sentenced to Prison for Offshore Tax Evasion Scheme: Conspired to Secretly Bring to the US More Than $18 Million in Untaxed Money Held in Foreign Banks, here.  The key excerpts are:

A Houston, Texas, attorney was sentenced to 24 months in prison for conspiring to defraud the United States and tax evasion, announced Principal Deputy Assistant Attorney General Richard E. Zuckerman of the Justice Department’s Tax Division and U.S. Attorney Ryan K. Patrick for the Southern District of Texas. 

In September 2019, a jury convicted Jack Stephen Pursley, also known as Steve Pursley, of conspiring with a client to repatriate more than $18 million in untaxed income that the client had earned through his company, Southeastern Shipping.  According to the evidence presented at trial, Pursley knew that the client had never paid taxes on these funds so Pursley designed and implemented a scheme to transfer the untaxed funds from Southeastern Shipping’s business bank account, located in the Isle of Man, to the United States.  Pursley helped to conceal the movement of funds from the Internal Revenue Service (IRS) by disguising the transfers as stock purchases in United States corporations owned and controlled by Pursley and his client. 

Pursley received more than $4.8 million and a 25% ownership interest in the co-conspirator’s ongoing business for his role in the fraudulent scheme.  In 2009 and 2010, Pursley evaded the assessment of and failed to pay the taxes he owed on these payments by, among other means, withdrawing the funds as purported non-taxable loans and returns of capital.  Pursley used the money he garnered from the fraudulent scheme for personal investments, and to purchase personal assets, including a vacation home in Vail, Colorado, and property in Houston, Texas. 

In addition to the term of imprisonment, U.S. District Judge Lynn N. Hughes ordered Pursley to serve 2 years of supervised release and to pay approximately $1,788,753 in restitution to the United States. 

Being from Houston and otherwise familiar with the case, I was interested.  I posted on the case.  See particularly, Houston Attorney Convicted of Klein Conspiracy and Tax Evasion (Federal Tax Crimes Blog 9/6/19), here.

 At the sentencing or shortly thereafter the judge unsealed the Government’s sentencing memorandum.  I offer the sentencing memorandum here.  Some key points from the memorandum are:

Monday, August 3, 2020

2020 Federal Tax Procedure Book Available on SSRN (8/3/20)

I have posted to SSRN my 2020 editions (Student and Practitioner) of my Federal Tax Procedure Book.  Since there is considerable overlap between Tax Crimes and Tax Procedure, I will offer the links to the SSRN pages for the two editions where they can be downloaded.
  • Federal Tax Procedure (2020 Student Ed.), here.
  • Federal Tax Procedure (2020 Practitioner Ed.), here.
Information about these editions is presented on the Federal Tax Procedure page titled "2020 Federal Tax Procedure Book," here.

Wednesday, July 29, 2020

Superseding Indictment for Former Harvard Chair on Tax and FBAR Crimes (7/29/20)

DOJ announced here the superseding indictment for tax-related crimes of Dr. Charles Lieber, the former Chair of Harvard University’s Chemistry and Chemical Biology Department.  See also  James S. Bikales and Kevin R. Chen, Former Chemistry Chair Lieber Indicted on Four Additional Felonies for Tax Offenses (Harvard Crimson 7/28/20), here.  The prior indictment was for making false statements to federal authorities.

Key excerpts from the announcement are:
Dr. Charles Lieber, 61, was indicted by a federal grand jury in Boston on two counts of making and subscribing a false income tax return and two counts of failing to file reports of foreign bank and financial accounts (FBAR) with the Internal Revenue Service (IRS).  In June 2020, Lieber was indicted on two counts of making false statements to federal authorities.  Lieber was arrested on Jan. 28, 2020. 
The superseding indictment alleges that Lieber served as the Principal Investigator of the Lieber Research Group at Harvard University, which received more than $15 million in federal research grants between 2008 and 2019. Unbeknownst to his employer, Harvard University, Lieber allegedly became a “Strategic Scientist” at WUT [Wuhan University of Technology] and, later, a contractual participant in China’s Thousand Talents Plan from at least 2012 through 2015.  China’s Thousand Talents Plan is one of the most prominent Chinese talent recruitment plans designed to attract, recruit and cultivate high-level scientific talent in furtherance of China’s scientific development, economic prosperity and national security. 
Under the terms of Lieber’s three-year Thousand Talents contract, WUT allegedly paid Lieber a salary of up to $50,000 per month, living expenses of up to $150,000 and awarded him more than $1.5 million to establish a research lab at WUT.  It is alleged that in 2018 and 2019, Lieber lied to federal authorities about his involvement in the Thousand Talents Plan and his affiliation with WUT. 
According to the superseding indictment, in tax years 2013 and 2014, Lieber earned income from WUT in the form of salary and other payments made to him pursuant to the Strategic Scientist and Thousand Talents Contracts, which he did not disclose to the IRS on his federal income tax returns.  The superseding indictment also alleges that Lieber, together with WUT officials, opened a bank account at a Chinese bank during a trip to Wuhan in 2012.   Thereafter, between at least 2013 and 2015, WUT periodically deposited portions of Lieber’s salary into that account. U.S. taxpayers are required to report the existence of any foreign bank account that holds more than $10,000 at any time during a given year by the filing an FBAR with the IRS.  Lieber allegedly failed to file FBARs for the years 2014 and 2015.

Friday, July 24, 2020

The Unspotted Issue in an Audit; Ethics and Crimes (7/24/20; 8/2/20)

In an ABA Tax Section Court Procedure Virtual meeting on Wednesday, there was a one-hour discussion of ethical issues in handling a matter in the Tax Court.  The participants in the discussion were:
• Judge L. Paige Marvel, United States Tax Court, Washington, D.C.
• Elizabeth G. Chirich, Chief, Branch 1, Procedure & Administration, IRS Office of Chief Counsel, Washington, D.C.
• Guinevere Moore, Moore Tax Law Group, LLC, Chicago, IL
• Kandyce Korotky, Covington & Burling, Washington, D.C. (Moderator)
• Mitchell I. Horowitz, Buchanan Ingersoll & Rooney P.C., Tampa, FL
The discussion was excellent.  I highly recommend those who can access the recording of the event on the ABA web site to do so.  (I would provide a link but have not yet located the link, perhaps because the recording has not yet been put up.)

During the discussion I posted two questions which, apparently because of time, the participants did not respond to.  I offer the questions and some comment here.  The questions were:
1.        Question : What if the IRS sets up only one issue in the notice of deficiency and the IRS never spotted a big issue involving omitted income. There is no real gray area in the unspotted issue; the taxpayer clearly would owe tax if the unspotted issue were fully litigated (indeed taxpayer's counsel did not think she could even make a nonfrivolous argument that the omitted income should not have been included). After filing the petition, IRS Counsel offers to concede that one issue (the spotted issue in the NOD) and sends a stipulated decision document saying that the deficiency is $0. Because the taxpayers' counsel knows that stipulation that there is no deficiency is not true, can the taxpayers' counsel sign the stipulated decision?
2.        Question: This may be a philosophical question rather than one you can answer here:  What good are ethical rules when they don't provide answers -- i.e., when different ethical lawyers acting ethically can reach different conclusions -- does that simply reward the aggressive attorney (who may even be a lawyer who charges for the benefit offered to the taxpayer by being aggressive within the ambiguities -- even creative ambiguities -- in the ethical rules) and the taxpayer engaging this ethically aggressive attorney?  And would about the more conservative ethical attorney and his client?  Is the ethically conservative attorney providing less than ethically aggressive representation then not zealously representing the client?  There is more but I'll stop there?
The second question is more philosophical, so I will focus on the first question.  Here is the key background:

Saturday, July 18, 2020

IRS Return Information Disclosures to Other Federal or State Authorities for Information Obtained in Voluntary Disclosure Processing and other Agency Activity (7/18/20)

I previously blogged on the new Form 14457, Voluntary Disclosure Practice Preclearance Request and Application.  See Revised IRS Form 14457 for Voluntary Disclosure Preclearance (Federal Tax Crimes Blog 5/29/20; 7/17/20), here; for prior discussion, see New Form 14457, Voluntary Disclosure Practice Preclearance Request and Application (Federal Tax Crimes Blog 4/16/19), here; and New IRS Voluntary Disclosure Procedures and Civil Resolution Framework (Federal Tax Crimes Blog 11/29/18; 11/30/18), here.

The Form grows out of the offshore account voluntary disclosure initiative (variously initialized OVDP and OVDI), but now covers the entire IRS voluntary disclosure practice to filing of the Form to seek preclearance to the practice.  The IRS voluntary disclosure practice is described on a web page titled IRS Criminal Investigation Voluntary Disclosure Practice, here (which also includes links to historical information).

I previously discussed the revised form in the link above and added to that discussion comments from a July 14, 2020 an ABA Tax Section Civil and Criminal Penalties Committee virtual meeting in lieu of the in-person meeting at the annual May Meeting.  In that discussion, I noted the importance of a full and complete narrative disclosures on the Form Part II, Question 7.  That narrative disclosures “must include a thorough discussion of all Title 26 and Title 31 willful failures to report income, pay tax, and submit all required information and reports.”   The participants emphasized the requirement for disclosure only includes Title 26 and Title 31 crimes (as to the latter, those crimes under Title where the IRS has been delegated enforcement responsibilities, such as FBAR and dual IRS and FINCen Forms 8300, titled Report of Cash Payments Over $10,000 Received in a Trade or Business).

One issue I indicated I would discuss later was the discussion of whether information disclosed on the Form or in the voluntary disclosure process would be available to other federal or state law enforcement agencies who enforce crimes outside Title 26 and 31.  Of course, if the unreported income is illegal income, the taxpayer is disqualified from joining the voluntary disclosure practice.  But often in the milieu involving a taxpayer’s tax or Title 31 noncompliance, there will be other illegal activity in which other nontax federal or state agencies may have an interest.  Need taxpayers trying to join the voluntary disclosure practice be concerned that the disclosures the taxpayers make in the practice (including the narrative on Part II, Question 7 of Form 14457) or any other information the IRS develops other than submitted by the taxpayer will be available to those other federal or state law enforcement agencies and potentially used for criminal prosecution of the taxpayer with no protection offered by the IRS voluntary disclosure practice?

Thursday, July 9, 2020

Second Circuit Affirms Convictions, Rejecting Marinello and Bad Acts Evidence Arguments (7/9/20)

In United States v. Scali,  (2d Cir. 7/7/20), here, Unpublished, the Second Circuit affirmed the conviction of a prior lawyer for “ten criminal offenses, including: mail fraud, structuring cash deposits, tax violations, obstruction of justice, and perjury.”

For  most readers of this blog, the most interesting part of the decision is the discussion of Jury Instructions (Slip Op. pp. 10-11) regarding the Marinello issue.  Marinello v. United States, ___ U.S. ___, 138 S. Ct. 1101 (2018).  Marinello held that § 7212(a)’s tax obstruction crime (Omnibus Clause) requires:
  • A nexus to an administrative proceeding: “a ‘nexus’ between the defendant’s conduct and a particular administrative proceeding, such as an investigation, an audit, or other targeted administrative action. That nexus requires a 'relationship in time, causation, or logic with the [administrative] proceeding.’”
  • A pending or reasonably foreseeable proceeding: “the [administrative] proceeding was pending at the time the defendant engaged in the obstructive conduct or, at the least, was then reasonably foreseeable by the defendant.”

Before the Supreme Court decided Marinello, the trend in the cases was to hold that tax obstruction did not require a relationship to a pending investigation. 

In Scali, the trial occurred while the case was pending in the Supreme Court, so that the outcome was not known when the case was submitted to the jury.  The Second Circuit easily affirmed the Marinello issue because of how the district court submitted the case to the jury to address the uncertainty in Marinello outcome ((Slip Op. 10-11):
The district court, aware that the Supreme Court was considering the scope of § 7212(a) in Marinello, provided the jury with a special verdict form that required the jury to indicate whether it unanimously found that Scali committed one or more of the specified obstructive acts "after becoming aware of a pending IRS proceeding, specifically the IRS's civil collection activities." Suppl. App'x at 763 (italics in original). In finding Scali guilty of Count Five, the jury checked "Proved" next to each of the six obstructive acts listed in the special verdict form. Accordingly, the jury's findings make clear that it found the required nexus between Scali's obstructive acts and the pending IRS proceeding of which Scali was aware, rendering any Marinello error in the jury instructions non-prejudicial. See United States v. Beckham, 917 F.3d 1059, 1064-65 (8th Cir. 2019) (holding a Marinello instructional error harmless because the overwhelming evidence established the nexus and knowledge requirement), cert. denied, 140 S. Ct. 857 (2020).

Wednesday, July 8, 2020

Sixth Circuit Affirms Conviction, Upholding Relevant Conduct Tax Loss Attributable to Defendant's Conduct (7/8/20)

United States v. Igboba, ___ F.3d ___ (6th Cir. 7/7/20), here, the Court affirmed Igboba’s conviction “on multiple criminal counts based on his participation in a conspiracy to defraud the United States Department of the Treasury by preparing and filing false federal income tax returns using others’ identities.”  The Court rejected his arguments that:
1. The tax loss, the principal driver for the sentencing calculation, improperly included tax loss of others for jointly undertaken criminal activity under S.G. 1B1.3(a)(1);
2. The sophisticated means enhancement did not apply; and
3. Two other arguments made in a pro se brief that the Court deemed insubstantial, so I don’t address them here.
I address here only the tax loss issue.

S.G. 1B1.3(a)(1), here, treats certain sentencing factors as “relevant conduct” that can be included in the tax loss calculation which determines the base offense level under S.G. §2T1.1(a), here, the tax base offense level.  In part here relevant, S.B. 1B1.3(a)(1)(B) includes:
(1)       (A)       all acts and omissions committed, aided, abetted, counseled, commanded, induced, procured, or willfully caused by the defendant; and
(B)      in the case of a jointly undertaken criminal activity (a criminal plan, scheme, endeavor, or enterprise undertaken by the defendant in concert with others, whether or not charged as a conspiracy), all acts and omissions of others that were—
(i)      within the scope of the jointly undertaken criminal activity,
(ii)      in furtherance of that criminal activity, and
(iii)      reasonably foreseeable in connection with that criminal activity;
that occurred during the commission of the offense of conviction, in preparation for that offense, or in the course of attempting to avoid detection or responsibility for that offense.
Roughly, (A) covers the sentencing factors from the defendants’ personal conduct and (B) covers the sentencing factors from the conduct of others.  The scope of (B) is not the same as and generally can be less than conduct within the scope of so-called Pinkerton liability for which a defendant can be convicted for crimes committed by others within the scope of the conspiracy.  See also Pinkerton and Sentencing for Jointly Undertaken Activity; Proposed Sentencing Guidelines Amendment (Federal Tax Crimes Blog 4/17/15), here; and 11th Circuit Holds Relevant Conduct Loss for Guideline Calculation Can Be Less Than Loss Within Scope of Criminal Conspiracy (Federal Tax Crimes Blog 2/27/19), here.

The Guideline’s Application Note 3(B) provides:
(B)       Scope.—Because a count may be worded broadly and include the conduct of many participants over a period of time, the scope of the "jointly undertaken criminal activity" is not necessarily the same as the scope of the entire conspiracy, and hence relevant conduct is not necessarily the same for every participant. In order to determine the defendant's accountability for the conduct of others under subsection (a)(1)(B), the court must first determine the scope of the criminal activity the particular defendant agreed to jointly undertake (i.e., the scope of the specific conduct and objectives embraced by the defendant's agreement). In doing so, the court may consider any explicit agreement or implicit agreement fairly inferred from the conduct of the defendant and others. Accordingly, the accountability of the defendant for the acts of others is limited by the scope of his or her agreement to jointly undertake the particular criminal activity. Acts of others that were not within the scope of the defendant's agreement, even if those acts were known or reasonably foreseeable to the defendant, are not relevant conduct under subsection (a)(1)(B). 
In cases involving contraband (including controlled substances), the scope of the jointly undertaken criminal activity (and thus the accountability of the defendant for the contraband that was the object of that jointly undertaken activity) may depend upon whether, in the particular circumstances, the nature of the offense is more appropriately viewed as one jointly undertaken criminal activity or as a number of separate criminal activities. 
A defendant's relevant conduct does not include the conduct of members of a conspiracy prior to the defendant joining the conspiracy, even if the defendant knows of that conduct (e.g., in the case of a defendant who joins an ongoing drug distribution conspiracy knowing that it had been selling two kilograms of cocaine per week, the cocaine sold prior to the defendant joining the conspiracy is not included as relevant conduct in determining the defendant's offense level). The Commission does not foreclose the possibility that there may be some unusual set of circumstances in which the exclusion of such conduct may not adequately reflect the defendant's culpability; in such a case, an upward departure may be warranted.
With that background in mind, the Court first said that Igboba did not properly preserve the argument, so the standard of review was plain error review.  The Court then moved to the merits (see Slip Op. pp. 7-12).  The Court noted that the district court "did not specifically address whether the relevant $4.1 million in losses was attributable to Defendant under subsection (A) or subsection (B)," but that "its analysis suggests that it found all $4.1 million attributable to Defendant’s own criminal activity, rather than others’ acts that were a part of 'jointly undertaken criminal activity.'"  Importantly, the district court excluded any loss "where Defendant could not be directly connected to a loss through reliable evidence."

Wednesday, July 1, 2020

New CTM discussion on § 7212(a) re Marinello (7/1/20; 7/12/20)

I was just notified the DOJ Criminal Tax Manual, here, often referred to as the "CTM," has updated the chapter on tax obstruction, § 7212(a), to reflect changes principally driven by Marinello v. United States, ___ U.S. ___. 138 S. Ct. 1101 (2018).   The new discussion is here.  I have posted several entries on Marinello.  See here.  I have not yet had time to review the new discussion and likely will not for a week or so, but those having Marinello based issues will certainly want to review this new CTM discussion.

Added 7/12/20 12:15pm:

I have now had time to read the revised CTM.  The changes that seem to have been driven by Marinello should be predictable to readers who paid attention to Marinello when it was released, including contemporaneous commentary, including commentary on this blog.  I will offer here some comments and short excerpts (excerpts are cleaned up for readability).

1.  Section 17.02, titled Generally, has a good succinct discussion of § 7212(a) and the Marinello holding.

2. Section 17.04, titled Elements of the Omnibus Clause as Construed in Marinello, has a lengthier analysis of the nexus interpretation in Marinello.

3.  Section 17.04[1], titled Corruptly, discusses the corruptly element and relates it to the willfulness element for most tax crimes which may be parallel in effect.  It says that Marinello did not alter the definition, but did state: "the Court simply opined that, “practically speaking,” a taxpayer who “willfully” violates the tax code would also intend to obtain an unlawful advantage [an element of the Omnibus Clause]."

4.  Section 17.04[3], titled Omissions as Endeavors, says that conceptually omissions, at least some omissions, might be within the scope of the Omnibus Clause and that Marinello did not address that possibility.  The Section then concludes:  "Against this legal backdrop, it remains the policy of the Tax Division that a § 7212(a) Omnibus Clause prosecution should not be based upon an omission, including a failure to file a tax return, without the express authorization of the Tax Division."

Tuesday, June 30, 2020

District Court Holds FBAR Nonwillful Penalty Is Per Form Rather than Per Account (6/30/20)

In United States v. Bittner (E.D. Tex. Dkt.4:19-cv-415 Dkt Entry 75 Order Dtd 6/29/20), CL Order here & CL Docket Entries here, the Court held that the nonwillful FBAR penalty was per form and not per account.  The holding is the first to so hold and rejects the holding in United States v. Boyd, 2019 WL 1976472 (C.D. Cal. 2019), CL Order here and CL Docket Entries here  I previously wrote on Boyd:  Two Cases Sustaining FBAR NonWillful Penalties on Per Unreported Account Basis (4/26/19), here.  As the Bittner court noted (Slip Op. 21 n. 8), the Boyd case is presently on appeal to the Ninth Circuit and oral argument is scheduled for September 1, 2020.

The Bittner result was significant, for it reduced the number of $10,000 per violation from 177 as asserted by the Government amounting to $1,770,000 to 4 as asserted by Bittner and held by the court, for an amount of $40,000.

The Bittner court also held that there was no material fact issue on summary judgment, so Bittner had not established reasonable cause that might have exempted him from some or all of the FBAR nonwillful penalties.

Readers of this blog can read the Bittner and Boyd opinions and make their own minds up.  I will say that, for a long time, I just assumed without detailed analysis that the nonwillful FBAR penalty was per form.  The conduct being penalized is the failure to file the form, regardless of the number of accounts.  Still, there are countervailing arguments.  They are presented in the Bittner and Boyd Orders, linked above.

I do call to readers attention the following from the opinion (Slip Op. 14):

Tuesday, June 23, 2020

U.S. Brings Summons Enforcement Suit against Del. Dept of Insurance re Micro-Captives (6/23/20)

DOJ Tax has brought a summons enforcement suit against the Delaware Department of Insurance (“DDOI”) to obtain documents and testimony that DDOI has failed to provide regardomg microcaptive insurance companies.  United States v. Delaware Department of Insurance (D. Del. Dkt. 1:20-cv-00829).  The petition and IRS agent declaration are available on CourtListener here and here.  The CourtListener docket entries are here.

Excerpts from the complaint (cleaned up):
4. The Internal Revenue Service issued a summons to the DDOI for testimony and certain records relating to filings by and/or communications  ith Artex Risk Solutions, Inc. (“Artex”) and Tribeca Strategic Advisors, LLC  “Tribeca”) or others working with Artex and/or Tribecca. With this petition, the United States seeks an order enforcing Request 1 of the [*2] summons to the extent the DDOI has not already provided those records to the Internal Revenue Service, and also requiring the DDOI provide the summonsed testimony to the IRS. 
5. The Internal Revenue Service is conducting an investigation for the purpose of determining the role of Artex in  transactions involving micro-captive insurance plans organized under 26 U.S.C. § 831(b), as well as other potentially  abusive transactions. Tribeca is fully owned by Artex as of 2010, and the IRS is also investigating its role in transactions involving micro-captive insurance plans and other potentially abusive transactions. Among other things, the Internal Revenue is looking at whether Artex or Tribeca have promoted micro-captive insurance schemes and whether their actions may result in penalties pursuant to 26 U.S.C. § 6700, which Congress designed as penalty provisions specifically directed towards promoters of abusive tax shelters and other abusive tax avoidance schemes.  * * * see also Keltner Decl. ¶ 4 (investigation to determine whether Artex and Tribeca are subject to penalties under 26 U.S.C. § 6700, which permits imposition of penalty against any person who makes or furnishes or causes another person to make or furnish certain statements which the person knows or has reason to know are false or fraudulent as to any material matter). 
6. Micro-captive insurance schemes were designated a “Transaction of Interest” by the IRS. Transactions of Interest are those the IRS believes have the potential for tax avoidance or evasion. The United States Tax Court has found these schemes can be used to avoid or evade taxes. In the last three years, the United States Tax Court has struck down three separate micro-captive insurance transactions where the taxpayer sought to shield income from taxation through sham insurance companies [*3] Avrahami v. Commissioner, 149 T.C. 144, 179-180 (Tax Ct. 2017) (describing micro-captive transactions); Reserve Mech. Corp. v. Commissioner,  Tax Ct. Memo. 2018-86, 2018 WL 3046596, at *16 (Tax Ct. 2018) (finding transactions did not constitute insurance where they involved circular flow of funds, were not the product of arm’s-length considerations, used premiums that were not actuarially determined, covered nonexistent risks, and involved unlicensed insurance companies created for no legitimate non-tax purposes) (appeal docketed at No. 18-9011 (10th Cir.)); Syzygy v. Commissioner, T.C. Memo. 2019-34, 2019 WL 1559540, at *45 (Tax Ct. 2019) (invalidating Delaware micro-captive insurance company because arrangement did not distribute risk and did not meet commonly accepted definition of insurance). In at least one case,  the United States Tax Court noted the participation of promoters in the micro-captive insurance scheme it invalidated. Avrahami v. Commissioner, 149 T.C. at 206 (taxpayers cannot rely on “promoters” of tax avoidance schemes to avoid  penalties under 26 U.S.C. § 6662).
* * * *
8. The DDOI has issued approximately 191 insurance certificates of authority to micro-captive insurance companies associated with Artex. The informationsought by the IRS summons is likely to be relevant to a determination of whether the Artex or Tribeca transactions were abusive tax shelters and whether Artex or Tribeca made false and fraudulent statements in organizing those abusive tax shelters.   

Friday, June 12, 2020

Swiss Financial Institution Clients May Have Claims for Hidden Fees (6/12/20)

I picked up this article, reporting that investors may have some relief for Swiss financial institutions receipt of hidden undisclosed fees related to their investment of client funds.  Leon Harris, How to turn the tables on the Swiss banks – opinion (Jerusalem Post 6/11/20), here.  According to the article, bribery and kickbacks are normally illegal, but Swiss financial institutions for many years took so-called “retrocession fees” or “portfolio maintenance commissions” from funds or other investment vehicles that reduced the yield to the financial institutions' customers without disclosure to the customers.  The example is:
Annual return, say: 5%
Undisclosed “Portfolio maintenance commission”: 2%
Disclosed return to the investor: 3%
Disclosed bank fee: 1%
Net disclosed return: 2% (less than half the 5%)
In other words, the bank or financial institution may have received not only a disclosed fee appearing on your bank statement, but also a hidden fee from the fund or similar where they invested your money.
The article reports
This lucrative business model helped the Swiss banks to enjoy billions of dollars of retrocession fees that are due to the investors and can therefore be claimed back. According to a study, around $4 billion  of retrocessions were apparently collected by the banking institutions in 2012 alone.
The article says that, pursuant to Swiss Federal Court decisions, clients of the banks suffering the economic cost of these hidden fees may have a remedy.  The process, as described, is:

Tuesday, June 9, 2020

Extradited E&Y Tax Shelter Enabler Sentenced (6/9/20/ 6/10/20)

I have often posted on the Government’s criminal prosecution of persons promoting abusive tax shelters.  There were a number of prosecutions starting around 2005 as the Government focused on major accounting firms, law firms and financial firms and the persons involved with them.  One set of the prosecutions related to principals at Ernst & Young, the accounting giant.  I blogged on a major Second Circuit decision in the prosecutions and included further links to the blogs on the E&Y prosecutions.  Major CA2 Decision on E&Y Tax Shelter Convictions (Federal Tax Crimes Blog 11/29/12), here; see also E&Y Admits Wrongdoing on Bullshit Tax Shelters; Will Pay $123 Million (Federal Tax Crimes Blog 3/1/13), here.

One of the E&Y defendants in the prosecution, David Smith, reached a plea agreement but left the country before he could be sentenced and serve whatever time would be imposed.  After fighting extradition for years, Smith, an attorney and one of the major facilitators at E&Y, was extradited and sentenced yesterday to three years in prison, the maximum that he could be sentenced under his plea agreement.  The Bloomberg news report is here:  Chris Dolmetsch, Lawyer Who Ran From Ernst & Young Tax Shelter Case Gets 3 Years (Bloomberg News Wire 6/8/20), here. 

According to the article, Smith requested that “he be sentenced to the 11 months he’d already served in New York’s Metropolitan Correctional Center,” after extradition.  Apparently, he also cooperated earlier during the initial investigation phase and reached the plea agreement before he fled the country, so that would be a positive factor for him.  And, in mitigation, Smith claimed that he did not go on the lam to avoid incarceration, but because of the 9/11 events; moreover, he claimed, "he feared prosecutors would renege on promises of leniency after he fully cooperated with their investigation."  The judge imposed the harshest sentence he could under the plea agreement.  I gather that the judge did not buy Smith's claims.  

It is a good thing that his attorneys negotiated a plea with a maximum possible sentence of three years.  The plea was to tax perjury, § 7206(2).  Attached here is a copy of the judgment on CourtListener.  The plea agreement was quite very favorable for Smith given his apparent role in the overall scheme.

Note the last paragraph was revised 6/10/20 12:00pm to reflect that the plea agreement was to § 7206(1), tax perjury, rather than § 7212(a), tax perjury, as I had speculated in the original version.  Either way, the incarceration period is limited to three years.  And, the major point was that the plea was a sweet deal given his apparent role.  Of course his time being held from the date of extradition to the sentencing does not count toward the sentence, but that period is really attributable to the fact that he fled the country rather than punishment for the underlying crime.

Thursday, June 4, 2020

District Court Denies Gov't Summary Judgment in FBAR Collection Suit (6/4/20)

In United States v. de Forrest (D. Nev. Dkt. # 2:17-cv-03048 Dkt entry 52, Order dated 5/31/20), here (with docket entries here), the court denied the Government’s motion for summary judgment in an FBAR willful penalty collection suit.  I don’t think the Order offers anything material to the discussion of FBAR willful penalty matters, except that, on the facts recounted, I speculate that other judges might have granted the Government’s motion.  And, on the facts recounted, if this judge were the “fact decider” (she is not because de Forrest demanded a jury), I am not sure de Forrest would prevail because the facts do not look particularly good.  I did note that the court says (Slip Op. at 3):  “Defendant asserts that over the course of their relationship, Mr. de Forrest [the money guy who started the offshore accounts] warned Defendant 'not to say anything about anything' regarding the the Swiss accounts. (Def. Dep. 42:22–43:1).2,” with the footnote saying:  “n2 In her Response, Defendant asserts that her husband threatened to murder her if she told anyone about the accounts. (Resp. at 2). However, there is no citation supporting this claim.”

The Defendant in the case demanded a jury.  I have previously discussed a jury trial in FBAR refund and collection suits in Outstanding Powerpoint Presentation on All Things FBAR Penalties (Procopio #1) (11/5/18), here.  I wonder which party a jury might favor as compared to a judge (this judge in particular).  The Government did not demand a jury on the original complaint.  There is no explanation for why the Government did not demand a jury, but it may have been simply because bench trials are easier and more expeditious than jury trials.  (At the margins, some judges might prefer to punt the fact issue to a jury rather than actually deciding the issue on motion for summary judgment.)  I do know that, from my experience in refund litigation with DOJ Tax, my attention was heightened when I got a refund suit with no jury demand by the taxpayer and I would sometimes demand a jury if there were some reason to believe that a jury would be more favorable to the Government.  Where I litigated, in the deep South in the mid-1970s,  the general understanding was that, except in some types of cases, a jury would not be more favorable – indeed likely to have at least one juror hostile -- to the Government (have war stories there, but won’t digress here).  Most tax litigators in the South knew that and would almost routinely demand a jury in a tax refund suit, so when the taxpayers did not demand a jury, that was worthy of attention.

Sunday, May 31, 2020

IRS Solicitation for Outside Expertise in CryptoCurrency Audits (5/31/20)

There are reports that the IRS has sent out a “Statement of Work” soliciting assisting from contractors to help with audits involving potential cryptocurrency transactions.  See Guinevere Morre, Got Cryptocurrency? Get Ready For An IRS Audi (Forbest Editors’ Pick 5/29/20), here; and IRS Soliciting Contractors to Help Audit Crypto Tax Returns (CryptoTrader.tax blog), here(with a copy of the Statement of Work).

The introduction says:
The Internal Revenue Service (IRS) requires consulting services to support a taxpayer examination involving virtual currency. In particular, the IRS requires consulting services to calculate taxpayers' gains or losses as a result of their transactions involving virtual currency. Specific requirements are outlined below.
 The Statement of Work process is described here.

The use and trading in cryptocurrency offers great opportunity for tax avoidance and evasion, so it is not surprising that, given the IRS cryptocurrency push, it would seek outside expertise to assist.

Friday, May 29, 2020

Revised IRS Form 14457 for Voluntary Disclosure Preclearance (5/29/20; 7/17/20)

In April 2020, the IRS revised its preclearance form for voluntary disclosure – Form 14457, Voluntary Disclosure Practice Preclearance Request and Application, here.  I have not compared the new form with the old, so cannot point out the differences.  I do note that the instructions (beginning on p. 6 of the 14 page form) has a Section titled “What’s New” which I found unhelpful.  Basically all it says is that “The Service revised and retitled Form 14457.”  In broad overview, it seems that it has the same two-stage process as the prior form, but there may be some disclosure items in the two-stage process that changed.  I presume also that the instructions may have changed to address some issues that have come up in the processing of voluntary disclosures under the old form.

Joel Crouch, here, of Meadows Collier has a discussion, titled Update on IRS Voluntary Disclosures on the firm’s blog here.

Added 7/17/20 1:15am:

On July 14, 2020, the ABA Tax Section Civil and Criminal Penalties Committee held a virtual meeting in lieu of the in-person meeting at the annual May Meeting.  One of the issues discussed was the new Form 14457, Voluntary Disclosure Practice Preclearance Request and Application, and the IRS practice with respect to the Form.  Here are some bullet points that I summarize from the meeting with, in some cases, exact quotes as best I could reconstruct them using the contemporaneous computer generated transcription (I think audio of the meeting is available from the ABA):

  • The IRS participants providing the information in the bullet points here were:  Carolyn A. Schenck, National Fraud Counsel and Assistant Division Counsel (International), SB/SE, Office of Chief Counsel, IRS, and D. Richard (Rick) Goss, Acting Director, International Operations, Criminal Investigation, IRS.  I won’t separately identify which of those two made the comments I bullet point here.
  • The related slide states the key requirements of the program:  (i) only legal source income qualifies; (ii) the disclosure must be timely, meaning that the IRS has not commenced civil examination or criminal investigation, received information from a third party, or acquired information of noncompliance from a criminal enforcement action (i.e., search warrant, grand jury subpoena, etc.); and (iii) must be truth and complete and with taxpayer cooperation with the IRS in the process by identifying all enablers, submitted returns and reports and making good faith arrangements to pay.
  • Voluntary disclosure and the benefits the program offers requires the submission of the Form for pre-clearance.  No Form and pre-clearance, no voluntary disclosure.  Quiet disclosures do not work.
  • The voluntary disclosure program is only for the client who has criminal exposure.  “So this is not for a negligent client.  This is not for someone who doesn't have any indicators of fraud.  No criminal exposure, this is not the practice for them.”
  • The program has a requirement for a civil fraud penalty for the year with the highest tax liability.  In some limited cases, the civil fraud penalty may not be asserted, but that will be rare.  “It will be unusual for a case to come out without an application of a civil fraud penalty.”
  • Apparently new Form 14457 instructions will be forthcoming with more information so “stay tuned.”  No timing for such additional instructions was given.
  • Multiple disclosures may be made on a single Form.  If two spouses file a single form, “make sure you clearly delineate which facts relate to which spouse.  If there's one spouse with willful conduct and one without, just make sure that's clearly delineated.”
  • For Part I Section 7, all entities must be listed.  Omissions may result in disqualification for voluntary disclosure.

Thursday, May 28, 2020

District Court Rejects Defendant's Creative Claim that Alleged Overpayments of Other Taxes Precludes Criminal Liability (5/28/20)

In United States v. Hamdan (E.D. La. Dkt. 19-60 Order Dated 5/22/20), here, the Court denied the defendants’ motion to dismiss most of the counts in their 74-count Superseding Indictment charging (i) the conspiracy by “evading paying federal income and employment taxes” (not clear whether an offense conspiracy or defraud/Klein conspiracy charge or both, but not important for this discussion) by underreporting wages, (ii) failure to account for and pay certain trust fund taxes (§ 7202), and aiding and assisting the preparation of false individual income tax returns for third parties (§ 7206(2)).  The defendants owned food marts through which the alleged crimes were committed.

In their motion, the defendants (principally Hamdan) argued (high level summary) that:  (i) Hamdan overpaid his personal income taxes in an amount exceeding the alleged employment and income taxes charged in the indictment which should have been offset against those taxes and that the alleged overpayment negated willfulness; (ii) Hamdan’s right to a credit for the alleged overpayment of tax should estop the Government from charging because the offset mechanism somehow assures taxpayers that overpayments of one tax liability will exonerate taxpayers from criminal liability related to other internal revenue tax; and (iii) that the Government has been unjustly enriched by the alleged overpayments.

The Court did not accept any of those claims, finding that the Superseding Indictment properly alleged the offenses charged.  The Court did not accept Hamdan’s key factual claim that he had overpaid his income taxes or that, even if he had, he had properly claimed the refund so that the refund would be available to offset.  Right now, I don’t see an easy path to providing a meaningful analysis of the Court’s rejection of the defendants’ diversions (creative and unusual as they were).  I just commend the opinion to readers who might find some such interesting.

Thursday, May 21, 2020

Confusion as to Sentencing Guidelines Tax Loss and Civil Tax Loss Requires Remand and Resentencing (5/21/20)

In United States v. Brannum (9th Cir. Unpublished 5/12/20), here, the Ninth Circuit reversed and remanded a case because of the prosecutor’s violation of the plea agreement as to the amount of the tax loss.  Readers will recall that, in the Sentencing Guidelines’ calculation of the offense level and sentencing range, the principal component in tax crimes cases is often the tax loss.  The plea agreement stipulated a tax loss of $101,554.01.  The PSR incorporated this number and recommended a below-guidelines sentence of probation and home confinement.  In its sentencing memorandum, however, the Government urged that the actual loss was approximately $3.3 million, and sought a sentence of 21 months.  Brannum objected.  The sentencing court said it would not consider the higher number in sentencing and then sentenced Brannum to a year and a day (a standard sentence to get the benefit  of good time credit).

The Ninth Circuit reversed and remanded for resentencing, holding that the Government’s assertion of higher tax loss than stipulated in the plea agreement violated the terms of the plea agreement.  The Court felt that remand and resentencing before a different judge was required because, in a sense, although the sentencing judge said he did not consider the higher number, it is hard to “unring the bell” so to speak.

 JAT Comments:

1. The Government’s excuse for citing the higher number was:  “that the stipulation about 'total tax loss' referred only to so-called ‘criminal’ losses for Guidelines purposes, not the actual total ‘civil’ loss of tax revenue, which the government contends could be used in applying the 18 U.S.C. § 3553(a) factors.”  If that indeed was the Government’s attempted justification, the justification was patently wrong.  Sentencing is based on the criminal tax numbers.  The civil tax numbers may and often do exceed the criminal tax numbers.  (Accordingly, after sentencing, it common for the IRS to assert a higher civil tax amount.)  But sentencing in a criminal proceeding can only consider loss related to the criminal tax conduct.  But neither § 3553(a) nor the Sentencing Guidelines suggest or hint that civil matters should be considered in sentencing.  

2. Thanks for the lead to the case from Evan J. Davis, 9th Circuit Confirms Plea Agreements Are Worth the Paper They’re Printed On (Tax Litigator Blog 5/21/20), here.  Readers will find the Tax Litigator Blog a useful resource for tax crimes and tax litigation generally.

Monday, May 18, 2020

Court Re-Calculates Willful Penalties Found to Be Arbitrary (5/18/20; 8/28/20)

In United States v. Schwarzbaum (S.D. Fla. Dkt 18-cv-81147 Order Dtd 5/18/20), here, following through on its earlier opinion holding the calculation of willful FBAR penalties to be arbitrary and capricious, the Court recalculated the willful FBAR penalties.  The recalculation resulted in a reduction of the willful penalty for 2007-2009 from $13,729,591.00 to $12,907,952.00, resulting in a $891,639 reduction in FBAR and, presumably, commensurately reduced penalties and interest.  I previously wrote on the earlier opinion.  District Court Muddles an FBAR Willful Penalty Case (Federal Tax Crimes Blog 3/21/20; 3/24/20), here.  I also wrote on a later case that relied on that earlier opinion in Schwarzbaum.  District Court Denies Summary Judgment on Willfulness But Finds Penalty Allocation Arbitrary and Capricious (Federal Tax Crimes Blog 5/15/20), here.

For the current order I make the following comments:

1.  According to the opinion (Slip Op. 6), the Government’s original “mitigated willful FBAR” penalty calculation amount was $35,729,591.  For that proposition, the Court cites its earlier order which offers no explanation.  Perhaps there is an explanation in the documents the Court earlier relied upon, but I have not traced that down because it is not necessary for analysis here.  I do note that, however, that extraploating from the numbers stated in the opinion, it is not at all clear to me how that original number of $35,729,591 could be reached.  The IRM process is to take 50% of the aggregate high amount for the highest year (which I presume eliminated duplications in the year for intra account transfers) which would mean that the aggregate high amount for highest year (which then included 2006-2009) would have been $74,479,182.  From the June 30 numbers offered in the opinion, it is hard to extrapolate that high a number during the respective years.  (Note that my presumption might not be correct that duplications were eliminated and that could explain why the IRS realized that the indicated high values produced an inappropriate FBAR amount; in addition, to the extent that the indicated amounts allocated to the years produced an amount in any given year in excess of the capped penalty of 50% of the amounts on the respective June 30, there would have to be an adjustment as well.)

2.  As I noted in the second blog entry above, if the calculation had been pursuant to the IRM, the IRS’s calculation should have produced an FBAR penalty in each year that was not in excess of the maximum 50% of account values on the respective June 30 reporting date.  So, it is not clear to me on the face of the opinion exactly what the differences between the Court’s calculations and the IRS’s mitigated calculations.  Perhaps it could be because the Court refused to base its calculations on estimated June 30 amounts for some accounts which the Government asked it to do.  Perhaps if those estimated accounts were used, the formula could have produced the $13,729,591.00.  But, by declining to use estimated values, thus limiting the penalty to $100,000 for accounts with higher estimates, the difference may be explained.  Perhaps someone who digs into the details of the case could offer an explanation that I could post here.