Follow Up on the Biggest Tax Heist Ever (1/30/20)

I wrote previously about an alleged scheme to steal revenue from various European countries based on claims for refund from so-called “cum-ex” trading.  NYT Article on Perhaps Biggest Tax Heist Ever (1/24/20), here.

I still don’t know the details of the precise scheme but have read in cases I cite at the end of this blog that it operated by having entities (retirement and pension plans) purportedly owning Danish stock on which Danish tax was withheld make claims for refund of the withheld tax under certain double tax treaties.  The cases I cite below involve the U.S. double tax treaty with Denmark.  In very high level summary, the basis for the claim for refund required, at a minimum, that the claimant own the stock that paid the dividend from which tax was withheld and paid over to the Danish tax authority (acronymed in the U.S. to SKAT).  SKAT came to believe that the claimants did not own the stock on which thy claimed the refund.  SKAT took steps under its tax procedures to recover the refunds; under those procedures pending in Denmark, SKAT claims that it is entitled to recover the erroneous refunds.  In addition, SKAT filed U.S. suits against the various U.S. entities causing the claims to be made.  In the U.S. suits, Denmark is not invoking its tax claims qua tax claims but is instead invoking “six common law claims against the defendants. Counts One and Two allege fraud and aiding and abetting fraud. Count Six alleges negligent misrepresentation. And Counts Three through Five allege payment by mistake, unjust enrichment, and money had and received.”  That U.S. litigation has been consolidated into a multi-district litigation (“MDL”) case being managed by Judge Lewis Kaplan of S.D.N.Y.  (Judge Kaplan, here, is one of the best trial judges I have appeared before in my career.)  The cases below were rendered in that MDL.

Here is a key allegation from In Re SKAT Tax Refund Scheme Litigation, 356 F. Supp. 3d 300, 309 (S.D. N.Y. 2019) (footnotes omitted):

SKAT alleges that these refund claims were fraudulent because the defendant plans did not own shares in the Danish companies that they purported to own.[12] It argues that it was not possible for the plans to have owned the shares they purported to own because many, including The Bradley London Pension Plan ("Bradley Plan"), were single-participant 401(k) plans limited to approximately $116,500 in contributions per year, yet they claimed to own millions of dollars of stock in Danish companies within the first year of their existence.[13] The numbers, the plaintiff argues, simply do not add up. The defendants therefore were not entitled to the dividends they claimed to have earned and were not entitled to the tax refunds they claimed under the U.S.-Denmark Treaty.[14] SKAT allegedly paid out approximately $2.1 billion as a result of this fraudulent tax refund scheme.[15]

I infer that the claim to have owned millions of dollars of stock when they had limited contributions must have require some "phony" loans of the type often see in bullshit tax shelters.

Excellent Decision for D.C. District Court on Brady Disclosures in Mass Document Dumps (1/24/20)

Some of the more high profile tax crimes cases, like the broader category of white collar crime, have large document sets that the Government must produce to the defense team.  This has led to mass document disclosures (sometimes open file discovery) which, the Government claims, includes all Brady and Giglio material, but the Government insists the defense team must ferret that out to make it useful.  Defense lawyers believe that mass disclosures in large data set cases violates the intent of Brady and Giglio.  I have written on this subject before, and include links in the Comments below.

In United States v. Saffarinia, 2020 U.S. Dist. LEXIS 6735 (D. D.C. 2020), CL here, the court dealt with that issue in a general white collar crime context (not a tax crime context).  (See Slip Op. 72-95.)  I include certain excerpts leading to the Court’s conclusion to order the Government to identify the known Brady material and then offer that conclusion (cleaned up):

[*74]
Between June and August 2019, the government made five productions of documents to Mr. Saffarinia, which included, among other things, nearly all of the FBI's investigative case file, interview reports (i.e. FD-302s), agent notes, and witnesses' statements pursuant to the Jencks Act, 18 U.S.C. § 3500. A large portion of the electronic data consists of electronic communications, including 264,800 e-mails and over 223,000 documents from the FBI's case file, that span roughly a four-year period. And the government's production includes hard drives from two different computers allegedly owned by Person B, which contain 394 [*75] gigabytes of data. . The discovery here, consisting of more than one million records and 3.5 million pages of documents, is massive. 

The government produced the documents to Mr. Saffarinia with production logs, Bates-stamping, and metadata in an electronic and searchable format that is accessible through "Relativity," an electronic database.  The government included a cover letter with each production and a basic, one to two page chart summarizing the Bates-stamped [*78]  numbers covered in each production. And the government represents that it explained its theory of the case to Mr. Saffarinia and defense counsel at two reverse proffer sessions. 

* * * *
[*76]

NYT Article on Perhaps Biggest Tax Heist Ever (1/24/20)

The NYT has this article:  David Segal, It May Be the Biggest Tax Heist Ever. And Europe Wants Justice (NYT 1/23/20), here.  I haven't yet figured out how the scam works, but it is a cum-ex deal.  The article says cryptically:

Through careful timing, and the coordination of a dozen different transactions, cum-ex trades produced two refunds for dividend tax paid on one basket of stocks. 

One basket of stocks. Abracadabra. Two refunds.

Another quote:

Before it all unraveled, the cum-ex ecosystem of lawyers, advisers and auditors enjoyed heady days. Last year, the lawyer who testified anonymously at the Bonn trial described the culture of the cum-ex world to Oliver Schröm and Christian Salewski, two reporters on the German television show “Panorama,” under disguising makeup. It was a realm beyond morality, he said: all male, supremely arrogant, and guided by the conviction that the German state is an enemy and German taxpayers are suckers.

And another quote:

American bankers didn’t try cum-ex at home because they feared domestic regulators. So they moved operations to London and treated the rest of Europe as an anything-goes frontier. Frank Tibo, a former chief tax officer at a bank where Mr. Shields and Mr. Mora worked, said American and British cum-ex traders regarded the Continent as a backwater of old economies ripe for swindling.

The article says that the traders were reluctant to pull the scam in the U.S., so did so in Europe.  One of the larger scammers is reported to tell his cohorts queasy about the scam:

“Whoever has a problem with the fact that because of our work there are fewer kindergartens being built,” Dr. Berger reportedly said, “here’s the door.”

As I read the article, I kept thinking about the Son-of-Boss bullshit tax shelters where lawyers, major law firms, accountants, major accounting firms, brokers, brokerage firms, financial and math gurus and others came together to create and implement raids on the U.S. Treasury.

JAT Comment:

Microsoft Summons Enforcement on Transfer Pricing "Planning" - Mixed on Privilege Claims (1/22/20)

In United States v. Microsoft, 2020 U.S. Dist. LEXIS 8781 (W.D. Wash. 1/17/20), here, the district court resolved a contentious designated summons enforcement proceeding started in December 2014.  (See the CourtListener docket entries, here.)  Summons enforcement proceedings are supposed to be “summary in nature.”  United States v. Clarke, 573 U.S. 248, 254 (2014) (citing United States v. Stuart, 489 U.S. 353, 369 (1989)).  Why the extended time for resolution?

Well, one of the problems is that the transfer pricing "planning" was, as the court found, a KPMG promoted type of tax shelter from the era of KPMG's foray into bullshit tax shelters in the late 1999s and early 2000s.  (I am just saying that it was from that era, not that the KPMG promoted planning was a bullshit tax shelter; that is yet to be seen.)  In resolving the various privilege claims (work product, attorney-client and § 7525 Federally Authorized Tax Practitioner ("FATP") Privilege, the court did not resolve the ultimate audit for the tax years 2004-2006, but did find that KPMG's promoted transfer pricing "planning" was a tax shelter with some not Microsoft-favorable descriptions. 

I write on the case on my Federal Tax Procedure Blog.  See Microsoft Summons Enforcement on Transfer Pricing "Planning" - Mixed on Privilege Claims (1/22/20), here.

The Interplay of Restitution as Condition of Supervised Release and § 6201(a)(4) Restitution Based Assessment (1/19/20)

For many (perhaps most) federal crimes (certainly those in Title 18), the court "may order, in addition to or, in the case of a misdemeanor, in lieu of any other penalty authorized by law, that the defendant make restitution to any victim of such offense, or if the victim is deceased, to the victim’s estate."  18 USC 3663(a)(1)(A).  Restitution is mandatory in some cases, including tax cases with counts of conviction under Title 18 (such as conspiracy).  § 3663A. In tax crimes cases, the IRS is considered a victim for whom restitution may be imposed.  However, this mandatory or even permissive restitution does not apply to the Title 26 tax crimes.  Accordingly, for tax crimes, restitution may be imposed only if (i) "agreed to by the parties in a plea agreement" (18 USC 3663(a)(3)) or as a condition for supervised release or probation (18 USC. §§ 3563(b), 3583(d)).

DOJ CTM 44.00 Restitution in Criminal Tax Cases (Last Edited August 2018), here, has a good bullet-point summary of key restitution points in tax cases (some redundant from the opening paragraph to this blog):

• Restitution is statutory; district courts have no inherent power to order restitution absent statutory authorization.
• Restitution is limited to the actual loss caused by the count(s) of conviction, unless the defendant agrees to pay more.
• For Title 18 tax offenses, restitution as an independent part of the sentence is mandatory pursuant to 18 U.S.C. § 3663A.
• For Title 26 tax offenses, restitution may be ordered as an independent part of the sentence if the defendant agrees to pay restitution in a plea agreement (18 U.S.C. § 3663(a)(3)).
• For Title 26 cases in which the defendant has not agreed to pay restitution, restitution may be ordered as a condition of supervised release or probation (18 U.S.C. §§ 3563(b), 3583(d)).
• Prosecutors should seek prejudgment Title 26 interest in restitution in order to fully compensate the IRS.
• Use the Tax Division’s form plea language whenever possible (available at § 44.09, infra) 

CTM 44.01 Background provides:

Accordingly, in tax cases, the applicable statutes provide the following: (1) for tax offenses prosecuted under Title 18, restitution is mandatory and is ordered as an independent part of the sentence; and (2) for tax offenses prosecuted under Title 26, restitution is discretionary and is ordered as a condition of supervised release, but the defendant can agree to (and plea agreements should provide for) restitution ordered as an independent part of the sentence.  

Section 209 of the Mandatory Victims Restitution Act mandates that when negotiating plea agreements, prosecutors must give consideration “to  requesting that the defendant provide full restitution to all victims of all charges contained in the indictment or information, without regard to the counts to which the defendant actually plead[s].” Pub. L. No. 104-132 § 209; 18 U.S.C. § 3551 note; see also Attorney General Guidelines for Victim and Witness Assistance, Art. V(D) (May 2012); Principles of Federal Prosecution, USAM §§ 9-16.320. To assist prosecutors with this statutory and Department requirement, standard language for the restitution portion of plea agreements in tax cases is included in § 44.09, infra. 

Readers of this blog know that § 6201(a)(4)(A), here, requires the IRS to assess the amount of resitutition "for failure to pay any tax imposed under this title in the same manner as if such amount were such tax."

I focus this blog on the interplay of restitution as a condition of supervised release in Title 26 criminal cases and § 6201(a)(4)(A)'s mandate for assessment.  The impetus for this blog is PMTA 2018-19 (8/23/18), here.  I find that, although that PMTA was in my research "pile," I had not focused on it before.  The PMTA concludes bottom-line that

Marinello in the Courts – An Update (1/18/20)

Jeremy Temkin, a prominent tax/white collar crime attorney, has published this excellent article:  Two Years Later: Have Defendants Benefited From ‘Marinello’?, 263 NYLJ No. 11 (1/16/20), here.  The law firm posting regarding the article with the link is here.  Temkin’s bio is here.

The article is short, so all interested in the current state of Marinello in the courts should read the article.

JAT Comments:

1.  Temkin reports that results in the cases are mixed.  Marinello has not produced a wave of reversals.  Of course, the Government might have conceded many § 7212(a), tax perjury, convictions that never produced opinions published in the various legal publications.

Some of the cases, like Takesian, which I wrote on recently, did not produce a reversal because ““Takesian could reasonably foresee that an IRS investigation of him was (in Marinello's phrasing) ‘at least . . . in the offing,’” See First Circuit Affirms Tax Obstruction Conviction (Federal Tax Crimes Blog 1/9/20), here.

2.  Marinello-based reversals or Government concessions of the tax obstruction count often would have no bottom-line effect because of other counts of conviction.  In order to test this, the actual sentencing calculations and the Court’s discretionary Booker variances would have to be considered.  I have not done that.  But I did previously note that in Marinello itself, the other counts of conviction likely would permit the same sentencing result.  See Supreme Court Holds that Omnibus Clause of the Tax Obstruction Crime (§ 7212(a)) Requires Awareness of Pending Tax-Related Proceeding (3/21/18; 3/22/18), here, point 4 in JAT comments; see also Dealing with Other Counts of Conviction After Vacating Tax Obstruction Based on Marinello (Federal Tax Crimes Blog 6/26/18), here.

Criminal Tax Evasion and Civil Fraud–If Found by the Trier, Can There be a Reasonable Cause/Good faith Defense (1/16/20; 1/17/20)

I have blogged several times on my Federal Tax Crimes Blog about how the “good faith” defense is subsumed in the definition of willfulness for tax crimes.  Willful is the intentional violation of a known legal duty.  If a trier of fact determines that the defendant intentionally violated a known legal duty, then per se that person did not have a good faith defense.  Accordingly, if the trial court in a criminal case where willfulness is an element of a tax crime properly instructs the jury on the willful element, the fact that the judge did not separately instruct the jury that good faith (such as reliance on tax professional) is a “defense” is not error or, at least not reversible error.  Simply put, proof of willfulness negates the good faith defense.  The defendant cannot have intended to violate a known legal duty and then have reasonable cause/good faith in violating that known legal duty.  Accordingly, for example, consider the following:  "[T]o prove willfulness beyond a reasonable doubt, the Government would have to negate the taxpayer's claim that he relied in good faith on the advice of his accountant.”  United States v. Stadtmauer, 620 F3d 237, 257 n. 22 (3d Cir. 2010).

Now I want to move this concept to the civil arena.  Section 6663, here, imposes a civil fraud penalty.  The conduct penalized under § 6663 is “fraud.”  Basically, the conduct penalized under § 6663 is the same conduct that is tax evasion in the criminal context – intentional violation of a known legal duty.  (There may be different verbal formulations, but that is the essence of it in both the criminal and civil arenas.)  So, if proof of tax evasion negates a reasonable cause defense, one would think that proof of civil fraud negates a reasonable cause defense.

Although I think this logic is irrefutable, some courts nevertheless act like they believe otherwise.  For example, in Purvis v. Commissioner, T.C. Memo. 2020-13, at *33-*48, here, the Tax Court found that the taxpayers committed civil fraud subject to the penalty under § 6663.  The Court concluded after 15 pages analyzing the evidence (*48):   “Accordingly, we hold that petitioners are liable for the section 6663(a) fraud penalties for the years at issue.”

The Court then  (at *49-*50) considered the reasonable cause defense.  But why did the Court do that after the Court found that the taxpayer had intended to violate a known legal duty?

One reason is the way the statutory provisions are written.  Specifically, § 6663 imposes the penalty for fraud but then, § 6664(c)(1), here, states (emphasis supplied): “No penalty shall be imposed under section 6662 or 6663 with respect to any portion of an underpayment if it is shown that there was a reasonable cause for such portion and that the taxpayer acted in good faith with respect to such portion.”  But, as established in the criminal context, the taxpayer (called defendant in a criminal context) cannot have intended to violate a known legal duty if he had a reasonable cause/good faith defense.  That surely must be true in the civil context as well.

I would appreciate readers view on this issue.  Specifically, is it possible for the Government (the IRS in a Tax Court case) to prove civil fraud by clear and convincing evidence and the taxpayer then establish a reasonable cause/good faith defense?

One other thought.  The regulations for the reasonable cause defense under § 6664 only address the accuracy related penalty under § 6662.  See Regs. § 1.6664-4, titled "Reasonable cause and good faith exception to section 6662 penalties." I suspect that this analysis is the reason.  The reasonable cause defense is an oxymoron if § 6663 civil fraud is proved.  But § 6664(c) is not the only time that Congress has legislated an oxymoron.

Addendum 1/17/20 12:00pm:

Anesthesiologist Sentenced for Tax Perjury (1/16/20)

DOJ Tax announced today the sentencing of a Pennsylvania anesthesiologist, James G. Allen, Jr. To 30 months in prison.  See Pennsylvania Anesthesiologist Sentenced to Prison for Tax Fraud (1/16/20), here.

The key excerpts are:

A Pennsylvania anesthesiologist was sentenced to 30 months in prison today for filing a false income tax return, announced Principal Deputy Assistant Attorney General Richard E. Zuckerman of the Justice Department’s Tax Division. 

From 2010 through 2018, James G. Allen Jr., 54, filed and caused the filing with the Internal Revenue Service (IRS) of sixteen false tax returns for himself and his wife.  On these tax returns, Allen did not report more than $3 million in income that the pair earned as anesthesiologists.  In addition to filing false tax returns, Allen took steps to conceal the couple’s assets and income from the IRS, including depositing money in an offshore bank account held in the Bailiwick of Jersey, wiring money to Columbia to purchase a house, purchasing cryptocurrency and gold, and registering a vehicle in the name of a purported church. In total, Allen caused a tax loss of more than $900,000 to the United States. 

In addition to the term of imprisonment, U.S. District Judge Arthur J. Schwab ordered Allen to serve a one year term of supervised release and pay restitution to the IRS in the amount of $ 1,084,658.52.  

JAT Comments:

Texas Lawyer and Client Convicted for Conspiracy (1/15/20)

DOJ Tax has announced this conviction:  Jury Finds Texas Attorney and Client Guilty of Conspiring to Defraud the Internal Revenue Service (1/15/20), here.  See CourtListener docket entries here.

Key excerpts.

A federal jury convicted a Texas attorney John O. Green and his client Thomas Selgas today for conspiring to defraud the United States, announced Principal Deputy Assistant Attorney General Richard E. Zuckerman of the Justice Department’s Tax Division. The jury also convicted Selgas of tax evasion. Selgas’s wife, Michelle Selgas, was acquitted of conspiring to defraud the United States and tax evasion. 

According to the evidence presented at trial, Selgas conspired with Green, an attorney licensed to practice in Texas, to defraud the United States by obstructing the Internal Revenue Service (IRS) from assessing and collecting Selgas’s taxes. Selgas and his wife owed approximately $1.1 million in outstanding taxes that Selgas refused to pay. When the IRS made efforts to collect the outstanding taxes, Selgas concealed funds by using Green’s Interest on Lawyers Trust Account (IOLTA) rather than using accounts in his own name. An IOLTA is a bank account used by a lawyer to hold money in trust for clients. From 2007 to 2017, Selgas deposited proceeds from the sale of gold coins and other income into Green’s IOLTA and Green would then pay the Selgases personal expenses, including their credit card bills, from that account. Selgas and Green also filed a false tax return on behalf of MyMail, Ltd., an intellectual property development and licensing partnership Selgas co-founded, omitting a substantial portion of the partnership’s income.

JAT Comments:

Eleventh Circuit Affirms Conviction of Another Congressman (1/14/20; 1/16/20)

In United States v. Brown, ___ F.3d ___, 2020 U.S. App. LEXIS 556 (11th Cir. 2020), 11th Cir. here and CL here, Brown, a former congresswoman, was charged with 24 counts for a melange of crimes, including mail and wire fraud and conspiracy to commit, false statements, tax obstruction (§ 7212(a), one count) and tax perjury (§ 7206(1), three counts).  The jury convicted of all except 4 of the fraud counts.  On appeal, Brown argued that the trial judge had improperly dismissed a juror who, another juror reported, stated to the jurors at the beginning of deliberations that (Slip Op. 12-15):

"A Higher Being told me Corrine Brown was Not Guilty on all charges". He later went on to say he "trusted the Holy Ghost". 

The judge then questioned the juror outside the hearing of the other jury members.

Court: Okay. That's fine. So let me get a little more specific with you. Have you expressed to any of your fellow jurors any religious sentiment, to the effect that a higher being is telling you how—is guiding you on these—on these decisions, or that you are trusting in your religion to—to base your decisions on? Have you made any—can you think of any kind of statements that you may have made to any of your fellow jurors along those lines? 

Juror: I did, yes. 

Court: Okay. Can you tell me, as best you can, what you said? 

Juror: Absolutely. I told them that in all of this, in listening to all the information, taking it all down, I listen for the truth, and I know the truth when the truth is spoken. So I expressed that to them, and how I came to that conclusion. 

Court: Okay. And in doing so, have you invoked a higher power or a higher being? I mean, have you used those terms to them in expressing yourself? 

Juror: Absolutely. I told—I told them that—that I prayed about this, I have looked at the information, and that I received information as to what I was told to do in relation to what I heard here today—or this past two weeks. 

Court: Sure. When you say you received information, from what source? I mean, are you saying you received information from— 

Juror: My Father in Heaven.

Fifth Circuit Affirms Republican Congressman Conviction for Crimes Including Tax Perjury (1/14/20)

In United States v. Stockman, ___ F.3d ___, 2020 U.S. App. LEXIS 851 (5th Cir. 2020), here, the Fifth Circuit affirmed Stockman’s convictions of four counts of mail fraud, three counts of wire fraud, two counts of making false statements in FEC filings, eleven counts of money laundering, one count of conspiracy to make conduit campaign contributions and false statements, one count of causing an excessive campaign contribution, and one count of filing a false tax return.  Stockman was a former congressman (Republican).

The only item that I found interesting, more as a reminder rather than as new to readers of this blog, was the rejection of Stockman’s complaint that he should have received a “good faith” instruction for crimes (including the tax crime) with willful conduct as an element of the crime.  Stockman alleged his “good faith” reliance on his tax professional.  The relevant discussion from the Fifth Circuit opinion is (Slip Op. at 17-19 (cleaned up)) :

We next consider Stockman's argument that his tax and campaign finance convictions under Counts 10, 11, 12, and 28 of the indictment were tainted by the district court's refusal to instruct on "good faith." Stockman points to evidence that he relied on an accountant who "wrongly advised him that having aides contribute money to his congressional campaign in the name of their parents was permissible." He also points to evidence that Stockman and Posey intentionally omitted words of express advocacy from The Conservative News in order to comply with FECA. He asserts that in this context and where willfulness is required, a good faith instruction should have been given. 

Again, we disagree. Although the parties dispute the standard of review applicable to the district court's refusal to instruct on good faith, decisions of this court and the Supreme Court show that the refusal was not erroneous, whether reviewed de novo or for plain error. See United States v. Pomponio, 429 U.S. 10, 11-12 (1976); United States v. Simkanin, 420 F.3d 397, 409-11 (5th Cir. 2005). Stockman argues that a good faith instruction should have been issued because the tax and campaign finance offenses [*18]  in question all require a showing of "willfulness." 

But it is precisely that requirement that renders any such instruction unnecessary. The Supreme Court held in Pomponio that an additional good faith instruction is not required when the charge already requires proof of "willfulness," properly cabined to cover only voluntary, intentional violations of known legal duties. In so holding, the Court gave its approval to a charge that did not instruct on good faith but did instruct on the need for proof of a "willful" act, meaning an act done voluntarily and intentionally and with the specific intent to do something which the law forbids, that is to say with the bad purpose either to disobey or disregard the law.  Drawing from Pomponio, we held in Simkanin that a "specific instruction" on good faith is not required when the concept is sufficiently subsumed by a general instruction on "willfulness." Simkanin, like Pomponio, approved of instructions alerting the jury to the fact that a "willful" act is done voluntarily and deliberately, with the intention of violating a known legal duty. 

Here, the district court's instructions [*19]  mirrored those in Pomponio and Simkanin. With respect to Counts 10, 11, and 12, the district court instructed the jury that to act "willfully," the defendant must act "voluntarily and purposely, with the specific intent to do something the law forbids, that is, with the bad purpose either to disobey or disregard the law." With respect to Count 28 [the tax perjury count], the district court instructed the jury that it could not convict unless it found that Stockman acted "with intent to violate a known legal duty." We find no merit in Stockman's "good faith" argument.

JAT Comments:

Court Enters Default Judgment in FBAR Willful Penalty Collection Suit (1/10/20)

In United States v. Lanz, 2019 U.S. Dist. LEXIS 222922 (D. N.J. 2019), CL here, the district court entered default judgment against the defendant, Lanz, in an FBAR willful penalty collection suit.  The judgment is for "$544,731.73 for the penalties assessed against him under 31 U.S.C. § 5321(a)(5), accrued interest on such penalties, late payment penalties, and further statutory additions thereon as allowed by law from August 19, 2015, to the date of payment."

The key excerpts are:

Third, the Court finds that the Complaint states a sufficient cause of action. Plaintiff alleges that Defendant violated the reporting requirements of 31 U.S.C. § 5314, as implemented under 31 C.F.R. § 1010.350 and 31 C.F.R. § 1010.306(c), for calendar years 2006, 2007, and 2008. (Compl. ¶ 20). As Plaintiff explains, "[a]ll citizens and residents of the United States who have a financial interest in, or signatory or other authority over, any foreign financial account that had a maximum value greater than $10,000 during the calendar year are required to file an annual report disclosing the existence of each account." (Compl. ¶ 5 (citing 31 U.S.C. § 5314 & 31 C.F.R. § 1010.350)). That annual report—known as a Report of Foreign Bank and Financial Accounts ("FBAR")—is due no later than June 30th of the year following the calendar year. (Id. ¶ 6 (citing 31 C.F.R. § 1010.306(c)). Plaintiff alleges that Defendant was subject to these reporting requirements because Defendant was a U.S. citizen who held a foreign bank account, and the aggregate amount in that account exceeded $10,000 in U.S. currency during 2006, 2007, and 2008. (Compl. ¶¶ 9-12). Plaintiff further alleges that Plaintiff failed to (i) report the income generated in the Account on his federal income tax returns; (ii) [*7]  file an FBAR as required for 2006, 2007, and 2008; and (iii) report having an interest in a foreign bank account on Schedule B of his income tax returns for at least 2006 and 2008. (Id. ¶¶ 13-15). Based on these allegations, the Court finds that Plaintiff has sufficiently stated a cause of action for failure to comply with the reporting requirements of 31 U.S.C. § 5314. 

Moreover, the Court finds that the Complaint provides sufficient basis for the Court to determine that Defendant's failure to report was willful. Willfulness covers both knowing and reckless violations, and "may be proven through inference from conduct meant to conceal or mislead sources of income or other financial information." United States v. Williams, 489 F. App'x 655, 658 (4th Cir. 2012). Here, Plaintiff alleges several facts suggesting that Defendant acted willfully: (i) Defendant took steps to hide his ownership of the Account by telling UBS AG to hold all correspondence relating to the Account (Compl. ¶ 9); (ii) Defendant falsely told the IRS twice that he did not own a foreign bank account, and signed an affidavit stating that he did not have a foreign bank account during 2008 (id. ¶ 17); and (iii) Defendant eventually transferred the Account that he held in his name to another bank and [*8]  put the Account in the name of another person (id. ¶¶ 10-11). These actions suggest that Defendant acted willfully in failing to report his ownership and interest in the Account. See United States v. Brandt, No. 17-80671, 2018 U.S. Dist. LEXIS 226286, 2018 WL 1121466, at *4 (S.D. Fla. Jan. 24, 2018) (finding a willful reporting violation under similar circumstances).

First Circuit Affirms Tax Obstruction Conviction (1/9/20)

In United States v. Takesian, ___ F.3d ___, 2019 U.S. App. LEXIS 37571 (1st Cir. 2019), here, the Court opens with this:

Greg Takesian is a certified-public-accountant-turned-tax-cheat. Or so a jury essentially concluded in convicting him of four counts of filing false tax returns, see 26 U.S.C. § 7206(1), and one count of attempting to obstruct the internal-revenue laws, see 26 U.S.C. § 7212(a). A district judge at sentencing hit him with concurrent prison terms of 24 months on each count, 12 months of supervised release following the end of his incarceration, a special assessment of $100 on each count, a $10,000 fine, and restitution totaling $286,433. None too happy with these results, Takesian argues here that the judge thrice erred: first, by letting prosecutors impeach him with his 2006 conviction for making a false statement; second, by failing to tell the jury that to convict on the obstruction count, prosecutors had to prove that he obstructed a particular tax-related proceeding that he knew about or could reasonably foresee; and third, by ordering restitution beyond what the jury found the government's tax loss to be. Disagreeing with him, we affirm.

Two of the issues on appeal may be interesting to readers of this blog – first, a Marinello issue and second, a restitution issue.

Marinello

Readers will recall that, in Marinello v. United States,138 S. Ct. 1101 (2018), here, the Court held that the obstructive acts for a conviction of tax perjury under § 7212(a), required that the Government prove that the defendant acted to obstruct a known or foreseeable investigation.  Marinello was decided after the trial in Takesian.  Takesian argued that he was entitled to a Marinello-based instruction which he did not get.  The Court rejected the argument, although agreeing with the parties that the failure to give instruction the Marinello instruction was plain error.  Plain error requires that Takesian must still prove that the error jeopardized his substantial rights–that the defendant show “‘a reasonable probability" that the flawed instruction led to a flawed conviction.”  Basically, the Court found the from the facts showed that “Takesian could reasonably foresee that an IRS investigation of him was (in Marinello's phrasing) ‘at least . . . in the offing,’” For that reason, he cannot show that the jury would have acquitted with a proper instruction.

Restitution

Takesian objected to the restitution award of $286,433.  In an unusual procedure, the trial judge submitted to the jury not only the standard questions for guilty or not guilty but also sentencing factors (including most prominently, the tax loss).  The Court explains:

We should probably say a word about why the judge did what he did here. The government tells us without contradiction that this judge's practice is to "submi[t] . . . sentencing factors to the jury under a beyond-a-reasonable-doubt standard." And the verdict form that he used listed seven tax-loss ranges — each corresponding to an offense level, which helps set a convicted person's advisory prison range under the federal sentencing guidelines. See USSG § 2T4.1. No party complains about this procedure. So we have no occasion to weigh in on it.

Court Affirms Denial of Reliance on Tax Professional Jury Instruction (1/9/20)

In United States v. Wright, 2019 U.S. App. LEXIS 37713 (6th Cir. 2019) (Not Published), here, the Court affirmed the conviction and sentencing of the defendant, Wright.  As suggested by the failure to publish the opinion, there is nothing particularly new or noteworthy in the opinion. I do, however, offer the flavor from the opening paragraph:

This is the second time that James Wright has attempted to conceal income from the United States government. n1 In this instance, Wright underreported his income by claiming improper deductions to a subchapter S-corporation and engaged in self-dealing with a private foundation to pay for his children's tuition. A jury convicted Wright of seven counts of filing, or aiding in the filing of, false tax returns in violation of 26 U.S.C. § 7206. The district court sentenced Wright to 33 months in prison and ordered him to pay $146,404 in restitution. Wright appeals, alleging that the district court abused its discretion by refusing to give a jury instruction on good-faith reliance on accountants and lawyers. Wright also challenges the procedural reasonableness of his sentence, asserting  that the district court improperly calculated the amount of loss stemming from the false tax returns. We AFFIRM.
   n1 In 1998, Wright pleaded guilty to tax evasion for using trusts to conceal insurance-commission income. United States v. Wright, No. 97-cr-64 (S.D. Ohio).

 JAT Comment:

1. Although a defendant would want the reliance on tax professional instruction, it is really baked into the general willfulness instruction.  The willfulness instruction, which the court must give, says that the defendant can be convicted of the tax perjury offense, § 7206(1), only if the taxpayer acted willfully – with intent to violate a known legal duty.  Defenses such as good faith and reliance on tax professional are inherent in the requirement that the Government prove that the defendant did not act in good faith.  Accordingly, although the Sixth Circuit held that Wright did not satisfactorily put reliance on tax professional in issue with evidence sufficient to mandate a specific reliance instruction, the defendant was free to argue that he acted in good faith and had a good faith belief that he was not violating a known legal duty.  See See, e.g., United States v. Montgomery, 747 F.3d 303, 311 (5th Cir. 2014).  He just did not get an instruction that would draw the jury’s particular attention to that defense.

2. My experience is that persons convicted once avoid the conduct in the future.  Even if they continue the conduct, the IRS and DOJ Tax may not learn of the next round(s) and even if they do might not see any value if wasting further criminal investigation or prosecution resources on the same taxpayer.  But, the IRS and DOJ Tax has to bring some of these cases just to remind people that one conviction does not give a free pass for misbehavior.

Union Bancaire Privée, UBP SA ("UBP") Enters an Addendum to its Swiss Bank Program Category 2 NPA (1/5/20)

I previously reported that Union Bancaire Privée, UBP SA ("UBP"), had entered a NonProsecution Agreement (“NPA”) with DOJ Tax under the DOJ Swiss Bank Program.  One More Swiss Bank Achieves NPA Under Swiss Bank Program (Federal Tax Crimes Blog 1/6/16), here.  Under the original NPA, UBP paid $74,5 million (rounded) in penalties.  DOJ Tax announced here that UBP has entered an addendum to the NPA after disclosing additional, previously undisclosed, accounts and agreeing to pay an additional $14 million, for a combined penalty amount of $201,767 million.

(Note:  I have added at the end of this blog entry a short discussion of a similar agreement reached with Banque Bonhôte & Cie SA that I missed earlier.)

The key excerpts for the UBP Addendum are (emphasis supplied):

The Department of Justice announced today that it has signed an addendum to a non-prosecution agreement with Union Bancaire Privée, UBP SA (UBP), a private bank headquartered in Geneva, Switzerland. The original non-prosecution agreement was signed on Jan. 6, 2016. At that time, UBP reported that it held and managed 2,919 U.S. Related Accounts, with assets under management of approximately $4.9 billion, and paid a penalty of $187,767,000. In reaching today’s agreement, UBP acknowledges it should have disclosed additional U.S.-related accounts to the department at the time of the signing of the non-prosecution agreement. 

“Foreign banks that participated in the Swiss Bank Program were obligated to identify all accounts in which U.S. taxpayers held an interest, directly or indirectly,” said Richard E. Zuckerman, Principal Deputy Assistant Attorney General for the Tax Division. “Today’s agreement reflects our continued commitment to ensuring that when entities cooperate and make disclosures to the Department, that they do so fully.” 

The Swiss Bank Program provided a path for Swiss banks to resolve potential criminal liabilities in the United States relating to offshore banking services provided to United States taxpayers. Banks eligible to enter the program were required to advise the department that they had reason to believe that they had committed tax-related criminal offenses in connection with undeclared U.S.-related accounts. As participants in the program, they were required to make a complete disclosure of their cross-border activities, provide detailed information on an account-by-account basis for accounts in which U.S. taxpayers had a direct or indirect interest, cooperate in treaty requests for account information, and provide detailed information about the transfer of funds into and out of U.S.-related accounts, including undeclared accounts. 

The department executed non-prosecution agreements with 80 banks between March 2015 and January 2016. The department imposed a total of more than $1.36 billion in Swiss Bank Program penalties. Pursuant to today’s agreement, UBP will pay an additional sum of $14,000,000 and will provide supplemental information regarding its U.S.-related account population, which now includes 97 additional accounts. 

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

The Addendum to the NPA is linked on the announcement and is bare bones.

JAT Comments:

1. It is not clear to me whether UBP suffered any additional cost for failing to advise DOJ Tax of the previously unreported accounts that it knew or should have known about at the time of the original NPA.  And it is not clear whether UBP eventually self-reported the undisclosed accounts or DOJ Tax and/or the IRS discovered some unreported accounts that led to UBP's cooperation.

2.  In preparing this blog entry, I discovered that I had failed to report one Addendum for Banque Bonhôte & Cie SA.  The DOJ Tax Press Release, dated 7/1/2019 is here.  The same pattern exists - failure to include in initial agreement accounts that the bank knew or should have known abuot..  The initial cost was $624,000, the Addendum added $1,200,00.  The Total is $1,824,000.

Second Circuit Opines that Tax Protestor/Defier Arguments for Lack of Criminal Jurisdiction are Bogus (1/1/20)

In United States v. McLaughlin (2d Cir. Dkt 19-308-cr Opinion 12/30/19), here, McLaughlin was convicted of making false statements to IRS (presumably the charge was tax obstruction, § 7212(a)) by submitting false documents intended to have the IRS audit and assess penalties against a state judge.  McLaughlin appealed, claiming that the district court did not have jurisdiction, a genre of tax protestor/defier argument “consistent with a ‘Sovereign Citizen’ ideology.”

Courts are confronted with this genre of argument often and routinely bat them down.  So, why did the Second Circuit, which often issues summary orders in routine and frivolous cases, decide to issue a full opinion?  The Court says:

McLaughlin’s argument here goes to the very heart of our authority to hear Federal criminal cases. It raises an issue that warrants a clear statement from this Court, to deter future litigants from making similar claims.    

The bottom line, as readers of this blog would expect, that the Second Circuit holds that the district court had jurisdiction.

Short opinion.

JAT Comment:

Maybe the opinion will circulate in the communities of taxpayers to whom it is targeted.  But, I doubt that, if any are deterred by the opinion, it won’t be many and members of these communities will continue to undertake the underlying behavior resulting in their prosecution where their only or, at least, preferred "defense" is this genre of argument.

The opinion will give district court judges additional reason to summarily dispose of similar arguments.