Bullshit Shelter Taxpayers Continuing FOIA Litigation to Identify Informants Turning Them In to IRS (3/30/20)

FOIA requests and litigation have not been featured prominently on this blog.  For this entry, FOIA litigation is front and center, but interesting for a tax crimes blog because of what the FOIA requesters (in the role of taxpayers in this case) seek from the IRS – the identity of the whistleblower, if one exists, who turned them in for attempting a raid on Treasury via a bullshit tax shelter.  In United States v. Montgomery (D. D.C. No. 17-918 (JEB) Memo Op. Dtd 3/25/20), here, the Court starts:

This Freedom of Information Act dispute represents the latest round in Plaintiffs Thomas and Beth Montgomery’s never-ending heavyweight bout with the Internal Revenue Service over their multi-billion-dollar tax-shelter scheme. After settling various financial disputes with the agency, Plaintiffs submitted FOIA requests to Defendant in order to discern whether a whistleblower had incited the agency’s investigation. The Service’s responses, however, did not bring Plaintiffs any closer to discovering the source of their woes. Frustrated in their pursuit of this information, they filed suit in this Court. 

In response to the previous round of summary-judgment motions, the Court held that Defendant had appropriately invoked Glomar with respect to one category of Plaintiffs’ requests but had failed to conduct an adequate search as to the other. History repeats itself here in regard to the current dispositive Motions. Once again, Defendant has justified its invocation of  Glomar as to certain potential documents, but it has otherwise not conducted an adequate search. The Court will therefore grant in part and deny in part the parties’ Motions for Summary Judgment and direct the IRS to renew its search.

A Glomar response a FOIA response that “neither confirms nor denies the existence of documents responsive to the request” because it would cause cognizable harm under a FOIA exception.  E.g., Ctr. for Constitutional Rights v. C.I.A., 765 F.3d 161, 164 (2d Cir. 2014).  Obviously, the IRS does not either want to disclose that there was an informant or the name of the informant if there was an informant.

Then the Court recounts the facts:

The Court has recounted the facts surrounding this prolonged tax saga in several of its prior Opinions, but it will provide a brief recap here. See, e.g., Montgomery v. IRS, 292 F. Supp. 3d 391, 393–94 (D.D.C. 2018). In the early 2000s, Plaintiff Thomas Montgomery helped form several partnerships that were structured so as to facilitate the reporting of tax losses without those entities’ experiencing any real economic loss. Id. at 393. These “tax-friendly investment vehicles” allowed Thomas and his wife Beth, filing jointly, to report the entities’ alleged losses as part of their individual tax returns. Id. (alteration omitted). In other words, Plaintiffs were able to enjoy the tax benefits of experiencing an investment loss without shouldering the consequent burdens of such a loss. Somehow — and the Montgomerys are determined to learn exactly how — the IRS caught wind of their use of these vehicles, setting into motion over a decade of litigation on the issue. 

After examining the structure of the partnerships, the IRS issued “final partnership administrative adjustments” (FPAAs) as to two of them, which resulted in the agency’s imposing certain penalties and disallowing some of the losses the Montgomerys had claimed on their individual returns. Id. at 393–94. Next, the partnerships sued the Service in several separate actions, seeking a readjustment of the FPAAs (for those keeping score at home, this would amount to a readjustment of the adjustments). See Bemont Invs., LLC v. United States, 679 F.3d 339 (5th Cir. 2012); Southgate Master Fund, LLC v. United States, 659 F.3d 466, 475 (5th Cir. 2011). Ultimately, the Fifth Circuit affirmed the IRS’s determination that the partnerships had substantially understated their taxable incomes, Bemont, 679 F.3d at 346, but held that one transaction by the Southgate partnership had a legitimate investment purpose. Southgate, 659 F.3d at 483. With these mixed verdicts in hand, the Montgomerys and the partnerships pursued thirteen separate suits against the IRS, seeking, inter alia, a refund of assessed taxes and penalties. Montgomery, 292 F. Supp. 3d at 394. The cases were ultimately consolidated, and the parties reached a global settlement agreement in November 2014 that entitled the Montgomerys to more than $485,000. Id.

Thus, while the Montgomerys did get a substantial refund, it appears that they lost their claims to even more substantial refunds.  The Montgomerys walked away from the settlement of their tax liabilities with an ax to grind--with an informant causing their woe, if there was an informant.

The Court then addresses the particular skirmish in this long running saga, calling it "Another turn of the hamster wheel."

I don’t know that there is anything more to say about this continuing saga other than that the bullshit tax shelter abusers must have more money than they apparently need.

Cross posted on Federal Tax Procedure Blog, here.

District Court Muddles an FBAR Willful Penalty Case (3/21/20; 3/24/20)

I made a key revision on 3/24/20 at 4:00pm as indicated in red below to state with cites to the statute that the willful FBAR willful penalty limits (greater of $100,000 or 50% of unreported accounts) is a maximum penalty, thus giving the IRS authority to assert lesser FBAR penalty amounts than those maximums.  That reading of the willful penalty was implicit in the  rest of the discussion; I just thought it should be made explicit.  The changed language is marked in red below.

In United States v. Schwarzbaum (S.D. Fla. Dkt. 18-cv-81147, Order dated 3/20/20), here, in an FBAR collection suit, the court:

1. Held that Schwarzbaum was not liable for the FBAR willful penalty for 2006 but held open the possibility that the nonwillful penalty might apply. 

2. Held that Schwarzbaum was liable for the FBAR willful penalty for 2007, 2008 and 2009, but held that the IRS’s method of determining the penalty was arbitrary and capricious because it was not based on the June 30 values in the unreported offshore account, but the Court held that the parties were to confer to “in an effort to resolve the outstanding amount owed.”

The CourtListener docket for the case is here.

JAT Comments:

1.  I will not review the facts leading to the holding but will instead only deal with the legal issues in the opinion that I think are worthy of comment.

Fifth Circuit Erroneously Describes Defraud Conspiracy as Conspiracy to Commit Tax Fraud (3/19/20)

In United States v. Scully, ___ F.3d ___ (5th Cir. 3/4/20), here, the Fifth Circuit affirmed Scully’s convictin for “(1) conspiracy to defraud the United States, (2) conspiracy to commit wire fraud, and (3) three individual counts of wire fraud.” (Scully was acquitted of “preparing false tax returns,” § 7206(2).)  The district court had sentence Scully to “concurrent, below-guidelines sentences of 180 months on the wire-fraud counts and 50 months on the tax-conspiracy count.”  The CourtListener docket entries are here.

In very broad strokes, Scully was in a business with two others that imported shrimp for use in frozen meals the business sold.  He cheated his partners and, in the process, apparently he or related parties reported and paid less tax than they should have.  One of his partners turned him into the IRS.  IRS CI investigated.  Scully was indicted, and was tried on the second superseding indictment, here.  The jury verdict is here.

The arguments Scully raised on appeal do not directly implicate the tax related charge on which he was convicted (Count One, conspiracy to defraud).  Scully does raise a Fourth Amendment argument to suppress the results of the search warrant obtained and conducted incident to the IRS CI investigation.  Nothing particularly unique there.  The Court rejects this and Scully’s other arguments.

The case is not particularly noteworthy, but I posted it principally to complain about the Court's loose language in describing the defraud conspiracy.  Count 1 of the superseding indictment (incorporated from the original indictment) was a conspiracy to defraud under 18 USC § 371.  Section 371actually describes two type of conspiracy: (i) an offense conspiracy, “to commit any offense against the United States;” and (ii) a defraud conspiracy, “to defraud the United States, or any agency thereof.”  The Court of Appeals describes the charged defraud conspiracy in two different ways: “conspiracy to commit tax fraud” (Slip Op. 6); and “conspiracy to defraud the United States.” (Slip Op. 9.)  The correct description is the latter rather than the former.

Swiss Bank Account Records as Business Records for Hearsay Exception (3/18/20)

In a designated order, Tax Court Judge Lauber rejected taxpayer objections to the introduction of records obtained by the IRS pursuant to the DOJ and Swiss government agreement to provide information from Swiss banks concerning "accounts of interest.”  Harrington v. Commissioner (Designated Order 2/7/20), here.  This seems to be a resolution of a hearsay objection by applying the exception for business records.

The order is very short, so I will excerpt only part of it, mostly as a teaser to read the whole order.

In 2009 the U.S. Department of Justice reached an agreement with the Swiss Government concerning "accounts of interest" held by U.S. citizens and residents. Pursuant to this agreement the Internal Revenue Service (IRS) submitted to the Swiss Government, under the bilateral income tax treaty between the two nations, a request for information concerning specific accounts believed to be beneficially owned by U.S. taxpayers. The Swiss Government directed UBS to initiate procedures that would lead to turning over to the IRS information in UBS files concerning bank-only accounts, custody accounts in which securities or other investment assets were held, and offshore nominee accounts beneficially owned indirectly by U.S. persons. See U.S. Department of Justice, Press Release, U.S. Discloses Terms of Agreement with Swiss Government Regarding UBS (Aug. 19, 2009), at http://www.usdoj.gov/opa/pr/2009/August/09-tax-818.html. The parties acknowledged that the Swiss Federal Office of Justice would oversee UBS' compliance with its commitments.
- 2 -
Pursuant to this agreement the U.S. Competent Authority received from the Swiss Government information concerning numerous U.S. taxpayers. In September 2011 the IRS received 844 pages of information concerning UBS accounts held by or associated with petitioner. This material includes bank records, investment account statements, letters, emails between petitioner and UBS bankers, summaries of telephone calls, and documentation concerning entities through which assets were held.
Respondent has submitted with the UBS documents a "Certification of Business Records" executed by Britta Delmas, legal counsel for UBS. Ms. Delmas attached to her certification an index listing 844 Bates-numbered pages as UBS records associated with petitioner. Ms. Delmas avers that these records are original records or true copies of records that: (1) were made at or near the time of the occurrence of the matters set forth therein by persons with knowledge of those matters; (2) were kept in the course of UBS' regularly conducted business activity; and (3) were "made by the said business activity as a regular practice." At the bottom of her certification Ms. Delmas "declares under penalty of perjury under the laws of Switzerland that the foregoing is true and correct."
Having considered the origin and nature of the UBS records along with the certification of Ms. Delmas, we are satisfied that the records are authentic business records of UBS and that they were used and kept in the course of UBS' regularly conducted business activities. Respondent provided fair notice to petitioner of his intent to introduce them as such. See Fed. R. Evid. 901(11). And Ms. Delmas signed the records "in a manner that, if falsely made, would subject [her] to a criminal penalty in the country where the certification is signed." Fed. R. Evid. 902(12). Accordingly, we will admit the documents into evidence as self-authenticating foreign business records. See Fed. R. Evid. 801(d)(2), 803(6), 902(11), (12). n1
   n1 It is significant that the UBS records were provided pursuant to an agreement between the United States and a foreign government. See United States v. Johnson, 971 F.2d 562, 571 (10th Cir. 1992) ("A foundation for admissibility may at times be predicated on judicial notice of the nature ofthe business and the nature of the records as observed by the court, particularly in the case of bank and similar statements.") (quoting Federal Deposit Ins. Corp. v. Staudinger, 797 F.2d 908, 910 (10th Cir. 1986)).

DOJ Tax Announces Convictions in Massive Biodiesel Tax Fraud (3/16/20)

This DOJ Tax announcement is noteworthy even though it does not involve one of the Title 26 crimes or a conspiracy to commit a Title 26 offense or an offense conspiracy to defraud the IRS:  Jury Finds Los Angeles Businessman Guilty in $1 Billion Biodiesel Tax Fraud Scheme: Four Members of Kingston Family, including the CEO and CFO of Washakie Renewable Energy, Previously Pleaded Guilty (3/16/20), here.

Key excerpts (with bold-face added by JAT):

According to evidence presented at a seven-week trial, Dermen was the owner and operator of Noil Energy Group, a California-based fuel company; SBK Holdings USA, a Beverly Hills real estate investment company; and Viscon International, a Nevada fuel additive corporation.  From 2010 to 2016, Dermen conspired with the owners and operators of Washakie Renewable Energy (Washakie), a Utah-based biodiesel company, including its Chief Executive Officer Jacob Kingston, his brother, Chief Financial Officer Isaiah Kingston, and others, including their mother, Rachel Kingston, and Jacob Kingston’s wife, Sally, to fraudulently claim more than $1 billion in renewable fuel tax credits from the IRS. 

The IRS administers refundable federal tax credits designed to increase the amount of renewable fuel used and produced in the United States. As part of their scheme, Dermen and Jacob Kingston shipped millions of gallons of biodiesel within the U.S. and from the U.S. to foreign countries and back again to create the appearance that qualifying renewable fuel was being produced and sold.  They also doctored production and transportation records to substantiate Washakie’s fraudulent claims for more than $1 billion in IRS renewable fuel tax credits and credits related to the EPA renewable fuel standard. To further create the appearance they were buying and selling qualifying fuel, the coconspirators cycled more than $3 billion through multiple bank accounts.
As a result of the fraudulent claims, the IRS paid more than $511 million to Washakie and the Kingstons that was distributed between them and Dermen. Jacob and Isaiah Kingston sent more than $21 million in fraudulent proceeds to SBK Holdings USA, Inc., Dermen’s California-based company, and sent $11 million to an associate of Dermen’s at his request. Jacob Kingston used $1.8 million of the fraud proceeds to buy Dermen a 2010 Bugatti Veyron, and they exchanged gifts including a chrome Lamborghini and a gold Ferrari.  

Dermen and Jacob Kingston also laundered $3 million through Dermen’s company, Noil Energy Group, to purchase a mansion in Sandy, Utah for Jacob Kingston and his wife Sally.  Dermen also laundered $3.5 million through his California company, SBK Holdings USA, Inc., to purchase a mansion in Huntington Beach, California.   

Throughout the scheme, Dermen assured Jacob Kingston that he and the Kingstons would be immune from criminal prosecution because they would be protected by Dermen’s “umbrella” of corrupt law enforcement personnel. Jacob and Isaiah Kingston transferred over $134 million in fraudulent proceeds to companies in Turkey and Luxembourg at Dermen’s direction, in purported payment for protection. 

The jury found Dermen guilty of conspiracy to commit mail fraud, conspiracy to commit money laundering, and money laundering concealment money laundering, and expenditure money laundering. 

Another Plea Related to Offshore Accounts (3/9/20)

DOJ Tax issued this press release:  Alabama Salesman Pleads Guilty to Tax Evasion: Defendant Used Offshore Insurance Wrapper Accounts to Conceal Assets, here.  The criminal information and plea agreement are here and here.

Key excerpts are:

According to court documents and statements made in court, Ivan Scott “Scott” Butler was an automobile industry consultant and sold automobile warranties as an independent salesman. In 1993, Butler stopped filing tax returns and attended tax defier meetings and purchased tax defier materials. Starting in 1998, Butler used several Nevada nominee corporations to receive his income. In around 1999, Butler moved hundreds of thousands of dollars, some in precious metals, to bank accounts in Switzerland and concealed his assets in offshore insurance policies held in the name of non-U.S. insurance providers, disguising his ownership of the funds. Such accounts, which generally are used as investment vehicles, are commonly known as “insurance wrappers.”
In 2014, Butler converted some of his insurance annuities into precious metals, which were shipped to Butler and another individual in the United States. Some of those precious metals were given to friends and family for safekeeping. In total, Butler caused a tax loss to the Internal Revenue Service (IRS) of $1,093,400.
* * * *
At sentencing, Butler faces a maximum sentence of five years. Butler also faces a period of supervised release, restitution, and monetary penalties.

JAT Comments:

1.  The statement of facts is just a variation on a theme of the pattern of offshore account evasion.  The big twist here is that Butler coupled the offshore evasion failure to file tax returns.

2.  Obviously, this pattern of conduct involved a lot more potential crimes than Butler pled to.  Pleading permits a conviction on fewer counts.  But, the Sentencing Guidelines permits consideration of relevant conduct but assuming that the object of the crimes (pled and relevant conduct) is tax evasion, then the tax loss for all of them will be the critical component in the Guidelines calculation.  It is unlikely that the failure to get a plea to more counts will affect the sentence Butler receives.

U.S. Accountant Enabler Connected with Panama Papers Pleads Guilty (3/1/20)

DOJ has this press release: U.S. Accountant Pleads Guilty in Panama Papers Investigation (2/28/20), here.  Key excerpts are:

A Massachusetts-based accountant who was charged along with three others in connection with a decades-long criminal scheme perpetrated by Mossack Fonseca & Co. (Mossack Fonseca), a Panamanian-based global law firm, and its related entities, pleaded guilty today to wire and tax fraud, money laundering, aggravated identity theft and other charges.  

Richard Gaffey, aka “Dick Gaffey,” 75, of Medfield, Massachusetts, pleaded guilty to one count of conspiracy to commit tax evasion and to defraud the United States, one count of wire fraud, one count of money laundering conspiracy, four counts of willful failure to file Reports of Foreign Bank and Financial Accounts (Financial Crimes Enforcement Network Reports 114), and one count of aggravated identity theft. 

* * * * 

According to the allegations contained in the indictments, other filings in this case, and statements during court proceedings, including Gaffey’s guilty plea hearing, since at least 2000 through 2018, Gaffey conspired with others to defraud the United States by concealing his clients’ assets and investments, and the income generated by those assets and investments, from the IRS through fraudulent, deceitful, and dishonest means. 

During all relevant times, while acting as an accountant, Gaffey assisted U.S. taxpayers who were required to report and pay income tax on worldwide income, including income and capital gains generated in domestic and foreign bank accounts.  Gaffey helped those U.S. taxpayers evade their tax reporting obligations in a variety of ways, including by hiding the beneficial ownership of his clients’ offshore shell companies and by setting up bank accounts for those shell companies.  These shell companies and bank accounts made and held investments totaling tens of millions of dollars.  For one U.S. taxpayer, Gaffey advised the taxpayer how to covertly repatriate approximately $3 million to the United States by reporting to the IRS a fictitious company sale  to thereby evade paying the full U.S. tax amount.  Gaffey was assisted in this scheme through the use of Mossack Fonseca law firm, including Ramses Owens, a Panamanian lawyer who previously worked at the Mossack Fonseca.

Gaffey was the U.S. accountant for co-defendant Harald Joachim von der Goltz.  From 2000 until 2017, von der Goltz was a U.S. resident and was subject to U.S. tax laws, which required him to report and pay income tax on worldwide income.  In furtherance of von der Goltz’s efforts to conceal his assets and income from the IRS, Gaffey falsely claimed that von der Goltz’s elderly mother was the sole beneficial owner of the shell companies and bank accounts at issue because, at all relevant times, she was a Guatemalan citizen and resident, and – unlike von der Goltz – was not a U.S. taxpayer.  In support of this fraudulent scheme, Gaffey submitted the name, date of birth, government passport number, address, and other means of identification of von der Goltz’s elderly mother to a U.S. bank in Manhattan. 

The press release does not state the maximum sentence based on the counts of conviction as is often stated in press releases.  Stating the maximum sentence is often misleading because sentences, particularly in tax crimes cases, are often well below the maximums based on the counts of conviction.  The sheer range of crimes to which he pled and is thus convicted would make a statement of the "stacked" maximum so great that, probably, merely stating the maximum would be misleading to the uninitiated.  Although the stacked maximum sentence is surely well in excess of 15 years, the likely sentence given his age is probably in 3-4 year range.