Wednesday, June 29, 2022

District Court Rejects Motions for Acquittal and New Trial on Tax Perjury Convictions (6/29/22)

In United States v. Thompson, No. 21-cr-00279-1, 2022 U.S. Dist. LEXIS 99469 (N.D. Ill. June 3, 2022), CL here, the court denied Thompson's motions for acquittal and, in the alternative, a new trial. Thompson had been convicted of "two counts of making a false statement with the intent to influence the Federal Deposit Insurance Corporation (the FDIC) and a mortgage lending business, in violation of 18 U.S.C. § 1014, and five counts of filing a false tax return, in [*2]  violation of 26 U.S.C. § 7206(1)."

I focus on certain tax aspects of the opinion, although I note that the court held (Slip Op. 28-38) that, for the § 1014 conviction in the Seventh Circuit, literal falsity was not required. 

Special Agents Assisting the Grand Jury Make Surprise Visit.

As often happens in a tax investigation, IRS CI Special Agents make a surprise early morning visit, which is often the target's or subject's first indication of the investigation, designed to catch him or her off-guard and, even when given the modified Miranda warnings, more amenable to an interview without counsel. Here is the court's description of that interview. In this case, the Special Agents were, respectively FDIC and IRS Special agents, and were assistants to a grand jury rather than agents conducting agency administrative investigations.

             At 8:15 a.m. on December 3, 2018, Evans [Special Agent with the FDIC Office of Inspector General] and Special Agent Jason Gibson (Gibson), [*13]  with IRS Criminal Investigation, visited Thompson at his house unannounced to interview him. Tr. 935:16-936:4, 944:12-19. Evans testified that, during the interview, they discussed Thompson's loan at Washington Federal, Evans and Gibson asked him questions about the loan, and Thompson provided information about the loan. Tr. 938:16-25. Specifically, Evans told Thompson that he was investigating Washington Federal, but he never told Thompson that Thompson himself was the subject of an investigation or that Thompson's taxes or tax deductions were the subject of an investigation. Tr. 950:23-951:8. At some point during or at the end of the interview, Gibson served Thompson with a grand jury subpoena that called for Thompson to appear and provide records, including but not limited to federal tax records and records used to prepare federal tax returns, loan and credit applications, records related to the purchase of Thompson's primary residence, his rental residence, and a third property located in Michigan. Tr. 939:1-22, 941:9-942:6, 948:19-22; GX 411.

I infer that, although not expressly stated, Thompson was at least a subject of the grand jury investigation. The opinion does not state whether he was given modified noncustodial Miranda warnings or whether Thompson made incriminating admissions during the interview. I have to assume that defense counsel made whatever he could from the described event.

 Denial of Good Faith Jury Instruction for Tax Perjury.

Saturday, June 25, 2022

Good Article on the Abusive Syndication Easement -- Legislative and Judicial Initiatives (6/25/22)

I recommend to readers this article:  Peter Elkind, The Tax Scam That Won’t Die (Propublica 6/17/22), here.  Key excerpts related to tax crimes:

Criminal investigations of industry practices are reportedly underway in three states. The crackdown’s most sensational case became public in February, when a federal grand jury in Atlanta indicted North Carolina developer Jack Fisher, a major syndication deal promoter and owner of Inland Capital Management. The 135-count indictment charged Fisher and six associates with participating in a conspiracy to sell $1.3 billion worth of illegal tax shelters. The charges against Fisher include wire fraud, conspiracy to defraud the U.S., money laundering and aiding in the filing of false tax returns. He has pleaded not guilty.

The indictment was backed by a string of damning statements attributed to Fisher, including several secretly recorded by an undercover government agent posing as an easement promoter.

The indictment, for example, charged that Fisher’s conservation deals relied on “fraudulent” and “grossly inflated” land appraisals, often valuing the easement properties at more than 10 times what he had paid for them just months earlier. It asserted that Fisher routinely “pre-determined” these valuations before any appraisal was actually performed, telling his two “hand-picked” appraisers what valuation he needed to generate the generous deductions he’d promised investors. In one recorded conversation described in the indictment, Fisher said one of the appraisers simply “puts down whatever we say.” In another, he said he always made sure easement valuations were high enough to make sure investors “can still get a good return on their money,” even if a later IRS audit reduced their charitable deduction.

The government also charged that Fisher frequently orchestrated the illegal backdating of checks and tax documents, allowing him to keep offering unsold stakes in his deals to investors as much as nine months after the year-end tax deadline, after the easement was already donated. In one recording, Fisher acknowledged rewarding partners at an accounting firm with free shares in an easement deal because “they participated in basically backdating all the documents.” After learning he was under investigation, according to the indictment, Fisher told one associate he could claim that backdated checks weren’t deposited until after the close of the tax year because they had been “lost” on someone’s desk.

Both appraisers, now among Fisher’s fellow defendants, have pleaded not guilty. One says on his website that his firm decided in mid-2019 to stop doing conservation easement work “until there is greater clarity from the courts on conservation easements.”

Tuesday, June 21, 2022

Supreme Court Grants Cert in Bittner v U.S. On FBAR Nonwillful Penalty Per Form or Per Account Issue (6/21/22; 6/22/22)

The Supreme Court today granted certiorari in the Bittner case to address the issue of whether the FBAR nonwillful penalty is per form or per account.  See Order List, p. 2, here.  I covered the key points at this stage in a prior blog.  Solicitor General Acquiesces in Bittner Petition for Cert on Issue of FBAR Nonwillful Penalty Per Form or Per Account (Federal Tax Crimes Blog 5/19/22), here.  So I will defer further comment now.

The docket entries where the briefings and other documents as they are filed may be retrieved in the following web pages:

  • Supreme Court here.
  • Scotusblog here (Note, as of this posting the cert granted entry has not been posted but should be posted by the end of the day.

Added 6/22/22 at 1:40 pm: 

Based on some of my current diversions on the APA and Chevron (see e.g., my blog Reply to Professor Hickman's Response to My PT Article (Federal Tax Procedure Blog 6/17/22; 6/22/22), here), it occurs to me that we may use some of the constructs in that discussion here to either clarify or further confuse.  Using that lingo:

1. What if the normal tools of statutory construction do not resolve whether the statute applies the nonwillful penalty per form or per account?  Included in the normal tools of statutory interpretation is what is often called Skidmore deference.  (Actually Skidmore is not deference at all because it requires that the court be persuaded by consideration of the agency interpretation; some therefore call it Skidmore respect or even the respect due for any position asserted by a litigant in litigation.)

2. That would almost certainly mean that the statute is ambiguous and that the interpretation might be subject to Chevron analysis if incorporated in a Chevron entitled rule (usually a regulation).  But I don’t think there is a Chevron entitled rule for this issue.

3. What then if the Supreme Court is in interpretive equipoise – neither interpretation is the best interpretation?  See Chevron and Equipoise In Statutory Interpretation (Federal Tax Procedure Blog 5/26/22), here; and Even More on Skidmore (Including Equipoise as to Interpretation)( Federal Tax Procedure Blog 7/7/19), here.  Should the Court just flip a coin when in equipoise or, more likely, have to affirm the Circuit Court because it could not conclude that the Circuit Court was wrong.  Of course, the advantage of a Supreme Court opinion in a systemic sense is not that the Supreme Court necessarily gets it right, but that it gets a uniform interpretation that all courts must apply.  So, a coin flip or equivalent (even if made mentally and not acknowledged in the opinion) might be OK.

If anyone has an answer to the conundrum, I would appreciate having it either by comment or separate email.

Wednesday, June 15, 2022

Court Seems to Hold that Tax Willfulness Good Faith Defense Requires the Defendant to Testify (6/15/22)

In Darst v. United States (M.D. Fla. Case No. 8:21-cv-1292-WFJ-JSS Order dated 6/13/22), CL here, Darst had long ago been convicted of tax obstruction and four counts of failure to  file tax returns.  Darst sought belatedly to overturn his convictions with a petition for writ coram nobis and motion to compel discovery of documents.  The Court denied petitioner’s motion on fairly standard grounds for this type of belated hail-mary gambit.

Rather than discuss the trajectory of the order, I focus on one part that caught my attention.  Darst sought to obtain discovery of certain statements of the IRS Commissioners that “that filing a tax return is voluntary.”  (See Slip Op. 2, 5 (“he had no duty to file a tax return because of the comments by the commissioners”), & 8-9.)  Here is the discussion of the issue (Slip Op. 8-9):

            A commissioner's comments about tax laws enacted by Congress do abrogate those laws. Even so, Petitioner quotes statements by commissioners from 1953 and 1990. Dkt. 20 at 2 n.3. If he contends that these statements caused him to misunderstand tax law and “because of [this] misunderstanding of the law, he had a good-faith belief that he was not violating any of the provisions of the tax laws,” Mr. Darst should have testified and presented his good-faith belief to the jury at trial. Cheek v. United States, 498 U.S. 192, 202 (1991).

I have previously written on the issue of the necessity for the defendant to testify if he asserts a good faith defense.  Making a Cheek Good Faith "Defense" Without Testifying (Federal Tax Crimes Blog 11/24/11), here.; and Cheek Good Faith - Must the Defendant Testify to Assert the Good Faith "Defense" (Federal Tax Crimes Blog 10/13/10), here.  I think the defendant usually cannot assert a credible good faith defense without testifying, but the tenor of the court’s last sentence is that a good faith defense requires the defendant to testify.  I am just not sure that is the case.

Tuesday, June 7, 2022

Third Circuit Sustains FBAR Willful Penalty (6/7/22)

In Collins v. United States, ___ F.4th ___, 2022 U.S. App. LEXIS 15467 (3rd Cir. 6/6/22), CA3 here and GS here, the Court affirmed the district court’s holding that Collins was liable for the willful FBAR penalty.  See United States v. Collins, 2021 U.S. Dist. LEXIS 23260, 2021 WL 456962 (W.D. Pa. Feb. 8, 2021), GS here.

The steps in the Court of Appeals reasoning were:

1. Collins had unreported foreign accounts.

2. Collins joined OVDP, apparently in 2010.  After filing his “amended returns for 2002 to 2009, which yielded modest refunds stemming from large capital losses in 2002,” Collins opted out of OVDP, presumably hoping to pay less on opt-out.  The IRS audited and found that the amended returns failed to report PFIC income, which generated additional tax of “$71,324 for 2005, 2006, and 2007, plus penalties.”  Further, by opting out, Collins subjected himself to potential willful FBAR penalties rather than the mitigated miscellaneous penalty in OVDP.  The IRS proceeded to asset the FBAR penalty, although the IRS mitigated the penalty substantially under the IRM mitigation rules and agent discretion.

3. The District Court, on trial, “found a ‘decades-long course of conduct, omission and scienter’ by Collins in failing to disclose his foreign accounts” and held that the penalty determination (as mitigated) was “neither arbitrary and capricious nor an abuse of discretion.”

4. On the willful determination, The Court of Appeals articulated and applied the “civil standard of willfulness, which encompasses recklessness * * * * The dispositive question here is whether “Collins knew or (1) clearly ought to have known that (2) there was a grave risk that he was not complying with the reporting requirement, and if (3) he was in a position to find out for certain very easily.”  (Cleaned up.)

5. The Court of Appeals handily affirmed the district court’s holding that “Collins’s failure to disclose his foreign accounts was willful—not just reckless, but with ‘an actual intent to deceive.’”

Sunday, May 29, 2022

Government Suit to Enforce JDS to Offshore Promoter (5/29/22)

In United States v. Wessell (S.D. Fla. Case 22-cv-60988), Cl dkt entries here, the Government filed under seal a request for authorization of a John Doe Summons (“JDS”) to Kevin W. Wessell and related entities.  The Government had filed similar JDS’s in other jurisdictions for related summonsees.  The Government now files a petition to enforce the summons (JDS) issued to Wessell.  (See dkt entry 1, dated 5/24/22, here.)  The Government also filed a Brief in Support (dkt entry 3, dated 5/24/22, here (15 pages) with supporting documents including an IRS declaration here (124 pages) and certain other exhibits, including a privilege log of 482 pages).

The Brief summarizes the IRS’s concerns about Mr. Wessell as follows (pp. 1-2, footnotes omitted):

            On September 26, 2018, the IRS served a summons on Mr. Wessell. Exhibit 1 (Cincotta Decl.) ¶ 10. The purpose of the summons is to identify the clients of the Wessell Group, a sprawling enterprise operated by Mr. Wessell whose activities bear “the hallmarks of offshore tax evasion.” Id., Attachment C ¶ 27.1

            In particular, the Wessell Group creates foreign entities and bank accounts in tax havens such as the Cook Islands and Nevis in order to help United States taxpayers hide their money. Id. ¶¶ 19–49. The Wessell Group equips its customers with nominee directors and officers, and it even provides them with suggested avenues for circumventing court orders to repatriate funds. Id. ¶¶ 32–38. Based on extensive evidence outlined by the United States in a 2018 filing, this Court has already concluded that “there is a reasonable basis for believing” that the Wessell Group’s customers “may fail or may have failed to comply with the internal revenue laws,” which require taxpayers to report their worldwide income and pay associated taxes. See In re Tax Liabilities of John Does, No. 0:18-cv-62135- WPD, ECF No. 6 at 1 (S.D. Fla. Sept. 13, 2018).

            The IRS summons required Mr. Wessell to produce all documents related to United States taxpayers who, between January 1, 2012 and December 31, 2017, used the Wessell Group 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 a foreign entity.” Exhibit 1 (Cincotta Decl.) ¶ 11 & Attachment D. The deadline for compliance was October 26, 2018. Id. ¶ 9.

 Once the JDS was issued, the concern addressed in the petition to enforce is whether Wessell properly complied with the summons.  The Government has concerned about whether Wessell produced the summonsed records or properly accounted for the summonsed records in a privilege log.  Suffice it to say that the number of potential documents within the scope of the summons is quite large.

Things that caught my attention include the following:

Tuesday, May 24, 2022

Brockman Found Competent to Stand Trial (5/24/22)

In the gorilla of tax crimes cases, United States v. Brockman (S.D. Tex. Crim  4:21-CR-9), CL Docket Entries here, the Court yesterday denied Brockman’s attempt to avoid trial by feigning, so the Court found, incompetence.  The Memorandum Opinion and Order (“Order”) so holding is here (Dkt # 263).  The conclusion (pp. 41-42) is:


The Court finds that the Government has met its burden of establishing that Defendant Robert T. Brockman is competent to stand trial. In so finding, the Court is very mindful that Brockman is an elderly person who has Parkinson’s Disease, which is a neurodegenerative disorder, and has suffered from some degree of cognitive impairment. However, the evidence before the Court shows that Brockman is also an extremely intelligent person with both a high cognitive reserve and history of malingering for secondary gain. The Government has introduced compelling evidence showing that Brockman exaggerated his cognitive symptoms when he was being examined by medical professionals in the past; and Brockman’s performance on validity tests—some of them administered by his own neuropsychological expert—indicates that he continues to exaggerate impairment. Accordingly, the Court finds Defendant Robert T. Brockman competent to stand trial.

With this diversion behind for now, the case can proceed through other pretrial steps (including, certainly, further diversions for a defendant with the deepest of pockets to afford such diversions to delay or avoid justice) and go to trial.

I do not further discuss the Order because there are no exceptional criminal tax issues in the Order.  Just a guy trying to avoid trial as if he were a fugitive from justice.

Saturday, May 21, 2022

Unposting of Blog Entry (5/21/22)

Earlier, I posted a blog entry on the Federal Tax Crimes Blog that should have been posted on the Federal Tax Procedure Blog.  I have now moved that blog entry to the Federal Tax Procedure Blog.  The blog entry is now Adjudications of Agency Actions and the Right to Jury Trial (Federal Tax Procedure Blog 5/21/22), here.  Sorry to readers for that mistake.

Thursday, May 19, 2022

Solicitor General Acquiesces in Bittner Petition for Cert on Issue of FBAR Nonwillful Penalty Per Form or Per Account (5/19/22)

I previously discussed United States v. Bittner, 19 F.4th 734 (5th Cir. 11/30/21), CA5 here, and GS here, in which the Court held that the FBAR civil nonwillful penalty is applied per account rather than per form. See Fifth Circuit Applies FBAR NonWillful Penalty Per Account and Not Per Form (Federal Tax Crimes Blog 11/30/21), hereThat holding conflicted with a prior holding of the Ninth Circuit in United States v. Boyd, 991 F.3d 1077 (9th Cir. 2021), CA9 here and GS here. On February 28, Bittner filed a Supreme Court petition for writ of certiorari. The docket entries for documents related to that petition are here. On May 17, the Solicitor General filed the U.S. response, here, advising that the U.S. acquiesces in the petition (acquiesce was the term of art I recall from working at DOJ Tax Appellate in the 1970s) as follows (p. 12, bold supplied by JAT):


The court of appeals correctly determined that the Bank Secrecy Act authorizes the Secretary of the Treasury to impose a civil penalty of up to $10,000 on a U.S. person for each foreign financial account that the person fails to report as required by the Act and its implementing regulations, because each failure to report a qualifying account is a separate “violation,” 31 U.S.C. 5321(a)(5)(A), for which the Secretary may impose a separate penalty. Yet, as petitioner explains (Pet. 13-25), the decision below conflicts with a recent decision by a divided panel of the Ninth Circuit in United States v. Boyd, 991 F.3d 1077 (2021). The question presented is important and will often recur, and this case would be an appropriate vehicle in which to address it. Accordingly, the petition for a writ of certiorari should be granted.

Further, the Solicitor General said (pp. 18-19):

3. The division of authority between the Fifth and Ninth Circuits on the question presented is recent, and no other court of appeals has yet addressed whether the Secretary may assess a civil penalty of up to $10,000 for each foreign account that  a U.S. person fails to report on a single FBAR. Nonetheless, the question presented is important and likely to recur, and the government agrees with petitioner that the issue—a fairly straightforward and discrete question of statutory construction—warrants this Court’s review at this time.

In early March, I discussed Bittner’s petition with a friend, offering the following on the possibility of the Court granting cert.

Wednesday, May 18, 2022

District Court Retains Jurisdiction While Arbitrary and Capricious FBAR Willful Penalty Amount is Remanded to IRS for Recalculation (5/18/22)

In United States v. Schwarzbaum (S.D. Fla. Case # 18-cv-81147-BLOOM/Reinhart Dkt #146 5/16/22), CL here, the Court granted the Government's motion to retain jurisdiction while the FBAR penalty is remanded to the IRS for recalculation. The pleadings on the motion and much other commotion at the district court level can be reviewed on the CourtListener docket entries site for the case here. I have previously covered the issues on retention of jurisdiction:  More Thrashing in Schwarzbaum on Effect of Eleventh Circuit's Remand to Remand to IRS on Statute of Limitations (4/1/22; 4/7/22), here; see also 11th Cir. Remands For IRS To Re-Determine FBAR Penalties After Affirming Original Calculation Was Arbitrary And Capricious (1/26/22), here.

The net effect of retaining jurisdiction is that the fight over the statute of limitations with respect to the recalculated FBAR penalty will be thrashed out later, probably on appeal after the district court enters judgment on the recalculated penalty amount. I am not an administrative law or Administrative Procedure Act (APA) expert, so I don't know and cannot credibly predict what the ultimate resolution of the issue will be. Can the IRS correct an "arbitrary and capricious" assessment outside the six-year limitations period? My best guess is that the law is not clear on the issue. I can say that correcting the assessment amount with the old timely assessment remaining in effect seems like the "right" answer. I just cannot speculate credibly on whether the law permits that right answer.

Monday, May 2, 2022

First Circuit Sustains Willful Penalty Where Willfulness Found as Discovery Sanction (5/2/22)

In United States v. Toth, 33 F.4th 1 (1st Cir. 4/29./22), here, the Court affirmed the district court’s grant of summary judgment which had imposed a willful determination as a discovery sanction.   See In Willful FBAR Collection Suit, District Court Rejects Reconsideration of Finding of FBAR Willfulness As Discovery Sanction (Federal Tax Crimes Blog 12/28/19), here; and District Court Grants Government Summary Judgment on FBAR Civil Willful Penalty (9/19/20), here.  The opinion, written by Judge Barron (Wikipedia here) is a bit of a slog (42 pages in pdf of Slip Op.), so I just focus on the parts of the opinion that I found interesting.

1. The opinion says (Slip Op. 3) that Toth had filed her first FBAR in 2010.  I infer that the Court means 2010 FBAR which would have been filed in 2011.  The Court then says (Slip Op. 3) “the IRS filed the delinquent FBAR forms on her behalf for the relevant period (2005-2009).”  I may have missed something over the years, but I don’t recall hearing that the IRS files delinquent FBARs for taxpayers.  (Compare by analogy, substitutes for returns filed under § 6020.)   I  am aware of no such authority for the IRS or FinCEN to file substitutes for FBARs. (But then I am often unaware.)

2. The Court has considerable discussion (Slip Op. 21-31) of the issue of whether the FBAR penalty was limited under the regulation originally promulgated in1987 under the statute then capping the FBAR penalty at $100,000 which was not changed after the 2004 amendment increasing the willful penalty to the greater $100,000 or 50% of the unreported accounts precluded.  The consensus in the Courts of Appeals is that the old regulation (now updated effective 12/23/21) did not apply to limit the maximum penalty under the 2004 revision.

Friday, April 22, 2022

Credit Suisse Taking Another Rap on the Knuckles (4/22/22)

David Cay Johnston. Wikipedia here, a prolific author of books and articles on the crimes of the rich, has this article on Credit Suisse, Repeat felon Swiss bank may finally lose privileged American status (RawStory 4/21/22), here.  The article reports that the Department of Labor is acting to take away a favored U.S. status, Qualified Professional Asset Manager, as a result of its numerous crimes.  Johnston reports Credit Suisse’s “rap sheet” as:

Rap Sheet

Credit Suisse has a long and thoroughly documented history of refusing to turn over money due to heirs of Holocaust victims, helping super-rich Americans cheat on their taxes and making loans using unusual terms that turned into disasters for the borrowers. One of its most recent felonies was punished with a $175.5 million fine. That’s chump change for a bank with assets of about $1.6 trillion. The fine was barely 1/10,000th of those assets.

Tuesday, April 12, 2022

TIGTA Report on IRS Effort to Enforce FATCA (4/12/22)

TIGTA issued this report: TIGTA, Additional Actions Are Needed to Address Non-Filing and Non-Reporting Compliance Under the Foreign Account Tax Compliance Act (Report # 2022-30-019 4/7/22), here.  I excerpt the highlights below, but for those practicing in this area, there is a lot of detail.  Good stuff in those details.

Why TIGTA Did This Audit

While taxpayers can hold offshore accounts for a number of legitimate reasons, some taxpayers have also used such accounts to hide income and evade taxes. The passage of the Foreign Account Tax Compliance Act (FATCA) sought to reduce tax evasion by creating greater transparency and accountability with respect to offshore accounts and other assets held by U.S. taxpayers.

This audit was initiated to evaluate the IRS’s efforts to use information collected under FATCA to improve taxpayer compliance.

Impact on Tax Administration

Individual taxpayers are required to file Form 8938, Statement of Specified Foreign Financial Assets, with their income tax returns if the aggregate value of the assets exceeds certain dollar thresholds. Foreign financial institutions (FFI) are required to File Form 8966, FATCA Report, to report information about financial accounts in which U.S. taxpayers hold certain “ownership interests.”

The IRS established Campaign  896 - Offshore Private Banking, to address tax noncompliance related to taxpayers’ failure to report income generated and information reporting associated with offshore banking accounts, and Campaign 975 - FATCA Filing Accuracy, which seeks to identify the FFIs that maintain specified foreign financial accounts for U.S. individuals but did not submit Form 8966.

What TIGTA Found

Due to resource limitations, the IRS has significantly departed from its original comprehensive FATCA Compliance Roadmap in favor of a more limited compliance effort. As part of its effort, the Large Business and  International (LB&I) Division established two campaigns to identify noncompliance with the individual and FFI provisions of FATCA. The chart below reflects nearly $574 million of FATCA-related implementation and maintenance costs compared against the LB&I Division’s campaign compliance results from the IRS’s systemic approach to address FATCA noncompliance, as well as FATCA-related assessments from field examinations.

Monday, April 4, 2022

District Court Concludes More Likely Than Not that President Trump and John Eastman Committed the Defraud Conspiracy (4/4/22)

 Readers of this blog will recall that I have written often about the defraud conspiracy and its interpretation in  Hammerschmidt v. United States, 265 U.S. 182, 188 (1924).  That interpretation, which I sometimes call the Hammerschmidt spin, provides a definition for defraud that expands beyond the definition of fraud in the criminal law and is thus a judicial expansion.  I and others have expressed concern about that expansion.  See e.g., my most recent offering which summarizes the concern. District Court Rejects Claim That Supreme Court Expansion of Defraud Conspiracy Is In Error (3/24/22; 3/27/22), here.   I usually address the concern in a tax setting where the Hammerschmidt spin is referred to as a Klein conspiracy.

Those who have been watching the news may have picked up that a federal district judge in California recently deployed the Hammerschmidt spin in determining whether certain communications by John Eastman, Trump’s putative attorney for attempting to prevent the certification of Biden as President, including the events surrounding the siege and breach of the Capitol  on January 6.  See Eastman v. Thompson  (C.D. Cal. Dkt # 8:22-cv-00099-DOC-DFM 3/8/22), CL here and GS here [to come].  In rejecting various claims of privilege or right to withhold  documents, the Court concluded inter alia (pp. 36-39) that Eastman and Trump likely committed the defraud conspiracy crime.   I thought readers interested in this issue may like the analysis which I copy and paste here (I leave the footnote numbers in the text but omit the footnotes except for the footnote citation to Hammerschmidt.):

ii. Conspiracy to Defraud the United States

            The Select Committee also alleges that President Trump, Dr. Eastman, and others conspired to defraud the United States by disrupting the electoral count, in violation of 18 U.S.C. § 371.242 That crime requires that (1) at least two people entered into an agreement to obstruct a lawful function of the government (2) by deceitful or dishonest means, and (3) that a [*37] member of the conspiracy engaged in at least one overt act in furtherance of the agreement.243

            As the Court discussed at length above,244 the evidence demonstrates that President Trump likely attempted to obstruct the Joint Session of Congress on January 6, 2021. While the Court earlier analyzed those actions as attempts to obstruct an “official proceeding,” Congress convening to count electoral votes is also a “lawful function of government” within the meaning of 18 U.S.C. § 371, which Dr. Eastman does not dispute. An “agreement” between co-conspirators need not be express and can be inferred from the conspirators’ conduct.245 There is strong circumstantial evidence to show that there was likely an agreement between President Trump and Dr. Eastman to enact the plan articulated in Dr. Eastman’s memo. In the days leading up to January 6, Dr. Eastman and President Trump had two meetings with high-ranking officials to advance the plan. On January 4, President Trump and Dr. Eastman hosted a meeting in the Oval Office to persuade Vice President Pence to carry out the plan. The next day, President Trump sent Dr. Eastman to continue discussions with the Vice President’s staff, in which Vice President Pence’s counsel perceived Dr. Eastman as the President’s representative.246 Leading small meetings in the heart of the White House implies an agreement between the President and Dr. Eastman and a shared goal of advancing the electoral count plan. The strength of this agreement was evident from President Trump’s praise for Dr. Eastman and his plan in his January 6 speech on the Ellipse: “John is one of the most brilliant lawyers in the country, and he looked at this and he said, ‘What an absolute disgrace that this can be happening to our Constitution.’”247 Based on these repeated meetings and statements, the evidence shows that an agreement to enact the electoral count plan likely existed between President Trump and Dr. Eastman.

            Deceitful or dishonest means Obstruction of a lawful government function violates § 371 when it is carried out “by [*38] deceit, craft or trickery, or at least by means that are dishonest.”248 While acting on a “good faith misunderstanding” of the law is not dishonest, “merely disagreeing with the law does not constitute a good faith misunderstanding . . . because all persons have a duty to obey the law whether or not they agree with it.”249
    n248 Hammerschmidt v. United States, 265 U.S. 182, 188 (1924).

Friday, April 1, 2022

More Thrashing in Schwarzbaum on Effect of Eleventh Circuit's Remand to Remand to IRS on Statute of Limitations (4/1/22; 4/7/22)

I have previously written on the case of United States v. Schwarzbaum (S.D. Fla. Dkt # 18-cv-81147-BLOOM/Reinhart CourtListener Dkt. Entries here).  All my posts can be seen with a blog search on Schwarzbaum here. Where the posts are presented first by relevance but a link at the top permits reshuffling.

A good place to start is 11th Cir. Remands For IRS To Re-Determine FBAR Penalties After Affirming Original Calculation Was Arbitrary And Capricious (Federal Tax Procedure Blog 1/26/22), here.  Applying oft used APA procedure the Court remanded to the District Court to then remand to the IRS for correction of the deficiencies.  As I note in that blog, there are statute of limitations issue on that type of remand, such as if a corrected assessment is required, is the corrected assessment a new assessment clearly outside the statute of limitations or is it just an adjustment of the earlier assessment for statute of limitations purposes?

On remand, the brouhaha continues.  The parties now dispute the issue of whether the District Court can retain jurisdiction while the case is remanded.  The Government has moved for the District Court to retain jurisdiction.  Schwarzbaum opposes the Government’s motion, urging that the remand to the District Court concludes the jurisdiction in the District Court, requiring that the IRS make the penalty determination afresh requiring a new FBAR assessment that would now be plainly untimely.

I won’t discuss the arguments but will just link to the pleadings:

  • Government's Motion Dkt. 136, here;
  • Schwarzbaum’s Opposition Dkt. 141, here; and
  • Government's Reply Dkt. 144, here (added to blog 4/7/22).
Those wanting further developments can periodically check the CourtListener Docket Entries here.

Thursday, March 31, 2022

Summary of Tax Crimes for Tax Procedure Class (3/31/22)

 This past Tuesday, I was a guest lecturer at Jim Malone’s UVA Law Class on Tax Procedure.  My subject was tax crimes.  I circulated in advance a pdf summary of the topic here (which I have changed slightly as indicated in red).  The summary is taken from the corresponding section of my Federal Tax Procedure Book Practitioner Edition but stripping out the footnotes and modifying the text as I thought appropriate).  Readers of this blog can download the summary here.  SSRN links to download either the Student or Practitioner Editions of the book are here

Wednesday, March 30, 2022

More District Court Thrashing Around on Arbitrary and Capricious Calculation of Willful FBAR Penalties (3/30/21)

I have written before on the saga of Timberly Hughes.  Court Sustains Willful FBAR Penalty for Two of Four Years (Federal Tax Crimes Blog 10/15/21), here.  Hughes is back in the news, so to speak.  In United States v. Hughes (N.D. Cal 18-cv-05931-JCS 3/29/22), here, Magistrate Judge Spero is trying to wrap up the case so that it goes to the District Judge and then, apparently, to the Ninth Circuit.  (The docket entries in CourtListener are here.)

 In high level summary:

1. The court confirms that for the two years it previously found nonwillful, that while losing on the willful penalty for the 2 years, there would be no nonwillful penalty for those years.  The court says (p. 3, n 4):

   n4 “The United States does not seek nonwillful penalties against Ms. Hughes for 2010 and 2011, though the United States reserves its right to appeal the Court’s  willfulness determination as to 2010 and 2011.” Pl.’s Reply (dkt. 168) at 2

I have never thought about whether nonwillful and willful penalties can be assessed and litigated in the alternative (something like a lesser included offense concept).  Since the IRS never assessed the nonwillful penalty, I suppose it is out of time to assert assess.  I don't know whether such alternative assessments and/or litigation could be made under the statutes or procedures.  For example, in the Hughes case, applying the nonwillful penalty to the years the court found were not willful.

2. The Court found that there were errors in the calculations and methodology in several respects and remanded to the IRS to reconsider the penalties.  There is no discussion of potential statute of limitations issues from a recalculation and reassessment.  The issue is whether a new assessment would be permitted or only an adjustment downward to the prior assessment.  I am not sure whether the normal APA remand to the agency holds or forces open the statute of limitations (sort of the way a petition to the Tax Court in a deficiency cases suspends the statute of limitations so that the correct number after litigation gets assessed).

3.  In paragraph 2 my prior blog here, I discussed a potential glitch where the IRS uses its methodology to quantify the willful penalty by spreading the amount quantified at 50% of the single high amount over the willful years.  The example I gave was a high amount of $2 million over four willful years and for simplicity assumed that high amount was static at all times during the year.  The maximum penalty authorized by the statute would be 50% per year, for an aggregate of $4 million.  Under the IRS policy to apply only a 50% to the high amount for all willful years (that's not each year), the willful penalty would be the same $1,000,000, but applied to each of the four years.  Now, with two years dropping out, does $500,000 allocated to the now nonwillful years drop off or can the IRS re-allocate the lost $500,000 to the years in which the willful penalty was sustained.  I don’t know.  And, if you vary the amounts so that only in one year the high amount was $2 million, you can get weird results to this type of issue.  And what if in that varying scenario, the high amount were in a year judicially determined to be nonwillful?

Thursday, March 24, 2022

District Court Rejects Claim That Supreme Court Expansion of Defraud Conspiracy Is In Error (3/24/22; 3/27/22)

In United States v. Lucidonio,   (ED PA Criminal NO. 20-211 3/9/22), GS here and CL here and g, Lucidonio was charged with the Klein / defraud conspiracy (18 USC §371) counts of aiding and assisting (§ 7206(2)). The Court denied his motion to dismiss those counts. The denial addresses some major themes in tax crimes, and it is short. I recommend that tax crimes fans read the opinion. Perhaps read even more than once.

The opinion addresses two contexts tax crimes targets should consider the potential sweep of conduct subject to the crimes. First, there is the conspiracy charge in 18 USC 371. That statute includes two types of conspiracies:

(i)                The offense conspiracy to commit a specific statutory offense. The offense conspiracy requires the Government to prove that the object was to commit the conduct that meets each element of the offense. For example, for conspiracy to commit tax evasion, the Government must prove an intent to commit each element of the crime of tax evasion. The elements are of tax evasion are:  (i) substantial tax due and owing; (ii) an affirmative attempt to evade; and a willful attempt to evade.  Sometimes proving the elements of the conspiratorial object offense can be a burden, hence we turn to the other conspiracy in § 371.

(ii)              The defraud conspiracy (often called a Klein conspiracy in a tax setting). On the face of the statute, the object of the defraud conspiracy must be “to defraud the United States.”  Defraud normally in the criminal law means to take something of value from its rightful owner (or some variation). There is no reason to believe that, upon the original enactment of the predecessor of § 371 this crime in these words, Congress had any other definition of defraud for this element of the defraud conspiracy. Yet, as interpreted by the Supreme Court, the defraud conspiracy certainly means to cheat or attempt to cheat the Government out of property or money, but it also means to interfere with or obstruct lawful governmental functions “by deceit, craft or trickery, or at least by means that are dishonest” even if no fraud is the object. Hammerschmidt v. United States, 265 U.S. 182, 188 (1924).  Through interpretation, Hammerschmidt effectively grafted into the defraud conspiracy criminalization of conduct beyond fraud onto the defraud conspiracy. For treatments showing Hammerschmidt’s embrace of a formulation of the crime beyond the normal meaning of defraud, see United States v. Coplan, 703 F.3d 46, 66 (2d Cir. 2012), cert. denied, 571 U.S. 819 (2013); John A. Townsend, Tax Obstruction Crimes: Is Making the IRS's Job Harder Enough, 9 Hous. Bus. & Tax. L.J. 255 (2009), here; see also United States v. Caldwell, 989 F.2d 1056 (9th Cir. 1993) (opening with the question: “We consider whether conspiring to make the government's job harder is, without more, a federal crime.”)  [Note: The defraud conspiracy as spun by Hammerschmidt may apply in other agency contexts, but its specific application in a tax context is usually referred to as a Klein conspiracy after the leading tax case apply the defraud conspiracy after Hammerschmidt.  See DOJ CTM 23.07[2][a] Generally.)] In short, the defraud conspiracy as currently interpreted, goes beyond the original meaning of the statutory text because the word defraud in the criminal statutes did not have that meaning until spun by the Supreme Court culminating in Hammerschmidt

In every practical sense, the Supreme Court added to the conduct that Congress required for the defraud conspiracy. Just stating that concept seems contrary to the oft-made statement that only Congress can create the elements of criminal statutes. Of course, it has always been the law that courts can spin the elements of criminal statutes, but just how much spinning is allowable. How far can courts wander from the statutory text?

That was the claim Lucidonio and others before him have unsuccessfully sought for the Hammerschmidt spin. The most prominent attack came in United States v. Coplan, 703 F.3d 46 (2d Cir. 2012), cert. denied, 571 U.S. 819 (2013). The Second Circuit questioned the Hammerschmidt spin on the defraud conspiracy but felt obligated to apply because it was the higher court’s spin; the Supreme Court denied cert thus carrying forward the Hammerschmidt spin as law. Coplan, 703 F.3d at 62. Recognizing that reality, Lucidonio made the argument to preserve the possibility that either his case or some other case while his was still alive might get the Supreme Court to reverse the Hammerschmidt spin. (See Slip Op. p.  6 n. 2).

Lucidonio claimed that the Hammerschmidt spin was inconsistent with United States v. Davis, ___ U.S. ___, 139 S. Ct. 2319 (2019), SC here & GS here, and the concepts discussed and applied there. I urge readers considering this issue to review that case carefully because the conclusion of the Davis majority outside the context of tax crimes seems inconsistent with the Hammerschmidt spin on the defraud conspiracy.

For those interested in the issue of how far a court, even the Supreme Court can wander from the text of the criminal law elements, I recommend careful reading of Davis. This is a teaser from the introduction of the opinion (authored by Justice Gorsuch or his clerks (I have an anecdote on that at the end of this blog entry):

Saturday, March 12, 2022

District Court Rejects Summary Judgment for FBAR Civil Willful Penalty (3/12/22; 3/13/22)

In United States v. Schik, 2022 U.S. Dist. LEXIS 41025 (SD NY 3/8/22), CL here, the Court denied the Government’s Motion for Summary Judgment for the FBAR willful penalty. In other cases with more or less similar facts (although Schik has some unusual facts, as I note below), the Government has been able to convince courts that objectively proved facts on the Motion for Summary Judgment (particularly answering “No” to the Schedule B question about foreign accounts) met the expansive civil definition of willfulness for FBAR purposes. But, probably because of the unique facts, the Court rejected the notion that a “No” answer suffices for willfulness on summary judgment. A key excerpt: 

            When Congress included penalties for “willful violations” of Section 5321(a)(5), it explicitly delineated between failures to report that are and are not willful. Willfulness, therefore, must mean something more than mere negligence. The Government’s suggested reading of the word—that willfulness should be found categorically even when an unsophisticated taxpayer did not know of an obligation to report and relied on a tax preparer— would abrogate that distinction. See Lowe v. SEC, 472 U.S. 181, 208 n.53 (1985) (a court “must give effect to every word that Congress used in the statute”); see also United States v. Schwarzbaum, 2020 WL 1316232, at *8 (S.D. Fl. Mar. 20, 2020) (“Imputing constructive knowledge of filing requirements to a taxpayer simply by virtue of having signed a tax return would render the distinction between a non-willful and willful violation in the FBAR context meaningless.”); Jones v. United States, 2020 WL 4390390, at *9 (C.D. Cal. May 11, 2020) (in the FBAR context, “signing a tax return on its own cannot automatically make the taxpayer’s violation ‘willful’ as that would collapse the willfulness standard to strict liability.”).

So, what were the unique facts? The Court has a good discussion in the case (pp. 2-5), but the Introduction to Schik’s opposition to the Motion offers a concise summary (See Dkt entry 38 here):


            Defendant Walter Schik (“Mr. Schik” or the “Defendant”) hereby opposes the Motion for Summary Judgment filed by the government because there are numerous disputed issues of material fact in this case. The origination of Mr. Schik’s foreign bank accounts was not the nefarious scheme portrayed in the government’s brief, and the facts and circumstances present in Mr. Schik’s case are readily distinguishable from the cases cited by the government. Mr. Schik was born and grew up in eastern Europe before immigrating to the U.S. after experiencing the horrors of the Holocaust. This deeply traumatic experience has affected Mr. Schik’s entire life and, as relevant in this case, he justifiably believed that it was important to always maintain some funds in Switzerland, a neutral country during World War II, so that they could be accessed in the event of further religious persecution or some other catastrophe. This was Mr. Schik’s sole intent when he established the foreign accounts at issue; there was no intent to evade U.S. tax or reporting obligations. After the accounts were opened, Mr. Schik relinquished almost all control over the accounts to a local asset manager, David Beck, and he did not participate in investment decisions and did not have any understanding about how Mr. Beck structured the accounts. Mr. Schik, who lacks almost any formal education, had no knowledge concerning the offshore asset reporting requirements of U.S. taxpayers; his accountant during the relevant time period did not advise him concerning foreign accounts; and Mr. Schik did not believe that it was necessary to discuss non-U.S.-based accounts with his accountant. As soon as Mr. Schik became aware of his reporting obligations, he applied to the IRS’s Offshore Voluntary Disclosure Program (“OVDP”) and, even after he was inexplicably rejected from the OVDP, he nevertheless proceeded to file amended tax returns (and thereby incriminated himself and exposed himself to criminal prosecution) and pay back tax and interest on the income from his foreign accounts. These  [*2] factors raise numerous questions of fact with regard to Mr. Schik’s knowledge and intent. Therefore, summary judgment should be denied.

Tuesday, February 8, 2022

Follow On Cases After Criminal Tax Convictions--Daugerdas and Larson (2/8/22)

Two recent cases have evoked memories of criminal prosecutions for promoters of abusive tax shelters:  United States v. Daugerdas, 2022 U.S. App. LEXIS 2776 (2d Cir. 1/31/22), Summary Order, CA2 here and G.S. here; and Larson v. Commissioner, T.C. Memo. 2022-3, G.S. here.

I have discussed Daugerdas’ criminal prosecution and conviction in many blog entries. See here. Daugerdas was a lawyer promoter of Son of Boss tax shelters. He made a lot of money in the fraudulent shelters and, as one consequence, brought down his law firm, Jenkens & Gilchrist. At his sentencing, the Court imposed a sentence of 180 month period of incarceration and major financial penalties in the form of forfeiture of $164,737,500 and restitution of $371,006,397. Daugerdas had previously exhausted his direct appeal and 18 U.S.C. § 2255 remedies. This time, while still incarcerated, he sought relief for the monetary penalties by a writ of audita querela, a writ in criminal cases used to cover matters that could not be addressed in the other remedies he pursued. The Court held that the writ querela was not available because “Daugerdas could have sought relief through other legal avenues.”  As to both of the other remedies—direct appeal and § 2255—even though it was not certain that he could obtain relief, he had the opportunity to pursue relief.

One interesting argument Daugerdas raised was the potential for relief under the holding of Honeycutt v. United States, ___ U.S. ___, 137 S. Ct. 1626 (2017), G.S. here. Honeycutt held that, because of the language of the criminal forfeiture statute, a criminal defendant could not have forfeiture imposed for conduct for which the financial benefit went to other co-conspirators rather than Honeycutt. However, the principle of Honeycutt does not apply to restitution. (See 137 S.Ct. at 1634-1635.)  Co-conspirators can be held jointly and severally liable for restitution for losses within the reasonable scope of the conspiracy. See e.g., United States v. Veasey, (5th Cir. 1/28/21) Unpublished, CA5 here, and G.S. here (where the defendant raised the possibility for relief from restitution based on Honeycutt protectively in the event Honeycutt was applied to restitution during the appeal, see Slip Op. 27); and DOJ CTM, 44.03[2][b] Scheme, Conspiracy, or Pattern, here, pp. 14-16.

Tuesday, February 1, 2022

Second Circuit Affirms Tax Court that IRS Withdrawal of Certification of Seriously Delinquent Tax Debt to Secretary of State Makes § 7435 Proceeding Moot (2/1/22)

In Ruesch v. Commissioner, ___ F.4th ___, U.S. App. LEXIS 2568 (2d Cir. 1/27/22), CA2 here* and GS here, the Court affirmed the Tax Court's holding that the § 7345 proceeding was moot where the IRS withdrew the "seriously delinquent tax debt" certification to the Secretary of State. The Tax Court opinion is Ruesch v. Commissioner, 154 T.C. 289 (2020), TC here at Dkt #25 and GS here.

In addition to holding that the § 7345 proceeding was mooted by the withdrawal of the certification, the Tax Court also held (from the syllabus):

Held: We do not have jurisdiction, under IRC sec. 7345 or otherwise, to consider in this case petitioner's challenge to her underlying liability for the penalties.

 The Second Circuit addressed that issue as follows (emphasis supplied by JAT):

   Even if the Tax Court had jurisdiction to assess the validity of Ruesch's underlying debt, Ruesch had already received the only relief she could obtain under the statute, namely, reversal of her certification as an individual with "seriously delinquent tax debt." See 26 USC § 7345(e)(2). Since there was no further relief the Tax Court could have provided under the statute, and since the statute provided Ruesch's only claimed basis for relief, it should have determined that Ruesch's remaining claims were moot. n3
   n3 We note that Ruesch may yet have the chance to challenge her underlying liability in Court. That liability is currently the subject of an IRS appeals process that has still to run its course. See 26 USC § 6320. After receiving a final determination through that process, Ruesch will be able, if necessary, to "petition the Tax Court for review of such determination (and the Tax Court shall have jurisdiction with respect to such matter)." Id. § 6330(d)(1); see id. § 6320(c). If Ruesch continues to object to the IRS's position regarding her underlying liability, she will eventually have her day in Court. For now, however, there is nothing further for our Court or the Tax Court to do.

 Two points about this:

Saturday, January 29, 2022

Court Rejects Ineffective Assistance of Counsel Claim Based On Counsel's Delay In Preparation and Filing of Amended Returns (1/29/22)

In Evdokimow v. United States, No. 19-14130 (NLH), 2022 U.S. Dist. LEXIS 13110 (D.N.J. Jan. 25, 2022), CL here and GS here, the court rejected Evdokimow ‘s request for relief “to vacate, correct, or set aside his federal sentence pursuant to 28 U.S.C. § 2255.”  Evdokimow raised several claims for relief, all related to ineffective assistance of counsel.  All of Evdokimow’s unsuccessful claims are interesting but I focus on the first one considered in the opinion, which the district court titles “Correction of Petitioner’s Returns” (Slip Op. 9-12.)

Evdokimow’s argument was that his lawyer, Kridel, after learning of the criminal investigation, failed to have Evdokimow’s amended returns filed promptly “had a crushing impact on Evdokimow’s defense at trial, as Evdokimow was, as set forth above, barred from introducing evidence that he had amended his returns based entirely upon the delay between the time Evdokimow learned of the government’s investigation and the time his amended returns were filed, which this Court held to be too long to be considered ‘prompt;’ the Third Circuit affirmed the conviction on that basis.”

There was a substantial delay in filing amended returns.  In the criminal trial, the defense wanted to submit proof of the filing of amended returns to permit the jury to infer his good faith and lack of criminal intent with respect to the original returns.  The Government opposed the proffer, and the court rejected the proffer on motion in limine and again at trial.  Evdokimow raised the issue on the appeal from the conviction, but the Court of Appeals rejected the argument.  United States v. Evdokimow, 726 Fed. Appx. 889, 2018 U.S. App. LEXIS 6564 (3rd Cir. 2018) CA3 here & GS here, which I discuss in Court of Appeals Affirms Exclusion of Amended Returns and Payments after Start of Criminal Investigation (Federal Tax Crimes Blog 3/20/18), here.

In this § 2255 proceeding, the district court held that the argument did not meet did not meet the requirements of Strickland v. Washington, 466 U.S. 668, 687 (1984) that the petitioner show “(1) defense counsel’s performance was deficient and (2) the deficiency actually prejudiced the petitioner.”  The Court reiterated its holding from trial held that (i) proof of subsequent filing of the amended returns, even if filed more promptly, would have had “slight probative value” on the issue of his intent when filing the original returns forming the basis for the tax evasion charge and (ii) that slight probative value was “substantially outweighed by the potential for prejudice and confusion to the jury.”

Thursday, January 27, 2022

Ninth Circuit Clarifies Affirmative Act for Evasion of Assessment After Return Filed Can Restart Statute Of Limitations (1/27/22)

In United States v. Orrock , ___ F.4th ___, 2022 U.S. App. LEXIS 2373 (9th Cir. 1/26/22), CA9 here and GS here, the Court resolved potential confusion in the 9th Circuit as to whether the evasion of assessment statute of limitations runs from (i) the first date that all elements of the crime existed (often in evasion of assessment cases when the taxpayer files the return) or (ii) a later date where the taxpayer committed an affirmative action of evasion (e.g., lie in an audit or, as in Orrock, file some false related return). The Court held that the latter date could, in effect, restart the statute of limitations. In other words, if the taxpayer had done no affirmative act after filing the return, the statute of limitations applies from the date of filing the return. If the taxpayer does an affirmative act after filing the return, the statute of limitations is in effect “refreshed.”

I am surprised that this could really be a continuing issue. I think that, in the 9th Circuit cases that appeared to create uncertainty on the point, there was just confusion that has now been clarified.

I offer on this subject the following from Michael Saltzman and Leslie Book, IRS Practice and Procedure, ¶ 12.02[1][c][iv] Affirmative act of evasion (Thomsen Reuters 2015) (some footnotes omitted) (note: I am the principal author of Chapter 12,  titled Chapter 12: Criminal Penalties and the Investigation Function):

We discuss statutes of limitations below, but it is important to note here that the statute of limitations begins to run on the date of the last affirmative act of evasion. To illustrate, assume the taxpayer files a false return with intent to evade tax. That filing alone can be the affirmative act. If it is the only affirmative act, then the statute of limitations runs from the date of filing. There can be later affirmative acts with respect to a previously filed return. For example, if, incident to an audit of the return, a taxpayer makes a false statement to the agent in order to hide the original fraud on the return, then the statute of limitations on evasion will run from the date of the false statement.n104 Although the affirmative act element and the willfulness element of tax evasion are stated as separate elements, the elements are related in that the affirmative act element requires a willful intent to evade motivating the affirmative act. Stated otherwise, if the affirmative act element is satisfied, then wouldn't the willfulness element necessarily be satisfied? The cases discussing the issue are sparse, but the logic seems compelling.
   n104 United States v. Beacon Brass Co., 344 US 43 (1952) . The false statement is also a separate crime under 18 USC 1001. The Ninth Circuit, in an opinion many practitioners believe was wrongly decided, held that where the filing of a false return was an act of evasion of assessment, the crime was complete and started the statute of limitations, so that subsequent false statements in audit to avoid assessment were not separate acts of evasion starting a new statute of limitations. United States v. Galloway, 125 AFTR2d 2020-803 (9th Cir. 2020) (unpublished). The reasoning is not consistent with Beacon Brass where a taxpayer’s later false statements in the course of an audit effectively refreshed the statute of limitations.

 I will revise that footnote in the next cumulative supplement to the Saltzman treatise.

Wednesday, January 26, 2022

11th Cir. Remands For IRS To Re-Determine FBAR Penalties After Affirming Original Calculation Was Arbitrary And Capricious (1/26/22)

In United States v. Schwarzbaum, ___ F.4th ___, 2022 U.S. App. LEXIS _____ (11th Cir. 1/25/22), CA11 here and GS here, the Court affirmed the district court’s holdings that (i) Schwarzbaum was liable for the FBAR civil willful penalty and (ii) that the IRS calculation of the willful penalty was arbitrary and capricious. Based on the latter holding, the Court remanded for the IRS to recalculate the penalty.

The first holding—liability for the willful penalty—is consistent with the consensus holdings expanding the element of willfulness for the civil penalty beyond the strict meaning it has for the criminal penalty. Specifically, the willful penalty can apply to reckless conduct. However, in making that holding, the Court footnoted some of its reasons for the reckless conclusion (Slip Op. 13 n8):

   n8 Schwarzbaum argues that the district court’s finding that he recklessly violated the FBAR reporting requirements, even though his CPAs had advised him in previous years that he need not report accounts lacking a U.S. connection, conflicts with United States v. Boyle, 469 U.S. 241 (1985), in which the Supreme Court said: “When an accountant or attorney advises a taxpayer on a matter of tax law, such as whether a liability exists, it is reasonable for the taxpayer to rely on that advice.” Id. at 251 (emphasis omitted).
       Boyle concerned a different tax statute and did not provide the legal standard for willfulness in the FBAR context. Moreover, the Supreme Court’s statement in Boyle is readily distinguishable. While it may be generally reasonable for a taxpayer to rely on professional advice, it is no longer reasonable once the taxpayer has realized—as Schwarzbaum should have, once he read the FBAR instructions—that he has been receiving bad advice.

The second holding—arbitrary and capricious calculation with its consequence of remand to the IRS for recalculation—is, for me, the troublesome part of the opinion. The district court and the Court of Appeals applied the APA arbitrary and capricious test for review of agency actions. 5 U.S.C. § 706(2)(A). The statute states that the willful penalty per unreported account “shall not exceed” the greater of $100,000 or 50% of the amount in the account in the unreported account on the reporting date (June 30 for the years involved). The IRM has a formula that determines the maximum willful penalty that it will assess at 50% of the highest amount in the accounts in all willful years. The IRM then allocates that penalty in equal portions over the willful years. For example, assume that the person had $900,000 static amount in an account over 3 years and their respective reporting dates that was willfully not reported on timely FBARs. The IRS could theoretically assess $450,000 per year for an aggregate of $1,350,000. The IRM nevertheless provides a formula for a lesser penalty of 50% of the highest amount in all willful years ($450,000) and applying that amount over all three years in proportion to the high amounts in the accounts for each year provided that the amount allocated for each year cannot exceed the maximum the statute allows (50% of the amount on the reporting date for the year). This formula will always result in the penalty for a year never exceeding the amount the statute permits the IRS to assess. Indeed, the example illustrates this perfectly because the IRS could have assessed $1,350,000, but under the formula, the penalty is substantially less, $450,000. In effect, the IRS has (in mind) exercised its discretionary authority to impose a lesser penalty than it could have. I discuss this aspect in District Court Muddles an FBAR Willful Penalty Case (Federal Tax Crimes Blog 3/22/20; 3/24/20), here; see par. 4 of that blog. (I should note that, depending upon the numbers assumed in the account for high amounts and reporting date amounts, the IRM formula could be affected, but the formula would always limit the amount that could be assessed for each year to 50% of the unreported account amount(s) on the reporting date.)

Thursday, January 13, 2022

5th Circuit Reverses Conviction to Have Court Calculate the Foreign Evidence Request Final Action for Statute of Limitations Suspension and, Properly Instructed, Have Jury Determine Whether Criminal Act Occurred in Statute of Limitations as Suspended (1/13/22)

In United States v. Pursley, ___ F.4th ___, 2022 U.S. App. LEXIS 934 (5th Cir. 1/13/22), CA5 here and GS here, the Court reversed Pursley’s judgment of conviction on conspiracy and tax evasion counts because

  • the district court had not calculated the statute of limitations suspension period for foreign evidence requests under 18 U.S.C. § 3292; and
  • the district had not instructed the jury that it must find an overt act/affirmative act within the applicable statute of limitations period as extended by § 3292.

The Court remanded to have the district court (i) calculate the suspension period under § 3292 and (ii) if after that calculation, there are acts that a jury could find were committed in the applicable statute of limitations (calculated with the suspension), to retry the case and submit the issue to the jury as to whether there were such acts.

For an introduction to § 3292, I offer the following from my 2013 Tax Crimes book which was the last time I considered it in detail (John A. Townsend, Federal Tax Crimes, 2013 pp. 463-466 ( 2013 SSRN: (note I copy and paste the text without the footnotes, so those wanting the footnotes should download the pdf file; I think this remains a fair summary of the law even today):

b. Foreign Country Evidence.

             In a world where international commerce, often of the illegal sort and often assisting tax fraud, is increasing exponentially, key evidence may be overseas.  Because long delays may be encountered in gathering foreign evidence, 18 U.S.C. § 3292 in some cases permits the statute of limitations to be suspended during the period between the U.S. request for foreign evidence and the production of that evidence by the foreign authority.  The key elements for this tolling are:

Monday, January 10, 2022

3rd Circuit Rejects Argument to Extend Marinello Pending Proceeding Requirement for Tax Obstruction to the Defraud Klein Conspiracy (1/10/22)

In United States v. Desu, ___ Fed. 4th ___, 2022 U.S. App. LEXIS 465 (3rd Cir. 1/7/22), CA3 here and GS here, the Court affirmed a conviction of Desu for “tax fraud.”  The Court rejected several arguments but apparently wrote the precedential opinion to clarify the standard of review for an “an evidentiary hearing as provided in Franks v. Delaware, 438 U.S. 154 (1978).”  The Franks hearing is a general process in criminal cases rather than related to tax, so I don’t discuss it here.

The Court did address, rather perfunctorily, a tax crimes issue that has been discussed several times on this blog – whether the Supreme Court’s decision in Marinello v. United States, ___ U.S. ___, 138 S. Ct. 1101 (2018), holding that a pending administrative proceeding is required for tax obstruction can apply to and limit the tax defraud conspiracy (the Klein conspiracy) that arguably is sufficiently similar to tax obstruction as to warrant a pending administrative proceeding limitation.  The consensus of the holdings in other courts (district and circuit) has been that that aspect of Marinello does not apply to the defraud Klein conspiracy.

The Court rejected the argument.  The Court’s reasoning is short so I copy and paste pp. 7-9 (omitting a footnote):



            Desu next argues that the two counts in the indictment alleging violations of 18 U.S.C. § 371 fail to state an offense. In those counts, the government alleges that Desu conspired “to defraud the IRS by impeding, impairing, obstructing, and defeating the lawful government functions of the IRS to ascertain, compute, assess, and collect income taxes,” a crime known as a Klein conspiracy. App. 94, 100. Desu claims that [*8] both counts fail to state an offense under Marinello v. United States, 138 S. Ct. 1101 (2018). In Marinello, the Supreme Court held that to convict someone of obstructing or impeding the administration of the Internal Revenue Code under 26 U.S.C. § 7212(a), the government must prove that a ‘“nexus’ [existed] between the defendant’s conduct and a particular administrative proceeding, such as an investigation, an audit, or other targeted administrative action.” Id. at 1109. Desu claims that both counts fail to state an offense because they do not allege that an investigation was pending when he committed the conspiracies as required by Marinello in the separate but similar statute.