Government Abuse of Rule 6(e)’s Grand Jury Secrecy Requirement (7/31/21)

In Harbor Healthcare System, L.P. v. United States, 2021 U.S. App. LEXIS 20988  (5th Cir. 7/15/21) (Unpublished), here, a nontax case, the Court had this interesting footnote (Slip Op. 6 n. 1):

   n1 The government asserts several times in its brief that “Harbor is a subject of a grand jury proceeding.” Under Rule 6 of the Federal Rules of Criminal Procedure, the government’s attorneys “must not disclose a matter occurring before the grand jury.” Fed. R. Crim. P. 6(e)(2)(B)(vi); see also In re Grand Jury Investigation, 610 F.2d 202, 213, 219 (5th Cir. 1980) (“Punishment for contempt of court is the sanction specifically authorized by Rule 6(e)(1) for violations of its provisions, and a contempt citation will generally provide an adequate remedy for such violation.”); Wayne R. LaFave et al., Secrecy Requirements, 4 Crim. Proc. § 15.2(i) (4th ed. 2020) (discussing the need to “keep secret the subject of the grand jury’s inquiry while it is considering the possible issuance of an indictment” (citing United States v. Proctor & Gamble Co., 356 U.S. 677, 681 n.6 (1958))). An exception exists for “[t]he court [to] authorize disclosure—at a time, in a manner, and subject to any other conditions that it directs—of a grand-jury matter preliminarily to or in connection with a judicial proceeding.” Fed. R. Crim. P. 6(e)(3)(E)(i). The government has not pointed to such authorization by this or another court.

JAT Comments:

1. I am sure that attorneys with substantial experience in white-collar crimes, including tax crimes, have had instances, particularly in the old days when the Thompson memorandum applied, where the Government let the entity know that an employee was not “cooperating” after the employee asserted the Fifth Amendment either in a proffer session or before the grand jury.

D.C. SDNY Approves John Doe Summons re Offshore Enablers (7/30/21; 7/31/21)

In The Matter of the Tax Liabilities of John Does, United States Taxpayers (S.D. N.Y. 7/15/21), CL here, the Court ordered the service of a John Doe Summons upon several prominent financial services businesses related to taxpayers who may have used an offshore law firm, Panama Offshore Legal Services for U.S. tax noncompliance.  I first cut and paste the order (short 2 pages) and then link to and excerpt from the USAO SDNY Press Release explaining more about the perfunctory order.

1. The Order

UNITED STATES DISTRICT COURT FOR THE
SOUTHERN DISTRICT OF NEW YORK

IN THE MATTER OF THE TAX
LIABILITIES OF:

JOHN DOES, United States taxpayers who, at any time during the years ended December 31, 2013, through December 31, 2020, used the services of Panama Offshore Legal Services, including its predecessors, subsidiaries, and associates, to establish, maintain, operate, or control any foreign financial account or other asset; any foreign corporation, company, trust, foundation or other legal entity; or any foreign or domestic financial account or other asset in the name of such foreign entity.

Case No. 21 Misc. 424

ORDER GRANTING EX PARTE
PETITION FOR LEAVE TO
SERVE “JOHN DOE”
SUMMONSES

THIS MATTER is before the Court upon the United States of America’s “Ex Parte Petition for Leave to Serve ‘John Doe’ Summonses” (the “Petition”). Based upon a review of the Petition and supporting documents, the Court has determined that the “John Doe” summonses to Federal Express Corporation a/k/a FedEx Express; Fed Ex Ground Package System, Inc. a/k/a FedEx Ground; DHL Express (USA), Inc.; United Parcel Service, Inc.; the Federal Reserve Bank of New York; The Clearing House Payments Company LLC; HSBC Bank USA, N.A.; Citibank, N.A.; Wells Fargo Bank, N.A.; and Bank of America, N.A. (the “Summoned Parties”) relate to the investigation of an ascertainable group or class of persons, that there is a reasonable basis for believing that such group or class of persons has failed or may have failed to comply with any provision of any internal revenue law, and that the information sought to be obtained from the examination of the records or testimony (and the identities of the persons with respect to whose liability the summonses are issued) are not readily available from other sources. Moreover, the information sought to be obtained by the summonses is narrowly [*2] tailored to information that pertains to the failure (or potential failure) of the group or class of persons to comply with one or more provisions of the internal revenue law. It is therefore:

ORDERED AND ADJUDGED that the Internal Revenue Service, through Revenue Agent Katy Fuentes or any other authorized officer or agent, may serve Internal Revenue Service “John Doe” summonses upon the Summoned Parties in substantially the form as attached as Exhibits A-F to the May 4, 2021 Declaration of Katy Fuentes, Dkt. No. 4, and Exhibits G-J to the July 15, 2021 Letter from Talia Kramer, Dkt. No. 18. A copy of this Order shall be served together with the summonses.

Teacher Certificate Revocation Based on Fraud in Defraud Conspiracy; Wrong (7/29/21)

There are collateral consequences to being convicted of a tax crime (as well as other crimes).  Some of the collateral consequences for tax crimes are covered in Michael Saltzman and Leslie Book, IRS Practice and Procedure (Thomsen Reuters 2015), ¶ 12.06 Collateral Consequences.  (Note, I am the principal author  of Chapter 12, titled Criminal Penalties and the Investigation Function.)  Some of those are civil consequences.

In Certificate Revocation · "Crime of Moral Turpitude" · 18 U.S.C. §371 (Pennsylvania Law Weekly 7/20/21), the former teacher had his teaching certificate revoked after pleading guilty to a tax defraud conspiracy in 18 USC 371.  I don’t have a link to the article, but a Google search indicates that it is behind the Law.com paywall here.

The question addressed was whether the defraud conspiracy was a crime of moral turpitude.  The article says: “it was clear that conspiracy to defraud the United States was a crime of which fraud was an element.” 

As I have noted many times, the defraud conspiracy (commonly called a Klein conspiracy in a tax context) does not require fraud in its traditional meaning; thus, fraud (in its traditional meaning) is not an element of the crime.  Conduct falling far short of fraud is within the scope of the word defraud for the defraud conspiracy.  See  John A. Townsend, Tax Obstruction Crimes: Is Making the IRS's Job Harder Enough, 9 Hous. Bus. & Tax. L.J. 255, 330 ff. (2009), SSRN here.  It is true that at least deceit not involving fraud is required for conviction, but the point is that it is wrong to assume that because defraud is an element, fraud is an element.  It is not.

Accordingly, from the article, and without more, it would appear that the revocation was improper if it was based on a conclusion that the element of the crime was fraud in its traditional sense.  Of course, the Commission had the indictment in which, as usual, the prosecutors probably fluffed to manner and means to include some tax loss, so the intent to cause the tax loss would be fraud.  But, if that were the case, the offense was an offense conspiracy rather than a defraud conspiracy.  And, since this was a tax crime, the Government rarely charges without a tax loss -- which is the tax the defendant intended to evade so that there is a tax loss for sentencing.  Still, my understanding is that this type of consequence should be based on the elements of the crime.  A tax loss is not an element of the defraud conspiracy crime.  Hence, fraud is not an element of the defraud conspiracy.

ABA Tax Section Recommendation to IRS for Priority Guidance to Disavow Application of WSLA and Further Comments Re Same (7/23/21)

I have written several times on the Wartime Suspension of Limitations Act (“WSLA”), 18 U.S.C. § 3287, here.  In part relevant to tax crimes, the WSLA suspends “the running of any statute of limitations applicable to any offense involving fraud or attempted fraud against the United States or any agency thereof in any manner, whether by conspiracy or not.”  (Cleaned up.) The statute of limitations is suspended from the date of the “specific authorization for the use of the Armed Forces until 5 years after the termination of hostilities as proclaimed by a Presidential proclamation, with notice to Congress, or by a concurrent resolution of Congress.”  (Cleaned up.)

Where the WSLA is applicable, there are several authorizations that might establish the starting point for the suspensions.  Authorizations that have never been revoked were passed in 2001 and 2002 related to the activity after the 9/11 event.  So, for purposes of this discussion, I assume that the WSLA authorizes tax crimes prosecutions with the general 6-year statute of limitations for conduct back to 1995 or 1996 and the statute continues until 5 years after the authorizations are terminated.

Caveat:  There could be even earlier starting dates under the WSLA for earlier authorizations not yet revoked:  (1) a 1991 authorization incident to the Gulf “War”; and (2) a 1957 authorization (although it might not meet the “specific authorization” required by the WSLA.  Matthew Waxman, Remembering Eisenhower’s Middle East Force Resolution (LawFare 3/9/19), here.  The House has recently passed resolutions to revoke these authorizations.  See Karoun Demirjian, House votes to repeal military authorizations dating to Gulf War, Cold War (WAPO 6/29/21), here.

I have stated my belief that tax evasion under § 7201 is within the literal language of the WSLA.  That would mean also that the offense conspiracy to commit tax evasion would likely be within the literal language of the WSLA.  (The defraud conspiracy, in my view, would not be within the WSLA because the defraud conspiracy for some strange reason does not require fraud per Hammerschmidt v. United States, 265 U.S. 182, 188 (1924); see John A. Townsend, Tax Obstruction Crimes: Is Making the IRS's Job Harder Enough, 9 Hous. Bus. & Tax. L.J. 255 (2009), here; I think (perhaps speculation) that if the crime’s elements do not include fraud in the traditional sense of the term (defraud conspiracy does not), the WSLA would not apply.)

However, for some reason as yet unnanounced, at least in recent memory, DOJ Tax has asserted only the traditional six-year tax crime statute of limitations.  The CTM’s discussion of statutes of limitations does not even mention the WSLA.  DOJ CTM 7.00 STATUTE OF LIMITATIONS, here.  So how long DOJ Tax will forebear asserting the WSLA is open.  Further, in cases where the defendant challenges the normal statute of limitations, a court might sua sponte invoke the WSLA to deny the challenges.

Court Reverses TOP Offset Against Social Security Payments That Exceed Court's Restitution Schedule for Payments (7/21/21; 8/2/21)

In United States v. Taylor, No. CrimAction 06-658-03, 2021 U.S. Dist. LEXIS 134638 (E.D. Pa. July 20, 2021), CL here, the Court found that the Treasury Offset Program (“TOP”) collection, via offset, of criminal restitution from Social Security Benefits was not permitted under the Court’s schedule for restitution ($100 per year) and ordered return of the collections in excess of the Court’s restitution schedule.

Key points of the holding:

1. In January 2008, Taylor was convicted of the defraud / Klein conspiracy In ordering restitution in the earlier criminal case, the Court determined restitution was $3,300,000 but that Taylor could pay not more than $100 per year and scheduled that she pay that amount per year.  

2. Taylor thereafter began receiving Social Security monthly payments.

3. The Federal Government has a Treasury Offset Program (“TOP”) permitting the Government to collect against debts a person owes to the Government by offsetting payments the Government owes to the debtor.  The Court’s discussion of the TOP program is good, so I quote it (Slip Op. pp. 5-6; cleaned up):

TOP is a federal program authorized by the Debt Collection Act of 1982, as amended by the Debt Collection Improvement Act of 1996, which permits the Treasury Department to collect delinquent debts owed to federal agencies. See 31 U.S.C. § 3716. Under TOP Congress has subjected to offset all funds payable by the United States,’ § 3701(a)(1), to an individual who owes certain delinquent federal debts. The contours of TOP program have been described in the following terms: 

The practice of withholding federal payment in satisfaction of a debt is known as an administrative offset.” The Debt Collection Improvement Act of 1982, 31 U.S.C. §§ 3701 et seq., authorizes the Treasury Department “to collect non-tax debts by withholding funds paid out by other federal agencies.” Pursuant to the TOP, any federal agency with a claim against the debtor, after notifying the debtor that the debt is subject to administrative offset and providing an opportunity to dispute the debt or make arrangements to pay it, may collect the debt by administrative offset. In order to do so, the creditor agency must certify to Treasury that the debt is eligible for collection by offset and that all due process protections have been met. If properly certified, the Treasury Department must administratively offset the debt. 

Under TOP, Social Security benefits are eligible for offset pursuant to the Debt [*6] Collection Improvement Act. n6  
   n6 An offset to a person’s Social Security benefits, however, cannot exceed 15% of the monthly covered benefit payment. 31 C.F.R. § 285.4(e).

Judge Holmes Weighs (At Length) Against Taxpayers Involved in Complex Bullshit Tax Shelters; Fraud Penalties Approved (7/14/21; 7/15/21)

Back in my younger years in the practice of tax law, I heard something like an aphorism or at least a pithy statement meant to suggest some truth that the difference between a doctor and a lawyer cheating on their taxes is that the doctor will file a false return underreporting tax liability (a felony) whereas the lawyer will file no return (generally a misdemeanor).  While there may be some truth in the statement, there is probably not as much truth as those acting on it by failing to file would like to hope.

I was reminded of that statement in today’s opinion in Ernest S. Ryder & Associates, Inc., APLC. v. Commissioner, T.C. Memo. 2021-88, here.  The opinion. 191 pages long and with a table of contents to help one navigate the opinion, is written by Judge Holmes who weighs in with his usual gusto in writing.

Here is the opening (Slip Op. pp.  4-5,  footnotes omitted):

Ryder & Associates, Inc., APLC (R&A), marketed six tax-reduction strategies that produced over $31 million in revenue between 2003 and 2011. The firm’s fixed costs were low, and its out-of-pocket expenses not very large. Yet year after year it paid no income tax. Its revenue flowed instead into 560 accounts and into Ryder Law Corporation, a related S corporation.  It flowed into more than 1,100 ESOPs,  other S corporations, LLCs, and other passthroughs. It flowed into ranches in Arizona, and it flowed into other ranches in New Mexico. And then it mostly seemed to pool in places where it would benefit Ernest S. Ryder and his wife Patricia, who received more than $15 million in distributions between 2002 and 2011 but paid only $31,000 in income tax during the years at issue.

The lead petitioner is a corporation, but the case is consolidated with other cases.  The principal actor in the drama, Ryder, was an accomplished tax lawyer, with an LLM from NYU Law School.  His entry into the law practice in the 1970s was particularly auspicious as noted by Judge Holmes (Slip Op. pp. 6-7): 

His timing was fortunate--he was at the stem-cell stage of his career the year that Congress enacted the Employee Retirement Income Security Act of 1974 (ERISA). When there’s an avulsive change in the law like ERISA, young lawyers can develop valuable expertise in an environment uncluttered with more senior competitors.

Knowledgeable associates in a fast-growing field are a hot commodity, and in 1975 Ryder was hired away by Harrigan, Ruff & Osborne to help that firm’s clients get their retirement plans qualified under the new law. “[T]hat’s when my career really took a turn,” Ryder explained, and he was well on his way to becoming an expert in qualified retirement plans.

Judge Holmes recounts Ryder's trajectory thereafter to include (Split Op. 8 & 9, footnotes omitted):

The aggressiveness of Ryder’s tax-reduction strategies seems to have caused some tension with his partners at Ruff Ryder, and he was asked to leave the firm sometime in 1995. Ruff Ryder’s entire pension department and its profit-sharing clients left with him. With ample experience and a fully staffed pension practice, Ryder decided to open up his own firm in early 1996. And here begins the Ryders’ tax problems. R&A is a professional law corporation and has always been taxed as a C corporation. Ryder has owned 100%, and has acted as president, of R&A since its creation. We find that Ryder also provided 100% of his legal services to clients through R&A during the years at issue. 

Despite its success and longevity, R&A reported zero taxable income from 2002 through 2011. The Ryders also reported minimal taxable income on their individual returns for those years.

I can't help but point out the catchy firm name "Ruff Ryder."

Second Circuit Continues the Strong Consensus Rejecting the Argument that FINCen Regulations Under Pre-2004 Law Limit the Maximum Willful Penalty Prescribed under the 2004 Statutory Amendment (7/14/21)

In United States v. Kahn, ___ F.3d ___, 2021 U.S. App. LEXIS 20622 (2d Cir. 7/13/21), here, the Court held, consistent with the trend of cases after two district court burps, that the FBAR willful penalty in 31 USC § 5321(a)(5), here, as amended in 2004 to increase the maximum amount of the penalty, is not limited by the FINCen’s failure to update the underlying regulations which, consistent with pre-2004 law, capped the willful penalty at $100,000.  Readers of this blog should already be aware of the issue and the trend in the cases.  The majority opinion, while lengthy, does not break new ground in analysis of the issue, so I won’t address the majority opinion further, other than to say that, as of today, it is the definitive opinion, collecting and discussing the key issues and key cases, so it should be a starting point for those wanting to get into the issue as of now.

District Court Holds that Delinquent Payment and Filing After CI Agent Contact Is Admissible in Criminal Case (7/5/21)

In United States v. Thrush, 2021 U.S. Dist. LEXIS 118742 (E.D. Mich. 6/25/21), CL here, “Thrush was indicted on multiple counts of willfully failing to pay over payroll taxes and to file tax returns.”  After being contacted by the CI agent, Thrush “began making payments on his tax liability” and filed tax returns.  In the ensuing criminal case, the Government moved in limine “to exclude evidence of Defendant's delinquent tax payments and returns.”  

The Court held that, under Sixth Circuit precedent, Thrush could introduce the evidence.  After reviewing the case authority, the Court concluded (pp. 9-10):

Defendant's version of events, if believed, would allow a reasonable jury to infer that his failure to pay taxes and file tax returns was the result of ignorance, rather than willfulness. Accordingly, Defendant's [*10]  delinquent filings, if offered in conjunction with the assertions discussed above, would be probative of his mental state during the period in question.

In comparison, evidence of the delinquent filings poses only a modest risk of misleading the jury. The evidence will not, and cannot, be offered to show that Defendant's prior crimes, if any, were somehow vitiated, see Sansone 380 U.S. at 354, and the jury will be clearly instructed as to the elements of the charged offenses and the meaning of willfulness.

Based on the foregoing, the Government has not demonstrated that the probative value of Defendant's delinquent filings is substantially outweighed by the risk of misleading the jury.

JAT Comments:

District Court Holds that FBAR Nonwillful Penalty Survives Death (7/5/21)

In United States v. Gill, 2021 U.S. Dist. LEXIS 12203 (S.D. Tex. 6/30/21), CL here, the court held that an FBAR nonwillful penalty survives the death of the person subject to the penalty.  The decision turned on whether the FBAR nonwillful penalty was remedial or penal in nature.  The general rule is that remedial liabilities survive death, but penal liabilities do not.  The difference between these two categories is based on tests formulated in Hudson v. United States, 522 U.S. 100-101 (1997) (invoking the multi-factor test under Kennedy v. Mendoza-Martinez, 372 U.S. 144, 168–69, 83 S. Ct. 554 (1963)).  Where the cause of action does not fall “neatly” in these categories, the decision is made by “primary purpose of the statute.” (Slip Op. p. 8.)  Applying these tests, the Court finds the FBAR civil nonwillful penalty remedial.

A number of cases (cited by the court in the opinion) have held that the FBAR willful penalty (which in its typical application by the IRS produces larger penalties than would have applied under the nonwillful penalty) was remedial, thus permitting the penalty to survive death. Accordingly, it is not surprising that the nonwillful penalty survives death.

Preliminary Comments on the Trump Organization and CFO Indictment (7/2/21; 7/4/21)

The much-anticipated indictment of the Trump Corporation and components and its Chief Financial Officer (“CFO”), Allen Weisselberg, has been released.  The caption is The People of New York v. The Trump Corporation, et. al. (N.Y. Supreme Court - no number available).  The indictment is here.  (The pdf copies on the web were not adequately OCR’d; I had this copy OCR’d using Adobe Acrobat text recognition; the OCRing came out much better than the copies I found in my quick searches.)

Here are my first general comments (which I may supplement or revise later):

1. The general thrust of the indictment had been reported before the indictment came out.  Basically, through various schemes, certain individuals (including, for purposes of this indictment, the CFO) caused the corporation to underreport and underpay tax liabilities.  Essentially, these individuals caused the corporation to pay compensation that did not appear on the books and filings as corporation subject to various tax obligations – including reporting income of the individuals benefiting from the payments, avoiding payroll tax to the payors and payees, etc.  

2.  This is a fairly common pattern in a closely held corporation except that the payments often go to the owner and the owner’s family rather than to an employee (here the CFO).  In this case, the owner is Trump and the owner’s family are the Trump children and spouses.  Nothing is said about Trump’s off-the-books use of corporate assets, but with the egregious conduct for Weisselberg, one has to wonder whether charges against Trump are waiting in the wings, with the prosecutor hoping Weisselberg will flip.  Given Trump's alleged use of oral instructions (or signals) to avoid putting his conduct in writing to the extent possible, somebody like the CFO would be an important (perhaps not a necessary) witness against Trump if he were indicted.