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).

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. * * * *

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 Back 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 on the motion to date.  These motion documents can be retrieved from the Court Listener docket sheet linked above.

JAT Comments:

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.

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

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:

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.