District Court Sustains FBAR Civil Willful Penalty (2/28/20)

In United States v. Ott (E.D. Mich. Dkt. 2:18-cv-12174 2/26/20), here, the district court sustained the IRS assertion of willful FBAR penalties.  The CourtListener docket entries are here:

In material part, the court held:

1. The preponderance of the evidence standard applied to the FBAR willful civil penalty.

2. The definition of willfulness includes recklessness and willful blindness.  (Note the caption for that holding is: “Willfulness Definition for Civil Tax Liability.”)

3. FBAR willfulness can be shown by inference from the facts.

None of this is particularly new, and follows a line of cases over the past few years.

One point of interest is that the IRS asserted tax and civil fraud penalties under § 6663 for 2006, 2007 and 2008.  (See the Tax Court Docket Entries here.)  The taxpayer petitioned the Tax Court and the case was settled for penalties and the accuracy related penalty in § 6662.  See the decision document here (Dkt 45).  Of course, the IRS' burden to prove civil fraud for the civil fraud penalty is the clear and convincing standard, whereas, the trend in cases is that proving willfulness for the FBAR civil willful penalty is preponderance and the definition of willfulness may be looser than civil fraud.  So, the two outcomes are not inconsistent on their face.

Disqus Comment Problems - Hopefully Resolved (2/21/20)

I just realized late last week that there were some disqus comment problems that have apparently been going on for at least a couple of months.  I have not received an email alert of new comments.  And then when I tried to go to the moderation  page in disqus, I could not do so.  I finally got through to the moderation page and there were a number of old comments.  I have approved those comments and hopefully they now show up, albeit belatedly.  I will work through them and see if I should make any replies to the comments.

I am sorry about the problem and will be more diligent in the future.

Two Articles on Swiss Banks (2/19/20)

This is just a miscellaneous post on Swiss Banks to report two recent articles on two different topics.

• Samuel Gerber, U.S. Tax Dispute: Swiss Banks in for More Fines? (Finews.com 2/19/20), here. The article reports on recent addenda by two Category 2 banks who reached NonProsecution Agreements (“NPAs”) under the DOJ Swiss Bank Program.  I recently reported on two incidents:  Union Bancaire Privée, UBP SA ("UBP") Enters an Addendum to its Swiss Bank Program Category 2 NPA (Federal Tax Crimes Blog 2/5/20), here; and Coutts & Co. Ltd. Enters an Addendum to its Swiss Bank Program Category 2 NPA (Federal Tax Crimes Blog 12/20/19), here.  The article speculates that there may be more to come, concluding that: “The Swiss banking industry doesn’t know how far the U.S. authorities intend to go but one observer noted that the proverbial lemon has been squeezed dry already.”  That’s their story and they are sticking to it.
• Switzerland still a hot spot to hide money, but getting better (SWI Swissinfo.ch 2/19/20), here. This article reports (excerpted from the start of the article):

The biennial Financial Secrecy Index ranks each country based on how intensely the country’s legal and financial system allows wealthy individuals and criminals to hide and launder money from around the world. The index bases each country’s secrecy score on 20 indicators, each of which is scored out of 100.  

For the first time Switzerland isn't the worst offender in the Financial Secrecy Index, which was first published in 2011. The current Financial Secrecy Indexexternal link, released by the Tax Justice Network on Tuesday, found that overall financial secrecy around the world is decreasing due to a push for more transparency. On average, countries on the index reduced their contribution to global financial secrecy by 7% since the last index in 2018. 

The Cayman Islands took the top spot followed by the US, which posted a worse score than the previous year partly because it has yet to sign up to the Common Reporting Standardsexternal link for automatic exchange. 

Switzerland’s expansion of the automatic exchange of information on clients to include over 100 countries helped the country move from first to third when it comes to opacity. According to the ranking, Switzerland reduced the risk of acting as an offshore haven by 12% from 2018. 

However, wealthy people from countries not on the list, many of which are in the developing world, can still hide their money virtually risk-free from the tax authorities in their home country by using the offshore services of banks and other financial service providers in Switzerland.

D.C. Circuit Rejects Claim that Admissions were Coerced (2/12/2020)

In United States v. Cooper, ___ F.3d ___, 2020 U.S. App. LEXIS 4153 (D.C. Cir. 2020), here, two defendants, along with another (described as the hub in the wheel in this conspiracy), orchestrated a tax refund scheme and were convicted of theft of public money and conspiracy to defraud the United States. See 18 U.S.C. §§ 641, 371.  One was also convicted of aggravated identity theft, 18 U.S.C. § 1028A.  On appeal, they urged: (i) one asserted a Miranda failure from an interview at the time of executing a search warrant; (ii) that the court erred in allowing IRS agent summary witness testimony and (iii) miscellaneous other arguments that the court deemed insubstantial warranting only summary discussion.

I don’t think there is anything exceptional in the case.  But the first issue (the Miranda issue) is a reminder because it does come up often.

First, the particular fraud involved was tax fraud via erroneous refunds.  The Court describes the fraud as follows:

Several individuals in the District of Columbia acted together to steal millions of dollars from the Federal Treasury. Their method of operation was this. First beg, steal, purchase or borrow other people’s identities including, most importantly, their Social Security numbers. Then file false income tax returns seeking refunds in their names. Keep the refund requests relatively small. List on the tax returns the addresses, not of the purported filers, but of one or another co-conspirator. Then, when the refund checks from the Treasury arrive, compromise bank tellers, negotiate the checks, and deposit the proceeds in the conspirators’ personal accounts. This multi-year conspiracy netted a total of nearly $5 million in tax refunds from the Treasury.

Second, Notwithstanding the tax focus of the fraud, the investigation was started by a Postal Inspector “after detecting what appeared to be fraudulent tax returns being sent through the mail.”

Ninth Circuit Botches Evasion of Assessment Statute of Limitations (2/12/20)

In United States v. Galloway, 2020 U.S. App. LEXIS 3976 (9th Cir. 2020) (unpublished), here, Galloway was convicted of four counts of tax evasion.  On appeal, Galloway made several arguments.  I focus here only on his argument that the statute of limitations foreclosed his convictions on three counts of tax evasion (evasion of assessment).  I think the Court erred.

Here is the panel’s discussion of that issue:

1. Galloway argues that the district court erred in not dismissing Counts 1–3 on statute-of-limitations grounds because the indictment was brought more than six years after Galloway filed his 2003, 2004, and 2005 tax returns. We review the district court’s decision de novo. United States v. Sure Chief, 438 F.3d 920, 922 (9th Cir. 2006). 

The six-year statute of limitations for tax evasion, 26 U.S.C. § 6531(2), begins to run in evasion of assessment cases “from the occurrence of the last act necessary to complete the offense.” n1 United States v. Carlson, 235 F.3d 466, 470 (9th Cir. 2000).n2  Because tax evasion “is not a continuing offense” for statute of [*3] limitations purposes, Cohen v. United States, 297 F.2d 760, 770 (9th Cir. 1962) (quoting Norwitt v. United States, 195 F.2d 127, 133 (9th Cir. 1952)), the offense of tax evasion “is complete as soon as every element in the crime occurs,” see United States v. Musacchio, 968 F.2d 782, 790 (9th Cir. 1991). The elements of tax evasion under § 7201 are: (a) “willfulness”; n3  (b) “the existence of a tax deficiency”; and (c) “an affirmative act constituting an evasion or attempted evasion of the tax.” United States v. Kayser, 488 F.3d 1070, 1073 (9th Cir. 2007).
   n1  Both parties agree that Counts 1–3 charge Galloway with committing tax evasion only by evading the assessment of taxes, and not by evading the payment of taxes.
   n2  The Government’s contention that Counts 1–3 are timely because the statute of limitations began to run, not from the filing of the false tax returns, but from the date Galloway lied to the IRS agents about his taxable income—i.e., the last act of evasion—is squarely foreclosed by Carlson’s clear language. See 235 F.3d at 470.
   n3  The parties do not dispute that Galloway willfully filed his false tax returns.  

  When Galloway late-filed his 2003, 2004, and 2005 tax returns, he had already incurred a tax deficiency for each year. See United States v. Voorhies, 658 F.2d 710, 714 (9th Cir. 1981) (“A tax deficiency exists [by operation of law] from the date a return is due to be filed . . . .”). Therefore, each offense of tax evasion charged in Counts 1–3 was complete when Galloway willfully filed his false tax returns (i.e., each element of tax evasion was thereby satisfied). Because the indictment was brought more than six years after Galloway filed his 2003, 2004, and 2005 tax returns, Counts 1–3 are barred by the statute of limitations. We therefore reverse the district court’s denial of Galloway’s motion to dismiss and vacate his convictions as to Counts 1–3. 

The panel’s reasoning is that the crime of tax evasion (of assessment) was complete upon filing fraudulent returns underreporting the tax liability.  However, my understanding is that the crime of evasion of assessment can be committed by later acts such as lying with the intent to evade assessment of the tax liability.  The lying or other act of evasion of assessment can be a separate act of evasion if it is intended to evade an assessment.  See United States v. Beacon Brass Co., Inc., 344 U.S. 43 (1952), here (holding inter alia (p. 46), with respect to the statute of limitations "We do not believe that Congress intended to require the tax-enforcement authorities to deal differently with false statements than with other methods of tax evasion.")

Eighth Circuit Affirms Tax Preparer Conviction, Rejecting Argument for Search Warrant Suppression (2/12/20)

In United States v. Keleta, ___ F.3d ___, 2020 U.S. App. LEXIS 3566 (8th Cir. 2020), here, the court sustained Keleta’s conviction for “conspiring to defraud the United States and willfully aiding and assisting in the filing of a false tax return” but remanded for resentencing.  This case seems to be a garden variety case of tax preparer fraud.  The issues on appeal were: (i) whether the trial court erred in denying a motion to suppress evidence seized by search warrant; (ii) whether the prosecutor committed misconduct in certain statements before the jury; and (iii) whether the trial court erred in applying a four-level enhancement under S.G. § 3B1.1(a) as organizer or leader of a criminal activity involving five or more participants.  Issues (ii) and (iii) are fairly routine (although issue (ii) is likely a one-off occurrence, unlikely to appear in future trials).  I will address only issue (i)

The motion to suppress was based on a search warrant.  Here are key excerpts for issue (i) (Slip Op. 2-3, 7-8):

Asmerom “Ace” Keleta owned Eriace Enterprise, LLC (Eriace), which operated several tax-preparation businesses in the St. Louis metropolitan area under the names U-City Tax Service and Ace Express Tax Service. In 2012, the IRS’s Scheme Development Center (SDC) forwarded information about Eriace to the IRS’s Criminal Investigation Division. After reviewing the information, investigators noted that a high percentage of tax returns prepared by Eriace claimed certain tax credits.  They also found that much of the information used to seek these tax credits “was not verifiable by other information filed with the IRS” and that the unverifiable information was often combined with verifiable information in ways that made the taxpayer eligible for the maximum or near the maximum available tax credit. The personal tax returns for Keleta and U-City Tax Service employees Miyoshi Lewis and Teklom “Tek” Paulos fit this pattern.  

On February 27, 2013, IRS Special Agent Danette Coleman conducted an undercover operation at a U-City Tax Service branch in University City, Missouri. Lewis prepared a tax return for Coleman while Paulos helped another customer. Keleta was not present at the time. Lewis initially calculated a refund amount of $44 based on the information Coleman provided. When Coleman asked why the refund was so low, Lewis responded that she could “make it more, but the fee will go up.” Lewis then entered false information and calculated a refund of approximately $4,200. She charged Coleman $500 cash for obtaining this increased refund.  

The IRS also received three anonymous letters alleging tax fraud at that U-City Tax Service branch. The anonymous informant claimed that Keleta had sold the use of his preparer tax identification number (PTIN) and electronic filing identification [*3] number (EFIN) to several individuals, including Paulos, who used them to file tax returns containing fraudulent information. The IRS corroborated that Lewis, Paulos, and several other individuals named in the letters were “friends” on Facebook. The IRS also found that numerous withdrawals from Eriace’s business checking account appeared to be personal in nature. 

Based on this information, IRS Special Agent Nicholas Kenney obtained a warrant to search the U-City Tax Service branch and seize records found on the premises. The government executed the warrant on April 13, 2013. It seized computers, cell phones, client files, and other items, including a signature stamp with Keleta’s signature.

* * * *

Convicted Tax Protestor's Bid for Competency Hearing Fails on Appeal (2/10/20)

In United States v. DiMartino (2d Cir. No. 18-2053-cr 2/4/19), here, the Court of Appeals affirmed a tax protestor conviction described as follows:

Terry DiMartino appeals from a judgment of the United States District Court for the District of Connecticut (Thompson, J.) convicting him for his multi-year failure to pay taxes and for his deception and obstruction of the IRS—conduct inspired by the Sovereign Citizen movement, a loosely affiliated group who "`follow their own set of laws' and, accordingly, `do not recognize federal, state, or local laws, policies or regulations' as legitimate." United States v. McLaughlin, ___ F.3d ___, 2019 WL 7602324, at *1 n.1 (2d Cir. December 30, 2019) (quoting Sovereign Citizens: A growing Domestic Threat to Law Enforcement, FBI Law Enforcement Bulletin (2011)). 

DiMartino, a successful insurance agent, represented himself at trial and was convicted.
After trial and before sentencing, DiMartino retained counsel, who moved for a hearing to determine whether DiMartino had been competent to stand trial. Counsel argued that DiMartino's bizarre conduct before and during trial raised a series of red flags impugning his mental fitness, and submitted a psychological report from Dr. Andrew Meisler, who had interviewed DiMartino and examined part of the trial record.

Basically, on this point, the district court rejected the proffered expert testimony and sustained the denial of the request for a competency hearing based principally on a proffered expert report the district court found lacking.  The Second Circuit affirmed under an abuse of discretion standard.

Some interesting excepts (Slip Op. pp. 12-15):

[T]he district court reasonably inferred from DiMartino’s conduct at trial that he understood the proceedings against him and was capable of participating meaningfully in his defense. Among other things, DiMartino attempted to persuade the jury that he lacked the requisite criminal intent; he solicited the jury’s sympathy; and he made a bid for jury nullification. Lesser participation has sufficed to demonstrate competency. See U.S. v. Sovie, 122 F.3d 122, 128 (2d Cir. 1997) (noting that district court’s conclusion that defendant was a “knowing participant in his defense” was supported by the fact that the defendant “took notes, conversed with counsel, and reacted reasonably to the admission of evidence”). 

Crucially, nearly all the purported red flags concerning DiMartino’s competence relate in one way or another to his insistence on espousing or acting on views that are shared with other adherents to a political ideology, however marginal. At trial, the government presented evidence that the rhetoric DiMartino used in his correspondence with the IRS--and continued to espouse at trial--was typical of groups that resist the federal tax laws. Indeed, an undercover IRS agent observed DiMartino at a 2007 Sovereign Citizen convention in Las Vegas, where he expressed frustration at having to “pa[y] [his] ass up in taxes” and asked seminar participants for advice on how sovereign citizens “that have wealth . . . protect their wealth.” Ex. FBI-1A at 52-53, 86. 

U.S. Tax Attorney Denied Habeas Corpus in Extradition Proceeding Based on Netherlands Criminal Tax Conviction (2/10/20)

In Valentino v. United States Marshal (S.D. Tex. Civ. Action 4:20-CV-304 order dated 1/30/20), here, the court denied Valentino’s request for habeas corpus relief in an extradition proceeding.  Valentino is an attorney who practiced international tax law (see some bio information in JAT Comments below at #4).

The Court starts as follows:

I. Procedural Background 

This habeas case arises out of an extradition proceeding. Joseph Valentino was charged and convicted by the Kingdom of the Netherlands for participating in a criminal organization that intentionally filed false corporate tax returns. The Amsterdam district public prosecutor issued a summons for the criminal proceedings in the Netherlands on November 19, 2002. Trial was held in absentia and the judgment was rendered on February 24, 2004. After Valentino appealed his conviction and sentence to the Court of Appeals of Amsterdam, during which proceedings he was represented by counsel, the Court of Appeals rendered a new judgment finding Valentino guilty on two counts: Count One — "participation in an organization for the purpose of committing crimes" — and Count Two — "co-perpetration of intentionally incorrectly filing a tax return provided by tax law." He was sentenced to thirty-four months in prison. 

On February 2, 2018, the United States sought Valentino's extradition to the Kingdom of the Netherlands to execute a sentence on his conviction. Valentino was arrested around April 18, 2018. After holding a detention hearing, United States Magistrate Judge Stephen Wm. Smith ordered Valentino to be released on reasonable conditions pending his extradition hearing. United States v. Valentino, No. 18-mj-00146, 2018 WL 2187645, at *6 (S.D. Tex. May 11, 2018). Judge Smith found that Valentino did not pose a flight risk or a danger to the community and had a "reasonable likelihood" of prevailing on one or more issues at his extradition hearing. He found special circumstances supporting Valentino's release and ordered him released on bond pending the extradition hearing. He noted that "this is only a decision on whether to release Valentino pending the extradition hearing," which "placed [the court] in the difficult task of assessing Valentino's success on the merits" without "prejudging the claims or the evidence until both sides have had an opportunity to be fully heard. Further, the court may not have before it all of the evidence that will be presented in the extradition hearing." Id. at *5 (emphasis added). 

Valentino then moved to dismiss the extradition complaint. Magistrate Judge Peter Bray held a formal extradition proceeding on December 4, 2019, and on January 23, 2020, issued a thorough, 37-page opinion denying Valentino's Motion to Dismiss the United States' Extradition Complaint. Judge Bray certified Valentino as extraditable. 

The next day, Valentino filed a Petition for a Writ of Habeas Corpus under 28 U.S.C. section 2241, which currently is pending before this Court. Dkt. 1. Valentino asserts that the Court should grant the writ and hold that extradition must be denied because (1) all but two of the charges against Valentino were barred by the statute of limitations under United States law, (2) the fourteen-year delay between conviction and the extradition complaint violates Valentino's due process rights, and (3) the Netherlands failed to establish probable cause to believe that Valentino had the requisite knowledge to convict him of the charged offenses. These arguments were raised in the extradition proceedings and addressed in Judge Bray's opinion. Valentino asserts he has a high likelihood of success on these claims, and that he poses no flight risk or danger to the community. These factors, he argues, along with the Netherlands' fourteen-year delay between convicting him and seeking his extradition, establish "special circumstances" that warrant his release until determination of his habeas petition.