Thursday, April 15, 2021

Houston Tax Attorney Indicted for Conspiracy and for Aiding and Assisting (4/15/21)

I have previously written about the unnamed enabler named in the Smith nonprosecution agreement as Individual B.  See One Big Fish Indicted and Lesser Big Fish Achieves NPA for Cooperation (Federal Tax Crimes Blog 10/16/20), here.  Individual B was subsequently identified as Carlos Kepke in the Brockman discovery as an enabler for Brockman.  Individual B, the Houston Attorney in the Smith NPA, Is Unmasked (Federal Tax Crimes Blog 12/1/20; 12/2/20), here.  Today, DOJ announced that Kepke has been indicted for conspiracy (18 USC 371) and for three years of aiding and assisting (§ 7206(2)) relating to his assistance of Smith.  See press release titled Tax Attorney Indicted for Facilitating Tax Fraud: Helped Private Equity CEO Defraud IRS of Taxes on $225 Million in Capital Gains (4/15/21), here.

Kepke is from Houston.  I have known him since I practiced in a short stint in the 1970s with a law firm in which he was partner and I a senior associate.  He was the person I suspected as Individual B which I inferred from what I learned about his practice when I was with that law firm.

I have not been able to obtain the indictment.  As of this evening, it was not yet posted on Pacer.  I will be checking Pacer tomorrow, but if anyone has obtained the indictment, I would appreciate sending to me by email at  After receiving the indictment, if I have further comments, I will post them below.

Wednesday, April 14, 2021

CA6 Rejects Taxpayers Argument for Bankruptcy Discharge Based on Exception to Discharge for Intent to Evade Tax (4/14/21; 4/15/21)

In United States v. Helton (6th Cir. 4/14/21) (unpublished), CA6 here; TN here, the taxpayer, a lawyer, sought to avoid the exception for bankruptcy discharge in 11 USC 523(a)(1)(C) for a debt “with respect to which the debtor . . . willfully attempted in any manner to evade or defeat such tax.”  The relevant part of the opinion is:

Helton's principal argument, rather, is that § 523(a)(1)(C) requires proof that the debtor acted with “specific intent to evade the tax.” Hawkins v. Franchise Tax Bd., 769 F.3d 662, 670 (9th Cir. 2014). Thus, in Helton's view, the government was required to prove not only that Helton chose to allocate his funds toward Mercedes-Benz sedans and dinners out each night and luxury gifts, rather than towards his taxes; instead, the government was required also to prove that he purchased or paid for those things specifically to avoid paying his taxes. Regardless of whether that is the law in the Ninth Circuit, it is not the law in this one, as shown above. See, e.g., Gardner, 360 F.3d at 561; accord In re Feshbach, 974 F.3d 1320, 1331 (11th Cir. 2020); United States v. Coney, 689 F.3d 365, 374 (5th Cir. 2012); In re Fegeley, 118 F.3d 979, 984 (3d Cir. 1997). We therefore reject his argument.

I have not tried to track down whether there was Ninth Circuit authority for the distinction as articulated by the Court for Helton’s argument.  In the context of the way the Court explained the distinction, it does not appear to me to be a material distinction.

Added 4/15/21 3:15pm:  Les Book of the Procedurally Taxing Blog reminded me that Lavar Taylor, here, had posted two blog entries on the Ninth Circuit's view of § 523(a)(1)(C):

  • What Constitutes An Attempt To Evade Or Defeat Taxes For Purposes Of Section 523(a)(1)(C) Of The Bankruptcy Code: The Ninth Circuit Parts Company With Other Circuits (Part 1) (Procedurally Taxing Blog 9/18/14), here.
  • What Constitutes An Attempt To Evade Or Defeat Taxes For Purposes Of Section 523(a)(1)(C) Of The Bankruptcy Code: The Ninth Circuit Parts Company With Other Circuits (Part 2) (Procedurally Taxing Blog 9/19/14), here.

Saturday, April 10, 2021

Court of Federal Claims Rejects Taxpayer Games in Partial Payment FBAR Civil Penalty Refund Suit (4/10/21)

In Mendu v. United States, 2021 U.S. Claims LEXIS 537 (4/7/21), Mendu filed a partial payment FBAR penalty refund suit for $1,000 and the Government counterclaimed for the unpaid balance on the FBAR assessment of about $752,000 (plus additions).  The Court made these key holdings:

  • The Court has jurisdiction over a  partial payment FBAR penalty refund suit.  The Flora rule does not apply because the FBAR penalty is not a tax.
  • The Court made that jurisdictional holding in rejecting Mendu’s own motion to dismiss for want of jurisdiction.
  • The Court rejected also Mendu’s motion to voluntarily dismiss the refund suit under Rule 41(a)(2) and transfer to the counterclaim to the district court for SD Cal..

So, the case will proceed on the refund claim and the counterclaim.

What was all the commotion about?  Basically, Mendu was pulling out the stops to avoid the counterclaim even at the cost of giving up his refund suit and, in any event to avoid adverse precedent in the CFC and Federal Circuit.  The reason:  the big dollars were in the counterclaim.

In the course of the commotion, the United States requested for a transfer of the counterclaim (effectively a collection suit) to the district court if the Court found it did not have jurisdiction of the refund suit under Flora.  The Government was apparently concerned that, if the Court dismissed the refund suit filed by plaintiff, the Court would have no jurisdiction over the collection suit filed by counterclaim and that would mean that a new collection suit filed in the district court might be outside the key 2-year statute of limitations for filing an FBAR collection suit.  The notion was that, if there is a transfer of the counterclaim to the district court under 28 U.S.C. § 1631 (permitting transfer “in the interests of justice”), the Government’s timely filing of the counterclaim will suffice for the statute of limitations on the resulting collection suit in the district court.

Mendu made an alternative motion to voluntarily dismiss if the Court found it had jurisdiction.  For purposes of that motion, apparently, Mendu joined in the Government’s request for transfer of the counterclaim to the district court.  As explained by the Court:

Plaintiff’s peculiar insistence to dismiss his own complaint appears to be for no reason other than to manufacture a "want of jurisdiction" in order to avoid the Federal Circuit’s binding precedent in Norman v. United States, 942 F.3d 1111, 1114 (Fed. Cir. 2019). This Court will not permit such gamesmanship. Under Plaintiff’s suggestion, section 1631 could be used, not to cure a want of jurisdiction, but to create one that would undoubtedly be used to attempt to dismiss Defendant’s counterclaim. Indeed, if courts were to permit the type of transfer Plaintiff suggests, any plaintiff who becomes dissatisfied with the Federal Circuit’s jurisprudence could voluntarily dismiss his complaint notwithstanding a defendant’s counterclaim. Such a transfer is contrary to the text of the statute and is not "in the interest of justice."

Bottom-line, Mendu was playing cute with the Court which rejected the ploy.

Wednesday, April 7, 2021

FinCEN Seeks Comments on Issues in Corporate Transparency Act that May Require Regulations (4/7/21)

 FinCEN has announced an Advance Notice of Proposed Rulemaking (ANPRM) seeking “public comment on a wide range of questions related to the implementation of the beneficial ownership information reporting provisions of the Corporate Transparency Act (CTA).”  The announcement is here; the ANPRM is here in the Federal Register; the pdf of the ANPRM is here.  

Key excerpts from the announcement:

This ANPRM is the first in a series of regulatory actions that FinCEN will undertake to implement the CTA, which is included within the Anti-Money Laundering Act of 2020 (AML Act).  The AML Act is part of the FY 2021 National Defense Authorization Act, which became law on January 1, 2021.  

The CTA amended the Bank Secrecy Act to require corporations, limited liability companies, and similar entities to report certain information about their beneficial owners (the individual natural persons who ultimately own or control the companies).  This new reporting requirement will enhance the national security of the United States by making it more difficult for malign actors to exploit opaque legal structures to launder money, finance terrorism, proliferate weapons of mass destruction, traffic humans and drugs, and commit serious tax fraud and other crimes that harm the American people.

The CTA requires FinCEN to maintain the reported beneficial ownership information in a confidential, secure, and non-public database.  Furthermore, the CTA authorizes FinCEN to disclose beneficial ownership information subject to appropriate protocols and for specific purposes to several categories of recipients, such as federal law enforcement.  Finally, the CTA requires FinCEN to revise existing financial institution customer due diligence regulations concerning beneficial ownership to take into account the new direct reporting of beneficial ownership information.

I have just scanned the ANPRM.  I think there is some good discussion of the background leading to the CTA and of the CTA itself.  Most of this is probably not particularly revelatory for those who paid attention to the CTA on enactment and the buzz afterwards.  Those diving into the CTA probably had many of the questions that FinCEN is asking for comment as it moves to provide some regulatory detail to flesh out some of the uncertainties and ambiguities.

Sunday, April 4, 2021

ICIJ Interview with Former AUSA Involved in Panama Papers Investigations and Prosecutions (4/4/21)

ICIJ posted an interview of Sarah Paul, currently of Everhsheds Sutherland, here, who was formerly AUSA in SDNY and significantly involved in investigations and prosecutions related to offshore accounts, prosecutions particularly of enablers such as banks.  Will Fitzgibbon, From front pages to prison time: Behind the scenes of a Panama Papers criminal case (ICIJ 4/3/21), here.  The interview focuses particularly on the Panama Papers and Mossack Fonseca law firm.

Some key excerpts:

What do you think has changed since you first investigated the Panama Papers case?

I see the new Anti-Money Laundering Act is a game changer in terms of how these investigations are covered. As part of that, the Corporate Transparency Act is going to require certain companies to provide beneficial ownership information to FinCEN [the U.S. Treasury’s Financial Crimes Enforcement Network]. That part is obviously important.

I think from an investigation standpoint, the new mechanism about how to obtain foreign bank records is significant. Under the new AML Act, if a foreign bank maintains a U.S. correspondent bank account, a U.S. prosecutor can issue a subpoena requesting any records related to any account at the foreign bank, including records maintained outside the US. That subpoena power is not limited to records related to the U.S. correspondent account, which is the limitation that existed previously. While a foreign bank could move to modify or quash the subpoena, there’s language in the new Act that prohibits the court from doing so on the sole ground of compliance with foreign bank secrecy or confidentiality laws.

Had this been in place when I was investigating the Panama Papers, I think it would have made a significant difference. We were able to get foreign bank records through the treaty process. But getting those records would have been much easier and quicker under the new AML Act.

If you had a magic wand, what would you have changed to make the investigation easier?

Saturday, April 3, 2021

NYT Article on Bristol Meyers Aggressive Tax Position With Discussion of Role of Professionals Peddling Audit Risk Insurance through Fees for Faulty Opinions (4/3/21)

 Readers of this blog will likely be interested in this article.  Jesse Drucker, An Accidental Disclosure Exposes a $1 Billion Tax Fight With Bristol Myers (NYT 4/1/21), here.  The article recounts Bristol Myers's use of a highly complex offshore arrangement to avoid (perhaps evade) over $1 billion in U.S. tax.

The thing that I think is particularly interesting for those who have watched bullshit tax shelters over the years is the use of professionals (accounting firm and law firm) to attempt to insulate wealthy taxpayers from penalty consequences of their abusive behavior.  As recounted in the article, Bristol Meyers obtained lengthy opinion letters from PWC, the accounting firm, and from White & Case, the law firm.  The article says that the opinion letters omitted a key discussion that might have cast a pall on the opinion and reliance on the opinion.  The article says:
In addition to detailing the offshore structure, the I.R.S. report revealed the role of PwC and White & Case in reviewing the deal. While both firms assessed the arrangement’s compliance with various provisions of the tax law, neither firm offered an opinion on whether the deal violated the one portion of the tax law — an anti-abuse provision — that the I.R.S. later argued made the transaction invalid.

Tax experts said they doubted the omission was inadvertent. The I.R.S. can impose penalties on companies that knowingly skirt the law. By not addressing the most problematic portion of the law, Bristol Myers’s advisers might have given the company plausible deniability.

Both firms “appear to have carefully framed the issues so that they could write a clean opinion that potentially provided a penalty shield,” Professor Burke said.

David Weisbach, a former Treasury Department official who helped write the regulations governing the tax-code provision that Bristol Myers is accused of violating, agreed. PwC and White & Case “are giving you 138 pages of legalese that doesn’t address the core issue in the transaction,” he said. “But you can show the I.R.S. you got this big fat opinion letter, so it must be fancy and good.”
Over the years, many have observed that such opinion letters serve the sole function of insulating the taxpayer (or, in the case of entities, its officers or managers) from potential penalty liability, including criminal liability.  Those taxpayer knows it is misbehaving but, armed with an opinion from "experts," the taxpayer can say that he reasonably believed he was not misbehaving and thus avoid penalty exposure, at least the serious penalty exposure of criminal liability or the more significant civil penalty liability (civil fraud penalty).  Then with only perhaps imagined exposure only to perhaps a 20% or 40% civil penalty, it may be worth rolling the dice in the hopes that the IRS would never discover the matter.  This is likely a cost/benefit analysis.  What are the costs and potential benefits?  Say for a $1 billion in tax, a  downside (if able to mitigate the more serious penalties) so that only a 20% accuracy related penalty could apply, the downside cost is $1.2 billion with interest (fairly low for a $1 billion "borrowing" from the Government).  The upside is $1 billion in avoided (perhaps evaded) taxes.  And, with powerful and expensive in house and out house professionals helping to lower the risk of audit of the transaction, that may seem to some like a pretty good deal.

Thursday, April 1, 2021

Actions by District Courts to (i) Approve a John Doe Summons for Cryptocurrency Client Data and (ii) Order the Government to Show Cause as to Requirements (4/1/21)

 DOJ Tax has announced here that a Massachusetts district court authorized a John Doe Summons (“JDC” be issued to Circle Internet Financial Inc., or its predecessors, subsidiaries, divisions, and affiliates, including Poloniex LLC (collectively “Circle”).  The key excerpts are:

           The court’s order grants the IRS permission to serve what is known as a “John Doe” summons on Circle. The United States’ petition does not allege that Circle has engaged in any wrongdoing in connection with its digital currency exchange business. Rather, according to the court’s order, the summons seeks information related to the IRS’s “investigation of an ascertainable group or class of persons” that the IRS has reasonable basis to believe “may have failed to comply with any provision of any internal revenue laws[.]” According to the copy of the summons filed with the petition, the IRS is requesting that Circle produce records identifying the U.S. taxpayers described above, along with other documents relating to their cryptocurrency transactions.

            The IRS issued guidance regarding the tax treatment of virtual currencies in IRS Notice 2014-21, which provides that virtual currencies that can be converted into traditional currency are property for tax purposes. The guidance explains that receipt of virtual currency as payment for goods or services is treated as income and that a taxpayer can have a gain or loss on the sale or exchange of a virtual currency, depending on the taxpayer’s cost to purchase the virtual currency (that is, the taxpayer’s tax basis).

Readers should also note that a California magistrate judge deferred the Government’s petition to issue a JDS to Payward Ventures Inc. d/b/a/ Kraken (“Kraken”) and its subsidiaries, issuing an order that the Government “SHOW CAUSE why its petition to issue a JDS should not be denied for failure to meet the ‘narrowly tailored’ requirement of 26 U.S.C. § 7609(f), by filing a response to this order (which may include an amended petition or summons) no later than April 14, 2021.”  See In re TAX LIABILITY OF JOHN DOES (Order dated 3/31/21 in Dkt. 21-cv-02201-JCS N.D. Cal.), TN here (with link to pdf).