Wednesday, April 28, 2021

Commissioner Rettig Tax Gap Comments Relevant to Federal Tax Crimes (4/28/21)

The IRS has a new web page titled “Impacting the Tax Gap” here.  The page is a summary of Commissioner Rettig’s comments which are set forth in a linked pdf here.  Commissioner Rettig’s comments are excellent.  Highly recommended.

I will cut and paste the comments I think most relevant to readers of this Federal Tax Crimes Blog (footnotes omitted; I stated the categories of the report but only include the text under the category relevant to criminal matters so some comments will not be included; I do not state the page numbers but searching the pdf can get the pages):

Research on high wealth noncompliance

            Several RAAS researchers recently participated in a study published by the National Bureau of Economic Research (NBER) entitled “Tax Evasion at the Top of the Income Distribution: Theory and Evidence.” This study examined tax evasion at the highest income levels and estimated that the top 1 percent of Americans hide more than 20 percent of their income from the IRS. With more, specialized, and targeted enforcement resources, the IRS could significantly reduce the income tax gap for the top 1% and collect another $175 billion of taxes annually. 

            As to why sophisticated tax evasion seems so concentrated at the top, the study suggests that (i) concealment of tax evasion from auditors is costly, requiring substantial financial sophistication, (ii) high-income people can save huge amounts of tax with little risk by adopting sophisticated strategies, which makes it worth the cost, and (iii) audit rates are relatively high at the very top of the income distribution, so if the audits are not thorough enough to correct sophisticated evasion, then high audit coverage rates themselves incentivize the concealment of tax evasion.

            A key difficulty in identifying tax evasion by the wealthy is the complexity of the forms of tax evasion at the top, which can involve legal and financial intermediaries, sometimes in countries with a great deal of secrecy. Income flows from assets outside of 3rd party reporting requirements or obscured through multiple layers of ownership make it difficult to associate the income with specific individuals. The study estimated that accounting for offshore and undercounted pass-through evasion alone could identify an additional $110 billion in undetected income which would have resulted in an additional $33 billion of taxes annually.

Saturday, April 24, 2021

Eleventh Circuit Joins the Consensus that Reckless Conduct Is Subject to the FBAR Civil Willful Penalty (4/24/21)

In United States v. Rum, 995 F.3d 882 (11th Cir. 4/23/21), CA11 here; TN here, the Eleventh Circuit in a per curiam opinion affirmed the district court’s grant of summary judgment for the Government in an FBAR willful civil penalty collection suit.  I wrote on the district court’s grant of summary judgment previously.  District Court Confuses Analysis in Approving Magistrate's R&R Imposing FBAR Willful Penalty (Federal Tax Crimes Blog 9/26/19), here.  

The Eleventh Circuit opinions lists Rum’s arguments:

(A) that the district court applied an incorrect standard of willfulness (by holding that willfulness as used in 31 U.S.C. § 5321(a)(5)(C) includes a reckless disregard of a known or obvious risk); (B) that the district court erred in concluding that there were no genuine issues of material fact as to whether his conduct rose to required level of willfulness/recklessness; (C) that the district court erred in refusing to recognize that 31 C.F.R. § 1010.820(g)(2) limits the amount of a willful violation to $100,000; (D) that the district court erred when it held that the IRS's factfinding procedures were sufficient and therefore applied the arbitrary and capricious rather than a de novo standard of review with respect to the amount of the penalty; (E) that, even assuming the arbitrary and capricious standard applies, the district court erred in failing to conclude that the IRS factfinding procedures were arbitrary and capricious; and finally, (F) that the district court erred in rejecting Rum's challenge to the additions to the base amount (interest and late fees).

I address here only (A) and (D)-(E).

Standard for FBAR Civil Penalty Willfulness

The  Court adopted (Slip Op. 12-16) the consensus holdings that “willfully” as the element of the civil penalty includes recklessness.  I don’t think I need to say more about the holding here because it just rehashes what courts have held before.  The importance of the holding is that it adds to a number of similar holdings, so that it seems that there is no real counterweight to the holding.  It states the consensus.

Rum’s APA Claims

Friday, April 23, 2021

More on Willful Blindness (4/23/21)

I have written before on the willful blindness instruction and more broadly the willful blindness concept in the context of federal crimes requiring as an element of the crime that the actor have some knowledge of the criminal conduct.  For most IRC (Title 26) tax crimes, the statutory knowledge element is “willfully,” which, as interpreted in cases culminating in , is specific intent to violate a known legal duty, often referred to as the Cheek standard (Cheek v. United States, 498 U.S. 192, 201 (1991)).  Other crimes, as interpreted, may have a statutory “willfully” element or some other knowing element that does not require the Cheek specific intent level.  The question I have asked specifically with respect to the Cheek statutory willfully element is whether the willful blindness concept functions (or should function) as (i) an alternative element permitting the trier to convict when the Cheek specific intent cannot be found but acts of willful blindness can be found or (ii) as permitting the trier to consider acts of willful blindness as circumstantial evidence permitting it in the context of all evidence in the case to make the Cheek specific intent finding.  I have argued the latter because only Congress can enact the elements of a crime and the statute requires willful conduct which, as definitively interpreted in Cheek, means specific intent to violate a known legal duty.  Congress has not enacted text that, on its face, would permit conviction when the trier cannot find that the defendant acted willfully in the Cheek sense of specific intent to violate a known legal duty.  If  that argument is correct, a judge should be careful  to instruct the jury so that it knows that conviction is not appropriate if the jury cannot find specific intent to violate a known legal duty.

In United States v. Jeanty, 2021 U.S. App. LEXIS 11879 (11th Cir. 4/22/21) (unpublished), CA11 here, TN here, Jeanty was convicted of “one count of conspiring to steal money from the United States, in violation of 18 U.S.C. §§ 371 and 641 [apparently an offense conspiracy], and one count of stealing property from the United States, in violation of 18 U.S.C. §§ 641 and 642.”  The crimes related to an identity theft tax refund conspiracy.  Since the offense conspiracy has the same mens rea element as the crime that is object of the conspiracy, the mens rea element will be found in § 641.  Section 641 has a mens rea element that is not the strict Cheek requirement but a lesser knowing requirement.  The opinion assumes that a knowing element is required.  So, I ask the same question for a crime where Congress says in the statutory text that a knowing element is required (albeit not the Cheek specific intent level).  Does the willful blindness concept serve as an alternative to the knowing element or simply as circumstantial evidence of the knowingly element?

The district court in Jeanty gave the following willful blindness instruction (apparently using another unrelated knowing element crime to illustrate the concept for the jury):

If a Defendant's knowledge of a fact is an essential part of a crime, it is enough that the Defendant was aware of a high probability that the fact existed — unless the Defendant actually believed the fact did not exist.

“Deliberate avoidance of positive knowledge” — which is the equivalent of knowledge — occurs, for example, if a defendant possesses a package and believes it contains a controlled substance but deliberately avoids learning that it contains the controlled substance so he or she can deny knowledge of the package's contents.

So, you may find that a defendant knew about the possession of a controlled substance if you determine beyond a reasonable doubt that the defendant (1) actually knew about the controlled substance, or (2) had every reason to know but deliberately closed his eyes.

But I must emphasize that negligence, carelessness, or foolishness isn't enough to prove that the Defendant knew about the possession of the controlled substance.

I bold-face the parts of the instruction that raise the issue here.  As presented, the instruction permits conviction on finding willful blindness without a finding of knowing.  That is troubling for the same reason I noted for the Cheek specific intent standard.  Only Congress can state the elements of the crime and it has stated the element for the crimes charged in Jeanty as knowing.  As stated, knowing is not the same as not knowing but acting with willful blindness.  Of course, the district court fuzzed that issue by saying “’Deliberate avoidance of positive knowledge’ * * * is the equivalent of knowledge.”  My point is that willful blindness is not the equivalent of knowledge; it may indicate knowledge in context of all the facts, but it is not the equivalent of knowledge.

Of course, courts by interpretation may engraft weird concepts onto statutory elements that the actual text does not suggest.  My favorite example of courts, the Supreme Court specifically, doing that is Hammerschmidt v. United States, 265 U.S. 182 (1924) where the Court approved a definition of defraud for the defraud conspiracy in 18 USC 371 that departed from and expanded the definition of fraud used in other criminal statutes and in the common law – so that thereafter fraud for the defraud conspiracy means both fraud in its normal sense (“to cheat the Government out of property”) but also to “to interfere with or obstruct one of its lawful governmental functions by deceit, craft or trickery, or at least by means that are dishonest” even if there were no object to cheat the Government out of money.  (The defraud conspiracy is often referred to as a Klein conspiracy.)  By Supreme Court long-standing fiat, that expansion beyond the normal meaning of fraud is now “the law,” even though it has no logical nexus to fraud as Congress used the word for statutory criminal elements and the common law used the term.  In United States v. Coplan, 703 F.3d 46, (2d Cir. 2012), cert. denied 571 U.S. 819 (2013), the Second Circuit expressed “skepticism” about the correctness as an original matter of the Supreme Court’s statutory interpretation of the defraud clause in Hammerschmidt v. United States, 265 U.S. 182, 188 (1924).  The Coplan court reasoned (p. 61):

There is nothing in the Government's brief recognizable as statutory interpretation—no discussion of plain meaning, legislative history, or interpretive canons. Indeed, in all 325 pages of its brief, the Government does not even quote the text of § 371. The Government thus appears implicitly to concede that the Klein conspiracy is a common law crime, created by the courts rather than by Congress. That fact alone warrants considerable judicial skepticism. See United States v. Lanier, 520 U.S. 259, 267 n.6, 117 S. Ct. 1219, 137 L. Ed. 2d 432 (1997) ("Federal crimes are defined by Congress, not the courts . . . ."); see also Rogers v. Tennessee, 532 U.S. 451, 476, 121 S. Ct. 1693, 149 L. Ed. 2d 697 (2001) (Scalia, J., dissenting) ("[T]he notion of a common-law crime is utterly anathema today . . . .").

While the Second Circuit’s concern did not carry the day in Coplan because of the Supreme Court precedent it questioned, the concern still exists.  That same concern should apply to the expansion of the willful blindness concept to permit conviction as an alternative to the knowledge requirement in a criminal statute (whether the knowledge is the Cheek specific intent or a more generally knowledge element).

Note:  The willful blindness concept goes by different names, such as conscious avoidance (in Second Circuit), willful ignorance, and deliberate ignorance.

Tuesday, April 20, 2021

CFC Grants Summary Judgment Based on Bank Account Record Ownership Even Though Others May Have Been Beneficial Owners (4/20/21)

In Landa v. United States, 2021 U.S. Claims LEXIS 635 (Fed. Cl. Apr. 19, 2021), here, the Court entered summary judgment for the Government on the FBAR civil willful penalty.  The facts are not good for the plaintiff, Leon Landa, hence the summary judgment.  

The funds in issue came from his grandfather, who a citizen and resident of Ukraine who deposited funds in a Swiss bank in WW II before moving first to Israel and then the U.S.  The grandfather “apparently intended [the] money “for the family” to be preserved and used for emergencies ‘in case another situation like World War II . . . happen[ed].’”  Over time, at the various Swiss banks involved at for the year involved in the FBAR penalty [UBS, Credit Suisse and BSI], the record ownership of the accounts appeared solely in the name of Leon Landa, the plaintiff in the case and person who drew the FBAR civil willful penalty.  At some times, other family members were listed as having power of attorney at a couple of the banks.  But, at the key relevant times, Leon Landa only appeared as record owner of the accounts.  Regarding the UBS account, the Court found (p. 5) that in 2009 (as we all know) UBS under pressure closed accounts for U.S. taxpayers and a UBS represented "advised [Leon Landa] to open an account at a bank that “doesn’t do any operation in the United States.” Regarding a key account, the BSI account opened in 2009 apparently in response to the UBS advice, the Court found (p.5 & 6, cleaned up and footnote omitted):

The plaintiff applied to open the BSI account, identifying only himself as the account holder on the application, and he included his address and passport number. The account was opened as a numbered account. Mr. Landa signed a “Declaration of US Person,” which allowed him the choice between providing BSI with a form W-9, used by third parties to gather information on U.S. taxpayers to submit to the IRS, or, in the alternative, not authorizing the disclosure of his name. Mr. Landa signed his name under paragraph (b), which provided: “I do not authorise disclosure of my name. I am aware that the Bank will not invest in US securities on my account.” The plaintiff also signed a document titled “Declaration of identity of beneficial owner,” identifying “Landa Leon” as the contracting partner. Mr. Landa did not take a copy of any paperwork from BSI with him back to the United States. 

Mr. Landa directed BSI to hold mail at the bank so he would not receive mail about the account in the United States. On March 25, 2011, the plaintiff signed a held-mail receipt directing BSI to destroy 142 pages of correspondence dated between September 15, 2009, and March 23, 2011. 

Then, the Court found the following related to the IRS investigation (p. 7, cleaned up):

Thursday, April 15, 2021

Houston Tax Attorney Indicted for Conspiracy and for Aiding and Assisting (4/15/21; 4/16/21)

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.

Added 4/16/21 3:30pm:

Kepke's indictment is here.  I have limited points to make because the press release covers most of the interesting ones in the indictment.  I think that the prosecutors could have substantially flowered up the indictment with a lot more juicy facts, but after all a lot of fluff after putting the defendant on notice is often superfluous.

JAT comments:

1.  The conspiracy charged is the defraud conspiracy rather than the offense conspiracy.  I suppose that, on these facts, they could have charged offense conspiracy to violate either or both of § 7201 (evasion) or § 7206(1) (tax perjury) but that would have required additional elements of proof at trial.  Similarly, they could have charged evasion against Kepke directly.  But the charges are perhaps the minimum DOJ Tax felt necessary under all the facts, particularly since the maximum incarceration period on the counts charged is 14 years (5 for conspiracy and 3 each for the 3 counts of aiding and assisting).  Another factor though is that the amount of tax involved over all the years (and not just the charged years) can be included in the Sentencing Guidelines offense level calculation which would likely mean that, if the total tax Smith evaded were the $56.278 million, my rough and ready SG calculation assuming acceptance of responsibility is 70-87 months.  Of course, Kepke won't get that much, considering his age and health.  (Note, on 4/17/18, I corrected the SG calculation because I erroneously based the original calculation (now deleted) on the income rather than the tax.)

2.  It is not clear why Kepke's activity in the same pattern for Brockman were not included.  Perhaps the statute of limitations for that activity had closed.  Or, perhaps, Brockman was left out because they had what they needed on the Smith activity, particularly with Smith's cooperation to testify against Kepke.  But then, I think a creative prosecutor might be able to include Brockman tax in the calculation for SG purposes.  And perhaps Kepke's other clients (I suspect that there were some) with the same pattern.  Of course, larding additional tax loss on will not likely affect that actual sentence Kepke.

3,  A thought experiment.  With the substantial whistleblower awards in § 7623(b), those having some information about Kepke's practice could have profited handsomely if they could put some of the pieces together and delivered them to the Whistleblower Office without violating the attorney-client privilege.  With the crime-fraud exception, that might be easier even for some of the players in the adventure.  So, could Kepke have been a whistleblower?  In this regard, § 7623(b)(3) provides:

(3)Reduction in or denial of award
If the Whistleblower Office determines that the claim for an award under paragraph (1) or (2) is brought by an individual who planned and initiated the actions that led to the underpayment of tax or actions described in subsection (a)(2), then the Whistleblower Office may appropriately reduce such award. If such individual is convicted of criminal conduct arising from the role described in the preceding sentence, the Whistleblower Office shall deny any award.

So, logically it seems to me that if Kepke were the source of the information leading to either Brockman or Smith, he would have worked the whistleblower claim through an intermediary appearing as principal on the claim.  Just a thought experiment, and there are several different variations of that thought experiment.

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).