Carlos Kepke, Indicted Tax Lawyer Allegedly Enabling Large Tax Evasion Offshore Schemes, Dies Just Before Start of Criminal Trial (11/28/22)

I have blogged on the prosecution of Carlos Kepke, a Houston lawyer, who was prosecuted as an enabler of offshore tax evasion for Robert Brockman and Robert F. Smith.  Kepke was set to go to trial in San Francisco on tax crimes charges.  He died over the weekend.  See  David Voreacos & Neil Weinberg, Lawyer Charged in Billionaire Tax Case Dies on Eve of Trial (2) (BloombergLaw 11/28/22), here.

The earlier blogs on the progress of Kepke’s prosecution may be viewed here.  (Note that this link brings up blogs referring to Kepke in relevance order (with most references first), but a link can be clicked to show the blogs in reverse chronological order.)

Like Brockman, Kepke’s death will avoid a criminal trial and possible conviction.  For Brockman, see Brockman, Defendant in Pending Major Tax Crimes Case, Dies (Federal Tax Crimes Blog 8/6/22), here.

I don't know if there are any ancillary proceedings that were instituted (as the jeopardy assessment and related civil tax proceedings in Brockman's situation).  

One issue left hanging in the Kepke criminal case was who was paying his fees in the criminal case which given the quality of his counsel were very large.  See The Kepke (Brockman and Smith Lawyer Enabler) Prosecution - Developments (Federal Tax Crimes 10/27/22), here. My understanding from inferences in the docket entries is that something happened and was placed under seal with respect to those fees, but it did not prevent the criminal trial from proceeding. There could be some income tax consequences  for his estate from the fee arrangement, but I do not have enough facts to try to anticipate that.

In the Brockman and Kepke prosecutions and the Smith NonProsecution Agreement predicate investigation, the Government put enormous resources to try obtain some criminal vindication.  Of course, Smith had to admit his guilt, and, just by hanging on until death, Brockman and Kepke did not have to admit guilt or be convicted.  In this regard, the Bloomberg Law article reports:

“Carlos always maintained that he was innocent of these charges, and we were prepared to prove that at trial,” said Strassberg, who represented Kepke along with Grant Fondo.

Finally, as noted in the article (JAT added the bracketed description):

The passing of Kepke relieves Smith, 59, of the need to testify as the government’s star witness. Prosecutors accused Kepke of helping Smith evade taxes on $225 million he earned from Vista by setting up a trust structure with entities or accounts in Belize, Switzerland, Nevis and the British Virgin Islands. Under an unusual 2020 agreement [NonProsecution Agreement], Smith avoided prosecution for tax crimes.

Readers interested in viewing the docket entries for the Kepke criminal prosecution may do so free at CourtListener, here. Those who are teaching or are students of tax crimes subjects might want to review some of the pleadings leading up to the now discontinued prosecution. Both sides presented outstanding documents in a well-funded case.  So there are some good examples of what a major criminal trial is like.

Tax Attorneys Indicted for Fraudulent Tax Shelter and Related Conduct (11/18/22)

DOJ announced indictments in a press release, here, titled as follows: Tax Attorneys and Insurance Agent Indicted for Promoting and Selling Fraudulent Tax Shelter. The indictment is here (CL).

The charges are

• defraud conspiracy 18 USC 371 (Count One),
• aiding and assisting 7206(2) (Counts Two through Twelve and Eighteen through Twenty-two),
• tax perjury via false tax return 7206(1) (Counts Thirteen through Seventeen), and
• wire fraud 18 USC 1343 (Count Twenty-Three). 

The indictment also alleges a Notice of Forfeiture and Finding of Probable Cause.

The pattern of conduct alleged in the press release as:

According to the indictment, from 2011 to the present Michael Elliott Kohn and Catherine Elizabeth Chollet, both attorneys and residents of St. Louis, Missouri, and David Shane Simmons, a licensed insurance agent and broker based out of Jefferson, North Carolina, conspired to defraud the United States by promoting, marketing, and selling to clients a fraudulent tax scheme known as the Gain Elimination Plan (“GEP”). The defendants allegedly designed the GEP to conceal clients’ income from the IRS by fraudulently inflating business expenses through fictitious royalties and management fees. These fictitious royalties and management fees allegedly were paid, on paper, to a limited partnership largely owned by a charitable organization. In reality, Kohn and Chollet allegedly fabricated the royalties and management fees. In total, the defendants allegedly caused a tax loss to the IRS of tens of millions of dollars.

 The indictment further alleges that Kohn and Simmons engaged in a scheme to defraud an insurance company by providing false information on insurance applications on behalf of their clients. The false information allegedly included fraudulent representations concerning the clients’ financials and the purpose of the insurance policies. In total, Kohn and Simmons allegedly caused the insurance company to issue more than $200 million in insurance policies based on false application information. Simmons allegedly earned large commissions for selling the insurance policies, many of which he split with Kohn and Chollet. Simmons also allegedly filed false personal tax returns by underreporting his business income and inflating his business expenses.

The press release alleges sentencing matters as follows:

District Court holds in Tax Perjury (§ 7206(1)) Case That Defendant Can Introduce Evidence that IRS Failed to Pursue Civilly (11/12/22)

In United States v. Anderson-Trahan (E.D. La. 22-2 Order and Reasons Dkt. # 94 8/22/22), TN here and CL here, in a tax perjury case under § 7206(1), the Court denied the Government’s motion to prevent Anderson-Trahan from “introducing any evidence or argument concerning the fact that Defendant was prosecuted criminally rather than subjected to civil audit or collection activities by the IRS.”  The reasoning and scope of the holding is (footnotes omitted and bold-face supplied by JAT):

            If the Court allows the government to present evidence that Defendant failed to pay her taxes and/or filed her taxes late from 2012–2017, Defendant argues that she should be able to present evidence regarding the fact that she was not subject to civil collection activities by the [*8] IRS. As discussed in detail in the Order and Reasons granting the government’s Rule 404(b) motion, evidence that Defendant failed to pay her taxes and/or filed her taxes late from 2012–2017 is relevant and admissible. The government intends to argue that Defendant’s tax debt motivated her decision to file allegedly fraudulent tax returns to reduce her tax liability. The defense should be allowed to rebut this argument by pointing out that the IRS did not initiate civil audit or collection proceedings. Evidence of the actions the IRS took (or did not take) to enforce the tax liability, and evidence of whether Defendant was aware of any such actions, is probative of what Defendant knew about the tax liability. If, for example, Defendant was not aware of the extent of her tax liability, this would contradict the government’s argument regarding motive. Allowing the government to present evidence of other “bad acts” without allowing Defendant to respond that the IRS did not seek to enforce these obligations would be prejudicial to the defense. Defendant should be allowed to complete the story by showing that the IRS never instituted civil audit or collection activities.

             The government has not shown that the probative value of the evidence is substantially outweighed by a danger of unfair prejudice, confusing the issues, misleading the jury, undue delay, wasting time, or needlessly presenting cumulative evidence. The government argues that allowing this evidence could encourage jury nullification. “Jury nullification refers to the jury’s power to disregard the rules of law and evidence in order to acquit the defendant based upon the jurors’ sympathies, notions of right and wrong, or a desire to send a message on some social issue.” Defendant may not argue that the jury should acquit her because the government should have [*9] pursued civil civil (sic) audit or collection activities rather than prosecuting her criminally. Nevertheless, evidence that the government did not pursue civil audit or collection activities proceedings is relevant to Defendant’s state of mind.

Supreme Court Oral Argument in Bittner Re FBAR NonWillful Penalty Per Account or Per Form (11/3/22)

Yesterday, the Supreme Court held oral argument in Bittner v. United States (No. 20-40597), SC docket here and SCOTUSblog docket here (I offer SCOTUSblog link because the Supreme Court link does not seem to work.)  The link for the typed transcript is here; the link for the audio is here. 

I listened to the audio and thumbed through the transcript.  The oral arguments were outstanding.  The advocates were

Daniel L. Geyser, for Bittner, here.
Matthew Gaurnieri, Assistant to the Solicitor General, DOJ, for the United States

I have posted earlier on the trajectory of Bittner, but the two postings most relevant to the Supreme Court consideration are:

• 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.
• Amicus Briefs in Supreme Court Bittner Case on Nonwillful FBAR Penalty Per Form or Per Account (Federal Tax Crimes Blog 10/12/22), here.

I offer some snippets (copy and paste) of portions of the transcript related to criminal conduct I found interesting]

[*20]

MR. GEYSER: Yes, Your Honor, it's -it's the same definition of violation, I think, carries throughout the statute, both in 5321 and in 5322, by the way, which is why, in our case, had Petitioner acted willfully in a criminal sense, under the government's reading, he would be exposed to a prison sentence of 1300 years in jail, which seems pretty egregious for what is really a prophylactic paperwork error.

   * * * *