Is It a Variance for the Indictment to Allege Use of Attorney Client Trust Fund for Evasion When the Proof Showed only Attorney Trust Fund? (10/18/22)

In United States v. Hunter (W.D. Ky No. 3:20-cr-86-BJB Order dated 10/20/22), TN here and CL here, the court rejected Hunter’s claim of variance from the indictment because the indictment alleged use of an attorney client trust account to effect the tax evasion, whereas, Hunter claimed, the evidence (his own testimony) was that the account was the firm’s trust account without proof that it was a client trust account.  The court rejected the argument for several reasons because, in any event, as to the essential allegation and proof, Hunter used the trust account, whether client or not, to effect his evasion.

The court’s discussion is good, so I direct readers to Slip Op. pp. 2-7.  I make some points from the discussion to focus readers’ attention:

1. The testifying Revenue Officer explained why the Government does not levy on client trust accounts to collect the attorney’s tax liability.  The assumption is that the funds in an attorney client trust account are client funds.  See Slip Op. 3.)

2. The evidence that Hunter used the trust account, whether client or otherwise, to store personal assets “was substantial.”  (Slip Op. 4.)

3. Hunter was nitpicking (earlier the court said “persnickety”), noting Slip Op. 4 n. 4):

   n4 Hunter’s reply focuses extensively on the nature of so-called “IOLTA” accounts that many members of the Kentucky Bar must use in a manner that bears interest. Reply at 6–8. But the government’s evidence did not turn on the existence or use of an IOLTA account, or whether Hunter had to use one or not. Given that Hunter maintains he used his attorney escrow account for personal rather than client funds, this distinction appears utterly immaterial to whether his escrow account (however labeled or regulated) was used to shield | money from the IRS in a tax-evasion scheme. Given that Hunter maintains he used his attorney escrow account for personal rather than client funds, this distinction appears utterly immaterial to whether his escrow account (however labeled or regulated) was used to shield | money from the IRS in a tax-evasion scheme.

The Kepke (Brockman and Smith Lawyer Enabler) Prosecution - Developments (10/27/22)

Regular readers know that I have posted several times on the criminal prosecution of Carlos E. Kepke, a Houston attorney who was allegedly the enabler for two alleged massive tax evasion (and related crime) tax schemes involving offshore trusts. Readers will recall that Brockman died before his criminal case went to trial, and Smith achieved an NPA requiring him to testify in the Kepke prosecution. By order dated 10/20/22 (CL here), Judge Donato addressed certain pending motions. The ones that I thought might be interesting to readers are: 

For Dkt. No. 61, defendant’s disclosures for expert witness Rodney Read did not adequately state the bases and reasons for his proposed opinion testimony under Fed. R. Crim. P. 16(b)(1)(C). See Dkt. Nos. 61-1, 61-2, 61-3. In lieu of excluding  Read as a witness, and with the government’s agreement, defendant will have an opportunity to disclose by October 28, 2022, the bases and reasons for each of the following opinions:

 • Foreign asset protection trusts and foreign non-grantor trusts are valid and legal trust entities.

• It is not uncommon to establish a trust in a foreign jurisdiction that has a lower income tax rate than the United States in contemplation of potential United States income tax reduction or deferral.

• There are no legal prohibitions against appointing a beneficiary as the trust protector, which may include the power to remove and replace the trustee of a foreign trust. This arrangement does not necessarily affect the non-grantor status of the foreign trust.

• Foreign and domestic trustees alike owe a fiduciary responsibility to beneficiaries to ensure trust assets are being used exclusively for the benefit of a trust’s beneficiaries and acting within the restrictions and limitations set forth in the trust documents.

Court Rejects No Harm (Tax Loss) No Criminal Foul for Defraud Conspiracy in Backdating to Allocate Partnership Losses to New Partners (10/27/22)

 In an Order in United States v. Fisher (N.D. Ga. No. 1:21-cr-231-TCB dkt entry # 311 10/13/22), TN here, the Court denied motions for bills of particulars and to dismiss.  This is all fairly standard stuff in this area, so I write only to point out the portion I found interesting.

The Court addressed (Slip Op. 30-34) Fisher’s claim that the indictment’s conspiracy charge did not allege criminal conduct.  Specifically, Fisher targeted claim in the indictment that “Fisher (and others) backdated partnership documents in order to receive tax deductions for years in which the clients were not in fact partners.”    What caught my attention was this at the beginning of the discussion:

First, Fisher argues that the backdating led to no harm to the Government because the amount of deduction remained the same. In other words, whether ten or twenty partners split $1,000,000 ends in the same result to the Government; therefore, he contends, there is a lack of harm necessary to prove a Klein conspiracy.

Of course, everyone (at least those everyones practicing tax law or white collar crime law) would recognize as suspect on its face (although Fisher and presumably his lawyer(s) did not recognize it).  More importantly for tax crimes geeks, actual pecuniary loss is not required for the conspiracy alleged–to defraud the IRS.  (See Count One of the Superseding Indictment, here.)  All that is required is a conspiracy to interfere with the lawful functioning of the IRS; allocating losses inappropriately can do that. 

Still the rest of the Court’s discussion on this claim might be useful for  students and even some practitioners:

            But as the Government notes, backdating partnership documents does lead to harm. This is because Fisher’s actions “caused clients to file [*31] false tax returns that claimed fraudulent deductions based upon backdated documents.” [276] at 23. The United States Code explicitly criminalizes this behavior in 26 U.S.C. § 7206, which forms the basis for many counts in the indictment. To argue that causing clients to file false tax returns is not a harm for purposes of the conspiracy charge, when the act itself is criminalized, is simply wrong. Accord, e.g., United States v. Daugerdas, 837 F.3d 212 (2d Cir. 2016) (affirming conviction for conspiracy in tax shelter case involving backdated documents).

Amicus Briefs in Supreme Court Bittner Case on Nonwillful FBAR Penalty Per Form or Per Account (10/12/22)

I previously blogged that the Supreme Court granted Bittner's petition for writ of certiorari. Supreme Court Grants Cert in Bittner v U.S. On FBAR Nonwillful Penalty Per Form or Per Account Issue (Federal Tax Crimes Blog 6/21/22; 6/22/22), here. The Supreme Court docket sheet for the case (No. 20-40597) is here, with links to all filings in the case.  (Because for some reason, the Supreme Court docket sheet link does not work all the time, the parallel SCOTUSblog docket sheet is here with appropriate links.)

I write today on the amicus briefs in the case (also linked on the docket sheet). Both parties in the case gave blanket consent to filing amicus briefs on the merits. Here is the breakdown of the amicus briefs:

Amicus briefs in support of Bittner:  National Federation of Independent Business Small Business Legal Center; American College of Tax Counsel (note that the docket entry for this brief says it is filed in support of neither party, but the actual brief says it is in support of Bittner); Center for Taxpayer Rights; and The Chamber of Commerce of the United States of America,.

Amicus brief in support of the United States (IRS): National Whistleblower Center.

Amicus brief in support of Neither Party:  American College of Trust and Estate Counsel.

JAT Comments:

Tax Court Soundly Rejects Taxpayers' Motion to Compel Immunization of Third Party Witnesses (10/3/22)

In Oconee Landing Property, LLC v. Commissioner (T.C. No. 11814-19 Dkt. #229 Order 9/22/22), here (with Dkt entries here), a short order (3 pages), the Court (Judge Lauber) rejected the petitioner's Motion to Compel Immunization of Third-Party Witnesses. The gravamen of the holding is:

            It is well established that this Court lacks jurisdiction to grant criminal immunity to a witness who may be called to testify before the Tax Court. This power resides solely with the U.S. District Courts and only upon the request of the U.S. Attorney for the applicable district. 18 U.S.C. §§6001-6003; see, e.g., Coulter v. Commissioner, 82 T.C. 580, 583 (1984) (finding that “the Tax Court is not authorized to grant immunity” to a taxpayer); Hartman v. Commissioner, 65 T.C. 542, 547 (1975) (denying a taxpayer’s request for immunity “since jurisdiction to take such action is vested exclusively in the United States District Courts, and then only upon application of a United States Attorney”); Reynolds v. Commissioner, T.C. Memo. 1981-364, 42 T.C.M. (CCH) 395, 397 (holding that a taxpayer’s request that we grant him immunity “is spurious since jurisdiction to take such action is vested exclusively in the U.S. District Courts, and then only upon application of a U.S. Attorney”). It is equally well established that this Court lacks jurisdiction to compel the IRS to seek an order of immunity for a witness. See i, 65 T.C. at 547–48; Hershberger v. Commissioner, T.C. Memo. 1979-522 (finding that a taxpayer’s request that the Tax Court order the IRS to grant him transactional immunity was baseless). This Court has no “inherent authority” to confer immunity on a witness. Such discretionary power is statutorily reserved to the Executive Branch and is available to neither the Tax Court nor U.S. district courts (absent an application from a U.S. Attorney). See 18 U.S.C. §§ 6001-6005.

            In support of its position petitioner cites squibs from various cases taken out of context. Virtually all of these cases involve U.S. District Courts acting on the request of a U.S. Attorney. For example, petitioner errs in relying on United States v. [*3] Bahadar, 954 F.2d 821 (2d Cir. 1992). The question there was whether the U.S. District Court for the Eastern District of New York committed error by failing to order the government to immunize a witness and co-conspirator in a criminal drug trial. See id. at 825. Most cases cited by petitioner rely on Government of Virgin Islands v. Smith, 615 F.2d 964 (3d Cir. 1980). That precedent has been rejected by the Eleventh Circuit, to which this case is appealable. See United States v. DiBernardo, 880 F.2d 1216, 1220 (11th Cir. 1989) (ruling that the grant of immunity is strictly an Executive Branch function). Indeed, Government of the Virgin Islands has since been overturned by the Third Circuit, to the extent that it recognized any inherent authority of courts to confer immunity on a witness. United States v. Quinn, 728 F.3d 243, 252– 61 (3d Cir. 2013).

JAT Comments:

Supreme Court Grants Cert to Determine Whether Dual-Purpose Communications Involving Legal and Non-Legal Advice (in Tax Return Preparation Setting) is Protected by Attorney-Client Privilege (10/3/22)

The Supreme Court accepted certiorari in In Re Grand Jury (Sup Ct. No. 21-1397). See docket entries here. The acceptance does not state or refine the issue presented; presumably, the issue presented that the parties will brief is the one in the petition for cert as follows:

            Whether a communication involving both legal and non-legal advice is protected by attorney-client privilege where obtaining or providing legal advice was one of the significant purposes behind the communication.

The Solicitor General in its brief in opposition states the issue slightly differently (with some spin) as follows:

             Whether the district court permissibly denied petitioner’s general claim of attorney-client privilege over communications, related to the preparation of a tax return, that did not have obtaining legal advice as their primary purpose, while instructing that all legal advice contained in the communications be redacted.

 The amended opinion below is In re Grand Jury, 23 F.4th 1088 (9th Cir. 2022), CA9 here and GS here. The Ninth Circuit’s Summary (not included in GS opinion) is:

SUMMARY*
* This summary constitutes no part of the opinion of the court. It has been prepared by court staff for the convenience of the reader.

Grand Jury Subpoenas

            The panel affirmed the district court’s orders holding appellants, a company and a law firm, in contempt for failure to comply with grand jury subpoenas related to a criminal investigation, in a case in which the district court ruled that certain dual-purpose communications were not privileged because the “primary purpose” of the documents was to obtain tax advice, not legal advice.

Brockman Jeopardy Assessment of $1.4+ Billion Sustained (10/2/22)

 On 9/30/22, the district court sustained the IRS’s $1.4+ Billion jeopardy assessment for taxes, fraud penalties, and interest.  United States v. Brockman (S.D. TX No. 4:22-CV-202 Dkt. # 71 Memo Opinion and Order 9/30/22), here (as retrieved from PACER); see also CL Dkt entries here (the pdf does not yet show up on the CL docket entries but should shortly).  The IRS asserted that the assessment “represents the largest jeopardy assessment/levy case in the history of the United States and features tax fraud on an unprecedented” scale.” (internal quotation marks omitted).

I won’t get into the details since the opinion is short (13 pages) and easily readable (with some nice graphics).  The opinion plows no new ground in jeopardy assessment law.  It is noteworthy (if at all) only because of the size of the assessments and the facts leading to the assessments.

I note that FBAR assessments (which certainly have been made or will be made, depending upon the statute of limitations) are not included.  There is no jeopardy assessment authority for FBARs, but the IRS does not need jeopardy assessment authority for FBARs because it can assess the FBAR penalties without predicate requirements for income tax assessments.  Of course, with FBAR assessments, the IRS will not have the substantial collection tools available for tax assessments and will have to proceed by suit to reduce the FBAR assessments to judgment.

I don’t know what type of estate Brockman had at death and the assets the IRS can get through various third-party liability remedies (such as transferee and similar state law remedies, alter ego, etc.), but I speculate that, with the probable size of the FBAR assessments and third-party liabilities, the IRS will be able ultimately to substantially wipe out his net worth (with third-party liabilities).  Of course, he lived large during his lifetime. And his death permitted him to escape criminal responsibility and liability.

This blog entry is cross-posted to my Federal Tax Procedure Blog, here.  For other postings on Brockman on the Federal Tax Crimes Blog, see here.