Good Article on Lesser Included Offense Strategy in Trump Criminal Trial in NY Court Next Week (4/11/24)

I have written on several occasions on the concept of lesser included offense, including the strategies involved for defense counsel in seeking a lesser included offense instruction. See e.g., Defense Request of Lesser Included Offense Instruction Precludes Questioning Sufficiency of Conviction (Federal Tax Crimes Blog 10/3/17), here; and Court Affirms Conviction, Rejecting Lesser Included Offense Instruction Request (Federal Tax Crimes Blog 7/17/19; 7/18/19), here; for the complete list sorted by relevance see here and sorted by date see here.

I thought readers might like the following Politico article:  Ankush Khardori, The Surprising Strategy Trump Could Use to Win His Manhattan Trial (Politico 4/11/24), here. The author, a former federal prosecutor, has a good discussion of Former President Trump’s potential use of the lesser included offense in his upcoming criminal trial in New York state court set to commence on April 15, 2024.

One key risk for the defendant is that a jury who thinks the crime(s) charged are too harsh for the conduct or might have some other reason to not convict where the binary choice is guilty or not guilty of the more serious offense charge might settle back (compromise) on a lesser included offense whereas, had the choice remained binary, the jury would acquit. 

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?

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

I have previously written about the unnamed enabler named in the Smith nonprosecution agreement as Individual B.  See One Big Fish Indicted and Lesser Big Fish Achieves NPA for Cooperation (Federal Tax Crimes Blog 10/16/20), here.  Individual B was subsequently identified as Carlos Kepke in the Brockman discovery as an enabler for Brockman.  Individual B, the Houston Attorney in the Smith NPA, Is Unmasked (Federal Tax Crimes Blog 12/1/20; 12/2/20), here.  Today, DOJ announced that Kepke has been indicted for conspiracy (18 USC 371) and for three years of aiding and assisting (§ 7206(2)) relating to his assistance of Smith.  See press release titled Tax Attorney Indicted for Facilitating Tax Fraud: Helped Private Equity CEO Defraud IRS of Taxes on $225 Million in Capital Gains (4/15/21), here.

Kepke is from Houston.  I have known him since I practiced in a short stint in the 1970s with a law firm in which he was partner and I a senior associate.  He was the person I suspected as Individual B which I inferred from what I learned about his practice when I was with that law firm.

Added 4/16/21 3:30pm:

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

JAT comments:

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

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

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

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

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

One Big Fish Indicted and Lesser Big Fish Achieves NPA for Cooperation (10/16/20)

I write today about two related developments involving the tax misdeeds of private equity moguls that readers will have probably already read about in the popular news:  (i) Robert T. Brockman the biggest mogul and alleged tax cheat of the two was indicted in the Northern District of California (the indictment is here and the Court Listener Docket Entries is here), with an alleged criminal amount of $2 billion (revised at 5:00pm - I understand this is the omitted income amount rather than the bottom line tax loss); and (ii) Robert F. Smith, the smaller mogul (but still a large one) and now admitted tax cheat, reached a nonprosecution agreement (“NPA”) wherein he agreed to pay $139 million in tax and penalties (presumably with interest thereon as appropriate (the US Attorney’s press release on the NPA is here, the NPA and an Exhibit are linked on the press release)).

So, what’s this commotion all about?  I have not studied the indictment in detail, but here are key points (some with my inferences) that I derive from either the press release and two articles (Kadhim Shubber  & Miles Kruppa, Billionaire Robert Brockman charged in $2bn tax evasion case (Financial Times 10/15/20), here; and Jaclyn Peiser, A Texas billionaire evaded $2 billion in taxes, feds say. Now he’s charged in the ‘largest-ever’ tax fraud case (WAPO 10/16/20), here)

• This is said to be the largest tax fraud case ever.  The criminal cases against the Son-of-Boss professional enablers involved, in the aggregate more dollars, but I assume the this is the largest single taxpayer (as opposed to enabler of multiple taxpayers) case.
• Smith is not named in the indictment except by pseudonym which is typical for uncharged co-conspirators.  Smith has agreed to cooperate to achieve his NPA.  (The NPA is linked in the press release linked above.)  In addition to cooperation against Brockman and perhaps others, Smith agreed to pay about $139 million in tax and penalties.  Smith achieved some positive notoriety in 2019 by agreeing to “pay off all the student loans for the graduating class of Morehouse College, an all-male, historically Black college in Atlanta.  (WAPO article.)  I discuss aspects of the NPA below in my comments.  (I wonder whether Smith's generosity at the time was motivated in significant part to contribute in some way to achieving an NPA.)
• The pattern alleged for Brockman’s offshore evasion is just a variation of a theme that we have seen in offshore tax evasion but ramped up with many intrigues outlined in the indictment.
• The charges also included allegations that between 2008 and 2010, Brockman lied to investors and allegedly bilked them out of nearly $68 million. (WAPO article.)
• Smith attempted a voluntary disclosure in 2014 but apparently was already on the IRS radar screen and was rejected.  He probably attempt to do a voluntary disclosure because one or more of the offshore banks had turned information over to DOJ Tax or the IRS.
• The US attorney said Mr Smith had used a Houston lawyer to direct his offshore nominees.  The Houston lawyer is not named.

The counts charged against Brockman are from the attachment to the indictment (some of these have multiple counts):

• 18 U.S.C. § 371 – Conspiracy (Offense and Defraud)
  5 yrs prison, $250k fine, 3 yrs sup. rel., $100 special assessment;
• 26 U.S.C. § 7201 – Tax Evasion
  5 yrs prison, $250k fine, 3 yrs sup. rel., $100 special assessment, costs of prosecution;
• 31 U.S.C. §§ 5314 & 5322(b) –FBAR Violations
  10 yrs prison, $500k fine, 3 yrs sup. rel., $100 special assessment;
• 18 U.S.C. § 1343 – Wire Fraud Affecting a Financial Institution;
  30 yrs prison, $1M fine, 5 yrs sup. rel., $100 special assessment;
• 18 U.S.C. § 1956(a)(1)(B)(i) – Concealment Money Laundering;
  20 yrs prison, $500k fine or twice the gross gain or loss (whichever is greater), 3 yrs sup. rel., $100 special assessment;
• 18 U.S.C. § 1956(a)(1)(A)(ii) – Tax Evasion Money Laundering;
  20 yrs prison, $500k fine or twice the gross gain or loss (whichever is greater), 3 yrs sup. rel., $100 special assessment;
• 18 U.S.C. § 1956(a)(2)(B)(i) – International Concealment Money Laundering;
  20 yrs prison, $500k fine or twice the gross gain or loss (whichever is greater), 3 yrs sup. rel., $100 special assessment;
• 18 U.S.C. § 1512(b)(2)(B) – Evidence Tampering;
  20 yrs prison, $250k fine, 3 yrs sup. rel., $100 special assessment;
• 18 U.S.C. § 1512(c)(1) – Destruction of Evidence;
  20 yrs prison, $250k fine, 3 yrs sup. rel., $100 special assessment;

Even without considering the multiple counts the concept of stacking will tell readers that the maximum sentence if conviction on all counts is around 130 years. (revised 10/17/20 11:40am: my actual calculations of all counts shows 800 years maximum incarceration). Of course, the Sentencing Guidelines and Booker variance (if appropriate) will produce a much smaller actual sentence.  My rough and ready calculation of the offense level considering only $2 billion tax loss and acceptance of responsibility (although he has not accepted yet) shows a sentencing range of 168-210 months with good time credit of 21.6-27 months.  revised at 5pm: this is true even if $2 billion was the omitted income amount because it would almost certainly produce at tax loss of $550 million, the top of the table and even if the tax loss were less, the Guidelines calculation would not be reduced much).  

(Added 9:30pm):  The following is a summary of key facts (selective) from the Smith NPA Exhibit A, Statement of Facts:  Foreign Bank notified Smith of intent to participate in the Swiss Bank Program that would require outing Smith.  Smith filed preclearance request for OVDP.  The preclearance request was denied.  Smith filed a false FBAR omitting accounts and filed income tax return omitting income and including false Form 8275.  Smith attempted Streamline disclosure, filing false FBARs and false income tax returns.  (Although not stated in the Statement of Facts, the Streamlined filing would have required that Smith represent that his conduct was not willful, a representation that based on other admission would have been false.)  These actions were willful.

JAT Further Comments:

Court Affirms Conviction, Rejecting Lesser Included Offense Instruction Request (7/17/19; 7/18/19)

In United States v. Rankin, 929 F.3d 399 (6th Cir. 2019), CA6 here, and GS here, Rankin was charged with (i) seven counts of failure to collect, account for and pay over payroll withholding tax in violation of  7202, (ii) six counts of tax perjury , § 7206(1), for individual tax returns, (iii) three counts of tax perjury, § 7206(1), for corporate returns, and (iv) one count of tax obstruction, § 7212(a). After trial, he was convicted on all counts and sentenced to 60 months (5 years).

On appeal, Rankin raised a number of issues and prevailed on only one relating to the timing of restitution.  I think only one issue is particularly interesting -- the lesser included offense issue.

Defendants facing felony count charges will often want a lesser included offense instruction to give the jury an alternative to conviction on the more serious offense charged.  Rankin was charged with seven counts of § 7202, a felony 5-year charged.  Rankin asked to a lesser included offense instruction for § 7203, failure to pay, which is a 1-year misdemeanor.  The district court denied the instruction.  The Court of Appeals affirmed the denial of the instruction.

The Court starts off with the guiding law (slip op., at 8, cleaned up; 929 F.3d at 406):

If a defendant asks for a lesser included offense instruction to which he is entitled, it is generally reversible error not to give it. A defendant is entitled to an instruction on a lesser-included offense if: (1) a proper request is made; (2) the elements of the lesser offense are identical to part of the elements of the greater offense; (3) the evidence would support a conviction on the lesser offense; and (4) the proof on the element or elements differentiating the two crimes is sufficiently disputed so that a jury could consistently acquit on the greater offense and convict on the lesser.

Section 7202 (cleaned up) makes it a felony for "any person required . . . to collect, account for, and pay over any tax imposed" to "willfully fail to collect or truthfully account for and pay over such tax."

Section 7203 (cleaned up) makes it a misdemeanor for "any person required . . . to pay any estimated tax or tax, or required . . . to make a return, keep any records, or supply any information," to "willfully fail to [do so] at the time or times required by law or regulations."

Here, the Court rejected Rankin's claim that he was entitled to a § 7203 lesser included offense instruction (slip op., at pp 8-9; 929 F.3d at 406-407). The gist of the reasoning is:  While it is true that a failure to pay over withheld payroll taxes would be a crime described in both § 7202 and § 7203, § 7202, the felony did not have an extra element that would permit a jury to convict for § 7203, the misdemeanor, but acquit for § 7202, the felony.

The Court does paint in (too) broad strokes in getting there.  The Court said (929 F.3d at 407):  "all violations of § 7203 for failing to pay a tax necessarily constitute violations of § 7202."  (929 F.3d at 407) That statement is only true in the context of taxes that a person is required to collect, account for and pay over (like payroll withholding tax). My experience is that § 7203 failure to pay cases can be applied in contexts well outside withholding taxes.

JAT Comments:

Court Affirms Defraud Conspiracy Conviction; Rejects Lesser Included Offense Argument (3/7/19)

In United States v. Bradley, 917 F. 3d 493 (6th Cir. 2019), CA6 here and GS here, the court affirmed Bradley's defraud conspiracy conviction.  Bradley made three arguments on appeal: (i) constructive amendment or variance to the indictment; (ii) improper argument by the prosecutor that misstated the Government's burden to prove guilt beyond a reasonable doubt; and (iii) failure to give a lesser included offense instruction.

I will not discuss the first two issues, but those with the time might want to look particularly at the improper argument issue where the Court found the arguments improper but not prejudicial.  The Court's discussion (including quotes from the argument) is on Slip Op. 12-16.

Now, looking at the lesser included offense issue, Bradley was convicted of the defraud conspiracy which, under the conspiracy statute (18 USC 371) is a felony.  Remember that the conspiracy statute has two types of conspiracy -- the offense conspiracy to commit a specific offense otherwise criminalize and the defraud conspiracy (also called Klein conspiracy) to impair or impede the functions of the IRS through fraud or deceit.  Bradley was charged with the felony defraud conspiracy.  He wanted an instruction on the offense conspiracy to commit a misdemeanor offense (§§ 7203 and 7204).  The felony statute says that a conspiracy to commit a misdemeanor is a misdemeanor rather than a felony.

The Sixth Circuit stated its lesser included offense requirements as requiring (p. 508):

(1) a proper request is made; (2) the elements of the lesser offense are identical to part of the elements of the greater offense; (3) the evidence would support a conviction on the lesser offense; and (4) the proof on the element or elements differentiating the two crimes is sufficiently disputed so that a jury could consistently acquit on the greater offense and convict on the lesser.

The Court analyzed the 2d requirement (Slip. Op. 17, cleaned up; 917 F3d at 508-509):

The second criterion of the lesser-included offense analysis requires us to determine whether the elements of the lesser offense are identical to part of the elements of the greater offense. Bradley was charged and convicted for conspiring to defraud the United States—the proposed greater offense. The elements of conspiracy to defraud the United States that the district court charged to the jury are: (1) that two or more persons conspired, or agreed, to defraud the United States, or one of its agencies or departments, by dishonest means, (2) that the defendant knowingly and voluntarily joined the conspiracy, and (3) that a member of the conspiracy did one of the overt acts described in the indictment for the purpose of advancing or helping the conspiracy. The elements of the proposed lesser offense of conspiracy to fail to file W-2s would presumably be: (1) an agreement to fail to file W-2s; (2) one or more overt acts in furtherance of that illegal purpose; and (3) the intent to fail to file W-2s. Similarly, the elements of the lesser offense of conspiracy to fail to issue Form 1099s would be (1) an agreement to fail to issue Form 1099s; (2) one or more overt acts in furtherance of that illegal purpose; and (3) the intent to fail to issue Form 1099s.

Ultimately, though, the Court did not resolve the issue on the merits because Bradley had forfeited the argument because he had not properly presented or preserved the issue.

I think that this is a good reminder that when the Government charges a felony conspiracy (I don't recall it charging a misdemeanor conspiracy), counsel should think creatively about a lesser included offense charge that will permit a jury a way to compromise if the binary choice of guilty or not guilty is not palatable to the jury.  Of course, if the jury with only a binary choice would tilt toward not guilty, a defendant would not want the lesser included offense charge.  But, if the jury would tilt toward guilt, the defendant would want the charge to mitigate the damage.  And, reading the jury's mind on that can be vexing.

Court Holds that the Trust Fund Recovery Penalty is a Tax For Purposes of Tax Evasion, § 7201 (11/10/18)

In United States v. Prelogar, 2018 U.S. Dist. LEXIS 188305 (D. Mo. 2018), here), the Court rejected the defendant's argument to dismiss the following count of tax evasion, § 7201 that defendant:  "did willfully attempt to evade and defeat the payment of the Trust Fund Recovery Penalty ("TFRP") due and owing by him to the United States of America . . . and the payment of income tax due and owing by him to the United States of America."  The first thing to note is that two types of evasion are alleged -- one for the TFRP and the other for income tax.  I focus here on the allegation of tax evasion for the TFRP.

Defendant's argument was simple.  Tax evasion requires a tax to be evaded (or, in the language of the statute attempted to be evaded).  The TFRP, as stated in § 6672, is a "penalty" rather than a tax.  Therefore a person evading the TFRP is not evading tax and thus outside the scope of tax evasion.

The Court rejects the defendant's argument as follows:

Count I charges that Defendant "did willfully attempt to evade and defeat the payment of the Trust Fund Recovery Penalty ("TFRP") due and owing by him to the United States of America . . . and the payment of income tax due and owing by him to the United States of America" in violation of 26 U.S.C. § 7201. Defendant argues that § 7201 does not apply to him because the TFRP owed is a penalty and not a tax. In support of this argument, Defendant quotes Section 7201, which prohibits the willful evasion of "any tax imposed by this title or the payment thereof." Id. (emphasis added). Initially, the Court notes that Defendant's argument does not justify dismissal of Count I because Count I alleges that Defendant attempted to evade the payment of both taxes and penalties. At best, Defendant's argument would justify only limiting the scope of Count I. Regardless, the Court does not agree with Defendant that § 7201 applies only to evasion of the tax itself. Section 7201 makes it unlawful to attempt "to evade or defeat any tax", and § 6671(a) states that "any reference in this title to 'tax' imposed by this title shall be deemed also to refer to the penalties and liabilities provided by this subchapter." 26 U.S.C. § 6671(a). As explained in the Report, a "plain reading of Section 6671(a) leads to the inescapable conclusion that a reference to 'tax imposed' in a statute under the Internal Revenue Code [Title 26] must be deemed to include a 'penalty' provided in the subchapter [Subchapter B: Accessible Penalties]." Therefore, Defendant's arguments with respect to Count I are rejected. 

In Defendant's objections to the Report, he argues that the Fifth Circuit supports his claim that a penalty is not a tax for the purposes of § 7201. (Doc. 68, p. 3.)1 In United States v. Wright, 211 F.3d 233 (5th Cir. 2000), the Fifth Circuit addressed whether petitioners could be prosecuted for tax evasion if they owed only interest and penalties. Wright, 211 F.3d at 236-37. The Court based its analysis by relying on Sansone v. United States, 380 U.S. 343 (1965), where the Supreme Court observed that a conviction under § 7201 requires proof of a "tax deficiency." The Fifth Circuit then relied on the tax code's definition of "tax deficiency" - which does not include a tax penalty — to conclude that a conviction under § 7201 cannot be predicated on the willful evasion of a tax penalty. Id. at 236 & n. 3-4 (citing 26 U.S.C. §§ 6211, 6601(e)). The Court declines to follow Wright for several reasons. First, Wright does not discuss § 6671. Second, the phrase "tax deficiency" does not appear in § 7201, so the more limiting definition of "tax deficiency" (as opposed to the definition of "tax" found in § 6671) is inapplicable. Third, the issue in Sansone involved the circumstances under which a person charged with felony tax evasion is entitled to a lesser-included offense instruction for the misdemeanor of willful failure to pay a tax. Thus, it does not appear that when Sansone said the elements of § 7201 included a "tax deficiency," it meant to use the technical definition of the phrase as found elsewhere in the tax code. For these reasons, the Court denies Defendant's arguments with respect to Count I.

Special Counsel Opposes Motion to Dismiss FBAR Count as Untimely Because of Secret 18 USC 3292 Order (5/15/18)

Paul Manafort filed a motion to dismiss the FBAR count, Count 11 of the superseding indictment, here, in the case in E.D. Virginia, United States v. Manafort (E.D. Va. No. 1:18-cr-83 (TSE)).  The argument was the the statute of limitations prevented that count.  As described in the superseding indictment:

COUNTS 11-14: 31 U.S.C. §§ 5314 and

5322(a); 18 U.S.C. §§ 2 and 3551 et seq.

Failure To File Reports Of Foreign Bank

And Financial Accounts

Count 11 was for failure to file the FBAR for 2011, due on June 29, 2012.  The statute of limitations is 5 years (18 USC 3282(a), here), which had lapsed on June 29, 2017.  The original indictment was brought on February 13, 2018, and the superseding indictment brought on February 22, 2018.  The indictment was clearly out of time unless some special rule applied.  And it did.  As the prosecutors explained in its response to the motion, here (and Exhibit A here):

Section 3292(a)(1) of Title 18 suspends the running of the statute of limitations where the government, before the return of an indictment, applies to a court in which a grand jury is investigating the offense to suspend the running of the statute of limitations because evidence of the offense being investigated is in a foreign country. In connection with that application, the government must show, by a preponderance of the evidence, that “an official request has been made for such evidence and that it reasonably appears, or reasonably appeared at the time the request was made, that such evidence is, or was, in such foreign country.” 18 U.S.C. § 3292(a)(1). If the government is successful in making that showing, the running of the applicable statute of limitations is suspended from “the date on which the official request is made” until “the date on which the foreign court or authority takes final action,” id. § 3292(b), though the suspension may not exceed three years, id. § 3292(c).

Because the government secured a timely and valid order in this District to suspend the running of the applicable statute of limitations until at least the date on which the Superseding Indictment was returned, Manafort’s motion should be denied. On June 6, 2017, the government transmitted a request pursuant to a mutual legal assistance treaty (“MLAT”) to the Republic of Cyprus seeking, among other evidence, bank records, articles of incorporation, and witness interviews concerning certain of Manafort and Richard Gates’s bank accounts in Cyprus.  

On June 26, 2017, the government applied, ex parte, to this Court for an order pursuant to 18 U.S.C. § 3292 to suspend the applicable statute of limitations in light of the government’s MLAT request to Cyprus. This Court (Hilton, J.) granted the government’s request on June 27, 2017, thus suspending the applicable statute of limitations during the pendency of the government’s official request to Cyprus. See In Re Grand Jury Investigation, No. 14 GJ 1420 (E.D.V.A. June 27, 2017) (attached hereto as Exhibit A). As found by Judge Hilton, a grand jury impaneled in this District was conducting an investigation into, as relevant here, the flow of foreign money to Manafort, DMP International, Davis Manafort Partners, Smythson LLC, and Jesand Investment Corporation, and into subject offenses that included potential violations of 31 U.S.C. §§ 5314 and 5322(a) (Failure to File a Report of Foreign Bank Accounts). Judge Hilton further found, based on a preponderance of evidence, that evidence of such offenses was located in Cyprus and that the government had made an “official request” to Cyprus for that evidence under 18 U.S.C. § 3292(d) on June 6, 2017. Having found the requirements of Section 3292 satisfied, Judge Hilton ordered that the statute of limitations be suspended for the FBAR offenses, among others, for the period authorized by Section 3292(c). 

Because Cyprus had not taken “final action” on the government’s June 6, 2017 official request at the time the Superseding Indictment was returned, the statute of limitations remained suspended. Specifically, Cyprus produced documents in response to the government’s June 6 request on September 6, 2017; October 2, 2017; November 1, 2017; and April 30, 2018. Several of the items requested in the June 6, 2017 request remained outstanding at least until the time of the April 2018 production. For example, on December 8, 2017—before Cyprus’s most recent production—the government wrote to Cypriot authorities to renew its June 6, 2017 request (and a related request made two weeks later). The government’s December 8 letter stated that, after reviewing the records produced thus far, investigators had identified several items called for in the MLAT request that Cyprus had not produced. And Cyprus did not make a subsequent response to the government’s request until the April 30, 2018 production mentioned above. The bottom line, then, is that Cyprus had not fully satisfied the government’s official request when the original and Superseding Indictment of Manafort were returned on February 13 and 22, respectively. As a result, no “final action” had yet occurred as of the date of the operative indictments, and the applicable statute of limitations remained suspended. See United States v. Bischel, 61 F.3d 1429, 1433-34 (9th Cir. 1995) (construing “final action” to mean “a dispositive response by the foreign sovereign to both the request for records and for a certificate of authenticity of those records”); see also, e.g., United States v. Ratti, 365 F. Supp. 2d 649, 659-60 (D. Md. 2005) (following Bischel’s interpretation of Section 3292).

Reversal of Tax Obstruction Conviction Based on Marinello; A Win in a War Already Lost? (5/14/18; 5/15/18)

I assume all readers are already aware of the Supreme Court's decision in Marinello substantially paring back the Government's expansive reading of the tax obstruction crime.  See my blog, Supreme Court Holds that Omnibus Clause of the Tax Obstruction Crime (§ 7212(a)) Requires Awareness of Pending Tax-Related Proceeding (3/21/18; 3/22/18), here.  As I noted in that blog discussion, because of other counts of conviction that stand unreversed, it is not clear that Marinello's sentencing will be affected by the "victory." 

Marinello has resulted in other reversals of tax obstruction convictions.  I read another today, and briefly discuss it because it too may not win anything for the defendant.

In United States v. Gentle, 2018 U.S. App. LEXIS 12119 (2d Cir. 2018) (unpublished), here, the Second Circuit remanded a case to dismiss the conviction for tax obstruction and to re-sentence the defendant.  Unfortunately for the defendant, the remand left standing 38 counts of aiding and assisting under § 7206(2), each being a 3-year felony.  Although the Second Circuit did not say specifically what the court should do on re-sentencing, it did say (cleaned up):

  fn 1 The process of resentencing under these circumstances "need not be overly cumbersome" for the district court.  While the court may not automatically impose the same sentence on remand, it need not accept new evidence that could have been submitted at the original sentencing, and it may, in exercising its discretion anew, decide to impose the same sentence it did at the initial sentencing.

As Sentencing Guideline fans know, since the key Guidelines calculations are driven principally by the tax loss for the conduct of conviction and relevant conduct (conduct for other crimes whether charged, uncharged or acquitted), I would think it likely that the tax loss may be unaffected by the dismissal of the tax obstruction count of conviction or will not be affected in a meaningful way.  So, it well may be that the Guidelines calculation will be basically the same.  The key question is whether the sentencing judge will think that the dismissal of the tax obstruction count should meaningfully affect any decision whether to vary the sentence downward under Booker.

I further note that, in the event the tax loss originally calculated included loss from conduct other than to the unreversed counts of conviction, then that loss could probably be included anyway, albeit through relevant conduct for uncharged tax evasion or uncharged aiding and assisting counts.

Addendum 5/15/18 2:00pm:

Problems with Restitution Based Assessment in Excess of Amount Due (2/3/18)

In Choi v. United States, 2018 U.S. Dist. LEXIS 14393 (D. Md. 2018), here, the Court rejected an attempt by a defendant convicted of tax evasion to reduce the amount of restitution based on a subsequent resolution of the underlying liability with IRS Appeals that, on its face to me at least, indicates that the restitution amount was grossly overstated.  There is a lot to unpack there.  At the outset, I offer the following additional documents that I pulled from Pacer:

• The defendant's memorandum in support of the 28 USC § 2255 motion, here, whereby the defendant sought to invoke the Court's authority to reduce the restitution award and the resulting tax assessment under § 6201(a)(4).
• The U.S. Response, here, and Exhibit 1, here, to the Response (a Memo from Appeals)
• The docket entries as of yesterday, here.  Note that there are many extensions for the U.S. response, as the views of IRS CI and IRS Appeals were sought (this is noted in the U.S. response linked above).

The basic problem is that, once the criminal judgment becomes final, there appears to be no way to reduce the restitution award even if it exceeds the subsequently determined real loss to the victim (here the IRS).  Bottom line, that is what the Choi court held, although in any event the procedural device Choi used - the 28 USC § 2255 motion was not the proper procedure in any event.

The basic facts as narrated by the Court are (I eliminate the record references for easier readability):

On March 30, 2012, Petitioner Choi pled guilty in this Court to one count of tax evasion in violation of 26 U.S.C. § 7201. In his plea agreement, he agreed that the corporate tax returns that he filed for his business, Frankford Garden Liquors, for the years 2006 through 2009 "each understate the amount of the corporation's taxable gross receipts by more than $300,000." Further, he acknowledged that he understated his corporation's income to evade paying taxes. The plea agreement, however, did not state an agreed amount of taxes due and owing as a result of Choi's undereporting. Rather, the plea agreement laid out the Internal Revenue Service's (IRS) calculation of the taxes due and owing for the years 2006 through 2009. By the time of Choi's sentencing, however, both parties told this Court that they agreed to the IRS's calculation of tax loss and the imposition of a restitution order in the amount of $739,253.98 representing the taxes he owed for the years 2006 through 2009. This Court subsequently sentenced Choi to eighteen months incarceration, six months home detention, and three years supervised release. Additionally, this Court ordered a payment of $100.00 in special assessment, a $20,000.00 fine, and $739,253.98 in resitution. 

After his sentencing, Choi challenged the amount of taxes owed by his company in a civil action with the IRS Office of Appeals. In December of 2013, Petitioner was released from prison after serving his eighteen month term. Around January of 2016, Choi negotiated a settlement through the IRS Office of Appeals for total amount of $132,991.00.1

More on the Marinello Transcript of Oral Argument (12/9/17)

On Wednesday, I posted First Comments on the Marinello Oral Argument Transcript (Federal Tax Crimes Blog 12/6/17), here.  I had then anticipated a later offering a more detailed analysis of the transcript, here.  After reading the transcript through more I decided to offer some general comments rather a comprehensive discussion or try to predict the outcome.  In these comments, I often add my own thoughts and these thoughts may or may not be correct or may or may not be known to the Justices having to decide the case.  I will try to indicate the part that reflects my own thoughts.

1.  There was some discussion as to the role of the tax obstruction crime, § 7212(a)'s Omnibus Clause, in relation to other lesser or greater tax crimes.  Most pertinent was the concern expressed by Marinello's lawyer that a crime defined as a misdemeanor (such as failure to file a return, § 7203, or filing a false W-4 to lessen the withholding, § 7205) could be charged as felony tax obstruction at the discretion or whim of the prosecutor.  See e.g., Tr. 8-10 & 63-64.  The related concern is that Congress, by providing for the lesser misdemeanor for the described conduct, could not have meant to have the conduct charged as felony tax obstruction.  JAT Comment:  This genre of concern, however, is baked into the criminal laws and tax crimes specifically.  Conduct is often described in more than one criminal law with different punishments (maximum sentences).  Specifically, in the tax context, the prosecutor often has the discretion to charge particular conduct as either tax evasion, a five year felony under § 7201, or tax perjury, a three-year felony under § 7206(1).  Yet, that does not compel the prosecutor to charge the greater crime rather than the lesser crime or the lesser crime rather than the greater.  (By lesser crime, I do not mean the same as the concept of the lesser included offense, for tax perjury is not a lesser included offense to tax evasion.)

2.  In a related vein, there was discussion (Tr. 46-47; 55-56) of the general DOJ policy to charge the more serious offense. The question was whether this guidance would require or tilt in favor of charging the more serious crime, tax obstruction, rather than a misdemeanor crime that more precisely describes the conduct.  JAT Comment: The provision referenced, I presume, is USAM 9-27.300 - Selecting Charges—Charging Most Serious Offenses, here. (Note that the table of contents says this section is titled Selecting Charges—Conducting an Individualized Assessment, but the section itself is titled as indicated).  That provision directs the prosecuting attorney to make an individualized assessment which "will generally conclude that he or she should charge, or should recommend that the grand jury charge, the most serious offense that is consistent with the nature of the defendant's conduct, and that will probably be sufficient to sustain a conviction."  The most serious offense is one that "yields the highest range under the Sentencing Guidelines."  However, SG Appendix A - Statutory Index directs that the Sentencing ranges are calculated under either § 2J1.2 (obstruction  of justice) or § 2T1.1 (the tax guidelines).  In most cases, the sentencing is under § 2T1.1, so that the range is calculated the same as tax crimes, including the misdemeanor failure to file.  Since failure to file is rarely prosecuted for a single year, in all failure to file cases that get prosecuted, the indicated guidelines sentence would be the same and would not be limited by the counts of conviction cap.  (In other words, if the Guidelines range exceeded a single year, the prosecutor would not accept a plea for a single year which would otherwise limit the sentence to one year.)  Finally, I am fairly confident that where failure to file, even for multiple years, was the only conduct, the failure to file crime would be charged even if theoretically the obstruction crime could be charged.  Marinello's concern, echoed by some Justices, was that the obstruction crime if described broadly enough could make the same conduct either a misdemeanor or felony when Congress described the specific conduct as a misdemeanor.

3.  Also, in a related vein, the Government attorney said (Tr. 61) that

[Mr. Parker] The government would have brought a tax evasion charge in this case but for the fact that Mr. Marinello so destroyed his records that it was unable to prove beyond a reasonable doubt that there was an actual tax deficiency.

And so what I think Petitioner's proposed construction would do is it would effectively allow individuals to evade their taxes and then obstruct their way down to a misdemeanor charge, or if they are particularly good at it, maybe obstruct their way out of criminal penalties at all. 

And the government could do nothing about it, unless the individual actually happened to be obstructing a pending audit or investigation.

Defense Request of Lesser Included Offense Instruction Precludes Questioning Sufficiency of Conviction (10/3/17)

In United States v. Hurley, 2017 U.S. App. LEXIS 17217 (9th Cir. 2017) (nonpublished), CA9 here and GS here, Hurley, a former IRS agent, was convicted for receiving a gratuity under 18 USC. § 201(c).  As the Court of Appeals explains in the cryptic nonpublished decision, this conviction was for a lesser included offense to the more serious offense actually charged (solicitation of bribery).  Hurley questioned on appeal whether the evidence was sufficient to support the conviction on the lesser included offense.  The Court held

Hurley is precluded from challenging the jury's verdict regarding this crime because he asked that the jury be permitted to consider it as a lesser included offense on this count. United States v. Butler, 74 F.3d 916, 918 n.1, 924 (9th Cir. 1996) (rejecting argument that conviction on lesser included offense was improper when defendant himself requested the challenged instruction). Even if Hurley received nothing of value on the day he allegedly solicited the $20,000, his actions at trial invited any error in the verdict. See United States v. Frank, 36 F.3d 898, 903 (9th Cir. 1994) ("The doctrine of invited error prevents a defendant from complaining of an error that was his own fault." (citation omitted)).

The use of lesser included offense instructions to give the jury a point between the normal binary choice of guilt or innocence to the more serious offense charged is an interesting topic.  I discuss that topic in more detail in the chapter, Chapter 12, Criminal Penalties and the Investigation Function, for which I was principal draftsman in Michael Saltzman and Leslie Book, IRS Practice and Procedure (Thomsen Reuters 2015).  I offer the following from the introduction in ¶ 12.05[3][b][i] (footnotes omitted):

The doctrine is most frequently encountered at the close of a trial for a greater offense when one of the parties wants the jury to have a choice in addition to guilt or acquittal on the charged greater offense. Why would either the prosecutor or the defendant want to present to the jury this additional choice? The prosecutor may be concerned that he has not proved all elements of the greater offense beyond a reasonable doubt or that the jury may not be willing to convict for the charged greater offense but, the prosecutor fears, will return a verdict of acquittal unless given a lesser alternative. The defendant may assess the risks differently. The defendant may be concerned that the jury will convict of the greater offense rather than acquit, but would convict only of the lesser offense if offered that opportunity. 

Consideration of Sentencing Disparities in Sentencing (9/3/17; 9/8/17)

In United States v. Pierre, ___ F.3d ___, 2017 U.S. App. LEXIS 16851 (8th Cir. 2017), here, the Eighth Circuit affirmed the conviction and sentence of the defendant for defraud conspiracy with respect to Government claims (18 USC § 286) and for money laundering (18 USC § 1957).  The defraud conspiracy related to multiple false refund claims.  Only one part of the opinion caught my particular attention.  In the opinion, the Court held:

Pierre also complains that the district court created unwarranted sentencing disparities when it sentenced him based on intended loss ($5.2 million) rather than actual loss ($1.2 million), because his co-conspirators received sentences based on the actual loss amount attributable to them. The guidelines direct the court to consider the greater of actual loss or intended loss, USSG § 2B1.1, comment. (n.3(A)), so there was no error in using the larger amount. The statutory direction to avoid unwarranted disparities among defendants, 18 U.S.C. § 3553(a)(6), refers to national disparities, not differences among co-conspirators, so Pierre's argument founders on a mistaken premise. See United States v. Fry, 792 F.3d 884, 892-93 (8th Cir. 2015). In any event, any disparity among co-conspirators here was warranted by Pierre's greater culpability in the conspiracy. Pierre was aware of the full scope of the conspiracy: he recruited co-conspirators to open several phony tax-preparation companies and bank accounts, and he directed them to deposit and withdraw money from the bank accounts. Most of the co-conspirators were associated with only a single fictitious company and bank account. The district court reasonably sentenced Pierre based on a greater amount of loss.

For review, 18 USC § 3553(a), here, states the "Factors To Be Considered in Imposing a Sentence," including in subparagraph (6) "the need to avoid unwarranted sentence disparities among defendants with similar records who have been found guilty of similar conduct."  § 3553(b) requires the sentencing court to "impose a sentence of the kind, and within the range, referred to in subsection (a)(4) unless the court finds that there exists an aggravating or mitigating circumstance of a kind, or to a degree, not adequately taken into consideration by the Sentencing Commission in formulating the guidelines that should result in a sentence different from that described."  As interpreted by Booker, the Court has ultimate discretion in applying the § 355a(a) factors to vary from the Guidelines.

The concurring judge, Kelly, disagreed that the majority should have reached the proper scope of the "unwarranted sentence disparities" command of 18 USC § 3553(a)(6).  His concurring opinion is short, so I quote it in full:

Our court has not previously decided whether "[t]he statutory direction to avoid unwarranted disparities among defendants [in accordance with] 18 U.S.C. § 3553(a)(6) refers to national disparities [rather than] differences among co-conspirators." Supra at 8. See Fry, 792 F.3d at 892-93 (noting in dicta that "[m]ost courts say that the statutory direction to avoid unwarranted sentence disparities, see 18 U.S.C. § 3553(a)(6), refers to national disparities, not differences among co-conspirators" but affirming defendant's longer sentence as substantively reasonable when compared to sentences of other participants in fraud scheme because "disparate sentences among dissimilar defendants are not unwarranted") (emphasis omitted); United States v. Nshanian, 821 F.3d 1013, 1019 (8th Cir. 2016) (citing Fry, 792 F.3d at 892, but nonetheless "[a]ssuming for the sake of analysis that the statutory direction to avoid unwarranted sentence disparities might refer to differences among co-conspirators rather than national disparities"); United States v. Avalos, 817 F.3d 597, 602 (8th Cir. 2016) (citing Fry, 792 F.3d at 892-93, but "assuming for the sake of analysis that sentence disparities among co-conspirators could demonstrate unreasonableness"). In my view, there is no need to do so here, because any disparity between Pierre's sentence and those of his co-conspirators was warranted for the reasons stated by the court. For this reason, I concur in the result, but not in the conclusion regarding the proper scope of § 3553(a)(6). I otherwise concur in the court's opinion.

For some more context, I thought I would first offer a quote from a Supreme Court case on § 3556(a)(6), then offer a discussion Judge Jack Weinstein by linking to a prior blog discussion, and then some quotes from some representative tax cases.  I caution that these examples are more anecdotal to give readers some flavor for the analysis and are not intended to be exhaustive or even a fair representation of the § 3556(a)(6) authority:

Daugerdas Grasps for the Supreme Court (6/26/17)

Paul Daugerdas, a prominent topic of this blog since he was the king of bullshit tax shelters, was convicted and his conviction affirmed on appeal.  I reported on the much of his trial and appeal.  The blogs mentioning Daugerdas are here and the blog on the appeal is Daugerdas Conviction and Sentencing Affirmed by Second Circuit Court of Appeals (Federal Tax Crimes Blog 9/21/16), here.

On 3/20/17 Daugerdas filed a petition for writ of certiorari.  The petition for the writ is here.  According to the docket entries, here:

Mar 20 2017 Petition for a writ of certiorari filed. (Response due April 21, 2017)
Mar 31 2017 Waiver of right of respondent United States to respond filed.
Apr 5 2017 DISTRIBUTED for Conference of April 21, 2017.
Apr 17 2017 Response Requested . (Due May 17, 2017)
* * * *
Jun 23 2017 Brief of respondent United States in opposition filed.

The Government's brief in opposition is here.

Now, what to make of all this?  The starting point is the issue presented.

Daugerdas prefaces his statement of the issue with a summary of facts apparently believed necessary to understand the issue.  The Government does not agree with some of the nuances in the facts, so just keep that in mind.  So, I cut and paste the preface and the issue Daugerdas presents:

Petitioner Paul Daugerdas, a tax attorney, was tried by a jury for a “scheme to defraud” and obstruct the Internal Revenue Service (“IRS”) for the design, marketing and implementation of fraudulent financial tax shelters. At trial and during summations, the government presented two separate “schemes”: the first alleged that Daugerdas intentionally orchestrated a massive tax shelter fraud causing losses in excess of $1.6 billion by advising hundreds of clients to report tax losses based on financial transactions that lacked “economic substance”; the second scheme alleged that he conspired with other members of his law firm to intentionally backdate financial transactions on three or four client tax returns to fraudulently reduce their taxes owed, causing losses of approximately $2.2 million. During summations, the government urged the jury to convict Daugerdas of conspiracy, mail fraud, obstruction and relevant tax evasion counts based on the $2.2 million scheme. The jury agreed, acquitting him on six other tax evasion counts unrelated to the $2.2 million scheme. The government then asked the district court to sentence Daugerdas based on the greater $1.6 billion tax shelter scheme. As a result, the district court sentenced him to 180 months, as opposed to the 41–51 month Guidelines range for the backdating scheme, despite the government’s contrary argument to the jury and the jury’s ultimate verdict. 

The question presented is: 

Whether Petitioner’s sentence violated his rights under the Sixth Amendment and the Due Process Clause of the Fifth Amendment when a judge imposed a sentence based on an alleged greater “offense” than the government urged the jury to convict at trial, and after the jury convicted based on the lesser “offense” presented to them during the government’s summation?

In its brief in opposition, the Government goes straight to the issue (without engaging on predicate facts or even believing a statement of facts is necessary to the issue as it presents the issue):

Whether petitioner’s sentence was substantively unreasonable on the ground that the district court imposed a sentence based on judicial fact-finding regarding conduct of which petitioner was acquitted by the jury.

Basically, the issue is whether conduct in counts for which the jury acquitted can be considered in the tax loss calculation (or can be considered at all) in sentencing.  I thought that issue was long since settled and not particularly controversial which, I presume, is why the Government initially waived its right to respond.

Interested readers of this blog can pore over the submissions as their time and interests permit.  I just make the following quick comments about the Government's brief (after far less than a detailed study):

Inconsistent Verdicts and the Lesser Included Offense Doctrine (10/28/16)

In United States v. Armstrong, 2016 U.S. Dist. LEXIS 141192 (ED TN 2016), here, the defendant was charged with the defraud / Klein conspiracy, tax evasion, and tax perjury all related to profits from a scheme to evade Tennessee cigarette tax stamps.  The indictment is here.  "Following a jury trial, the defendant was found not guilty on Counts One and Two and guilty on Count Three."  In this opinion, the court denies the defendant's motion for acquittal or new trial related to the single conviction on tax perjury.  The defendant's motion is here; the US response is here.  I focus here principally on the relationship of the tax evasion count as to which the jury acquitted the defendant and the tax perjury count as to which the jury convicted the defendant.

The two counts are state in the indictment, here, as follows:

COUNT TWO

Attempt to Evade and Defeat Tax

1. The allegations set forth above in support of Count One are hereby re-alleged and incorporated herein by reference. [These are the usual copious allegations in the conspiracy count.]
2. On or about the 15th day of October, 2009, in the Eastern District of Tennessee, JOSEPH E. ARMSTRONG, a resident of Knoxville, Tennessee, who during the calendar year 2008 was married, did willfully attempt to evade and defeat a large part of the income tax due and owing by him and his spouse to the United States of America for the calendar year 2008, by preparing and causing to be prepared and by signing and causing to be signed, a false and fraudulent U.S. Individual Income Tax Return, Form 1040, on behalf of himself and his spouse, which was filed with the Internal Revenue Service and in that false return, it was stated that their joint taxable income for the calendar year was the sum of $152,999, and the amount of tax due and owing thereon was the sum of $36,441, in fact, as he then and there knew, his taxable income for the calendar year was the sum of $471,418, upon which taxable income there was owing to the United States an income tax of approximately $141,222. In violation of Title 26, United States Code, Section 7201. 

COUNT THREE

Fraud and False Statements

1. The allegations set forth above in support of Counts One and Two are hereby re-alleged and incorporated herein by reference.
2. That on or about October 15, 2009, in the Eastern District of Tennessee and elsewhere, JOSEPH E. ARMSTRONG, a resident of Knoxville, Tennessee, did willfully make and subscribe and did willfully aid, abet, assist, and cause to be so made and subscribed a joint U.S. Individual Income Tax Return, Form 1040, for the calendar year 2008, which was verified by a written declaration that it was made under the penalties of perjury and JOSEPH E. ARMSTRONG did not believe the return, which was filed with the Internal Revenue Service, to be true and correct as to every material matter in that the return failed to disclose that he was engaged in the operation of an investment activity from which he derived gross receipts and received income and JOSEPH E. ARMSTRONG then and there well knew that he was required by law and regulation to disclose the operation of this investment activity, the gross receipts he derived therefrom, and the income from this investment activity.

As noted, the jury acquitted on Court Two but convicted on Count Three.

The first point is the fact that the Government charged the defendant for tax evasion and tax perjury.  The allegations in the key paragraph of the tax evasion count, Count Two (paragraph 2), appear to allege that the affirmative act of evasion was the filing of the false return under-reporting gross income, thereby under-reporting and underpaying the correct tax liability.  In this regard, Count Two, paragraph 1 does incorporate the Conspiracy Count allegations by reference, but just focusing on the key charging allegations in paragraph 2, it looks like the key affirmative act -- an element of the crime of tax evasion -- was the filing of the false return under-reporting taxable income, thereby under-reporting and underpaying the tax liability.

Tax Attorney Convicted of Employment Tax Fraud (9/8/16; 9/10/16)

This DOJ Tax press release, here, caught my eye because the title was:  Pittsburgh Tax Attorney and Owner of Iceoplex Convicted of Employment Tax Fraud.  The 16 counts are for convictions under § 7202, here, titled "Willful failure to collect or pay over tax."  Don't know the details or,  really anything else noteworthy, except the following excerpted from the press release:

According to the evidence presented at trial, between 2004 and 2015, Steven Lynch, a tax attorney, co-owned and operated the Iceoplex at Southpointe, a recreational sports facility located in Washington County, Pennsylvania.  The Iceoplex included a fitness center, ice rink, soccer court, restaurant and bar.  Lynch controlled the finances for these businesses and was responsible for collecting income and employment taxes withheld from employee wages, accounting for these taxes and filing Forms 941, payroll tax returns, and paying these taxes over to the Internal Revenue Service (IRS).  The jury found that between 2012 through 2015, Lynch failed to timely pay over to the IRS more than $790,000 in taxes withheld from the wages of the employees for these businesses. 

JAT Comments:

1.  For some years, the IRS and DOJ Tax have been stepping up their criminal enforcement efforts in the employment tax area.  The point the IRS and DOJ Tax wants to make that those who think that this is just a civil tax issue may be mistaken, and may be criminally investigated, charged, convicted, sentenced and spend some time in jail, all the while remaining liable for the taxes evaded (and  a host of related costs, including other penalties and fines).  And, even if they are lucky enough to avoid all those criminal related costs, they are still subject to potential trust fund recovery penalty liability under § 6672, here, titled "Failure to collect and pay over tax, or attempt to evade or defeat tax."  (Readers should note that, although the titles of the criminal and civil provisions are slightly different, the substantive language is virtually the same, with the criminal statute simply requiring proof for conviction beyond a reasonable doubt.  Not a comforting thought for those who play this game, as the IRS and DOJ Tax increase their criminal enforcement efforts.

2.  Based solely on the sentencing factors noted  in the press release (indicated tax loss over $790,000, no acceptance of responsibility downward adjustment, and presuming the pre-2015 Guidelines), the indicated Guidelines level is 20 (according to my Guidelines spreadsheet) and the indicated sentencing range is 33-41 months.  (By contrast, had Lynch pled guilty to achieve an acceptance of responsibility downward adjustment (or, in the rare even he might otherwise qualify for acceptance of responsibility) the sentencing level would have been 17 with an indicated range of 24-30 months, so that he could have achieved a 9 month lesser sentence at the bottom of each Guidelines range.) Of course, the judge can always do a Booker variance, which, in tax cases, is almost always downward.  But that will depend upon factors not evident from the press release.  Those additional factors are produced for the court in the Pre-Sentence Report ("PSR") and the parties sentencing submissions after review the PSR.  When the sentence is announced, I will dig around what is the in public report (usually not the PSR, but perhaps some contested portions of it) and report back.

Addendum on 9/10/16 12:30pm:

3. Robert Horwitz, a seasoned criminal tax attorney, here, called my attention to a typo on the blog and to a more substantive issue.  I have corrected the typo.  More important is the substantive question he raised.  Paraphrased, he asked whether, as specifically stated in the press release, the jury found that Lynch failed to timely pay over $790,000.  Readers will recall that, in tax evasion cases, the jury finds only that the defendant committed tax evasion, but does not find a specific amount.  (This was the issue addressed in the blog entries on the Senyszen case discussed in 3 blogs, here.)  The conviction here was for willful failure to collect and pay over, § 7202, here.  The amount involved is not an element of this crime, so Robert's question was whether the DOJ press release was correct that the jury made a finding on amount of over $790,000.

So, I went to Pacer and pulled down the jury verdict form, here.  From the jury verdict, the following went to the jury:

• Tax obstruction, § 7212(a) (one count, presented as Count 1): Jury verdict:  NOT GUILTY.
• 2. Failure to collect and pay over, § 7202 (28 counts, one per employer per quarter, presented as Counts ___ - ___, with one in  that series dismissed):  NOT GUILTY ON 11 COUNTS, GUILTY ON 16 COUNTS. 

Most importantly for the present discussion, the jury verdict does not find any amount of tax involved.  But, the jury verdict does find the defendant guilty of 16 counts and the counts, as alleged in the superseding indictment, here, does contain the approximate numbers for each quarter.  So, the jury verdict although not explicit as to amounts might make the finding by incorporation from the superseding indictment.  Since, however, the amount of tax involved is not an element of the crime, I presume that the authority for § 7201 might be applicable here as well/

My calculations from the superseding indictment shows the following:  tax amount for 16 counts of conviction  $725,728; tax amount for 11 not guilty counts $694,044, tax amount dismissed count (count 12) $24,998, aggregate tax amount $1,444,260.  I am not sure where the reported $790,000 amount comes from, but I do note that the amounts could have been refined in the presentations at trial.  In any event, the key break point for the sentencing calculations is $1,000,000.

As readers know, the intended tax loss ("tax loss") is determined at the sentencing phase for the first, most critical, step in the sentencing guidelines calculation.  Importantly, in terms of the guidelines calculations, though, the tax loss for the guidelines calculations also includes the tax loss for "relevant conduct."  See §1B1.3.  Relevant Conduct (Factors that Determine the Guideline Range), here.  The tax loss involved in not guilty counts may well be in play in calculating the guidelines range because the standard of proof is preponderance of the evidence rather than beyond a reasonable doubt.  Using the indicated tax loss for the counts of not guilty verdicts, the aggregate loss will move the calculation to the next bracket (which covers the range from $1,000,000 to $2,500,000, so that is a comfortable conclusion for the not guilty counts).  That will move the sentencing table calculation to offense level 22 and an indicated sentencing range of 41-51 months.

Finally, with 16 counts of conviction for the 5 year § 7202 felony, the maximum sentence could be 80 years.  As indicated, even with relevant conduct, the guidelines calculations will produce a sentence of far less than that.

Attempts to Commit Tax Crimes (5/23/14)

I deal today with a little discussed feature of criminal procedure.  Federal Rules of Criminal Procedure Rule 31, here, provides:

(c) Lesser Offense or Attempt. A defendant may be found guilty of any of the following: 

(1) an offense necessarily included in the offense charged; 

(2) an attempt to commit the offense charged; or 

(3) an attempt to commit an offense necessarily included in the offense charged, if the attempt is an offense in its own right.

It is well established law that a defendant may be convicted of a lesser included offense in lieu of the offense charged.  I focus on subsection (2) -- conviction of an attempt to commit the offense charged.

In United States v. Johnson, 2014 U.S. App. LEXIS 8834 (4th Cir. 2014), here, the defendant was "convicted by a jury of four counts of violating the Internal Revenue Code ("IRC"); one count of corruptly obstructing or impeding, or endeavoring to obstruct or impede, the due administration of the IRC, in violation of 26 U.S.C. § 7212(a), and three counts of willfully failing to file income tax returns, in violation of 26 U.S.C. § 7203."  On appeal, one of his claims was that the trial court had improperly constructively amended the § 7212(a) charge.  Section 7212(a), here, is tax obstruction.  The statute, here, is:

§ 7212 - Attempts to interfere with administration of internal revenue laws
(a) Corrupt or forcible interference
Whoever corruptly or by force or threats of force (including any threatening letter or communication) endeavors to intimidate or impede any officer or employee of the United States acting in an official capacity under this title, or in any other way corruptly or by force or threats of force (including any threatening letter or communication) obstructs or impedes, or endeavors to obstruct or impede, the due administration of this title, shall, upon conviction thereof, be fined not more than $5,000, or imprisoned not more than 3 years, or both, except that if the offense is committed only by threats of force, the person convicted thereof shall be fined not more than $3,000, or imprisoned not more than 1 year, or both. The term “threats of force”, as used in this subsection, means threats of bodily harm to the officer or employee of the United States or to a member of his family.

As recounted by the Court of Appeals, § 7212(a) "criminalizes both successful and unsuccessful attempts to impede the IRS."  In this case, the § 7212(a) Count, Count One, was titled "Corrupt Endeavor To Obstruct, Impede, and Impair the Due Administration Of the Internal Revenue Code" but the text of Count One charged that the defendant "did corruptly obstruct and impede the due administration of the Internal Revenue Code."  [Actually, there was a typo, but I include what the correct text should have been.]  So, focusing only on the text of the charge and not the title (like a caption which usually is not controlling), the defendant was charged with a completed act of obstruction.  The court nevertheless:

instructed the jury on the meaning of the word "endeavor," defining it as "any effort or any act or attempt to effectuate an arrangement or to try to do something, the natural and probable consequences of which is to obstruct or impede the due administration of the Internal Revenue laws." 

The defendant complained that this broadened the scope of the charge actually made.

U.S. Congressman Indicted for Tax Related Crimes (4/29/14)

The federal indictment of U.S. Representative Michael Grimm -- formerly a Marine and an FBI agent -- has been in the news.  See the press release from USAO EDNY, here, and the indictment here.  According to the press release, the charges are:

A 20-count indictment was unsealed this morning in federal court in Brooklyn charging Michael Grimm with five counts of mail fraud, five counts of wire fraud, three counts of aiding and assisting in the preparation of false federal tax returns, one count of conspiring to defraud the United States, one count of impeding the Internal Revenue Service, one count of health care fraud, one count of engaging in a pattern or practice of hiring and continuing to employ unauthorized aliens, two counts of perjury and one count of obstructing an official proceeding.

As explained in the press release, the charges center around Grimm's alleged conduct that had a purpose of evading federal and state taxes related to employees, but also touched other crimes. Tax crimes enthusiasts will know that run of the mill tax crimes also potentially involve mail fraud and wire fraud, but DOJ Tax typically does not charge mail fraud and wire fraud except in the most egregious of cases.  See Tax Division Directive 128, here.  This appears to be an egregious case, at least as alleged in the indictment and in the press release.

The proliferation of charges from a unified pattern of conduct should remind readers that (1) the prosecutors have a grab bag of charges in the IRC and Title 18 and other Titles that can be marshaled in an indictment and (2) a sentencing truism that proliferating charges from a pattern of conduct is not likely to affect the sentence beyond what could have been achieved with a fewer number of charges.  In the latter regard, the press release further states:

If convicted, Grimm faces a term of imprisonment of up to 20 years for each mail and wire fraud charge and for the obstruction charge, up to 10 years of imprisonment for the health care fraud charge, and up to five years of imprisonment for the charge of conspiring to defraud the United States and for each perjury charge. Grimm further faces a term of imprisonment of up to three years for each charge of aiding and assisting in the preparation of a false and fraudulent tax return and for the charge of obstructing and impeding the due administration of the Internal Revenue Laws. Finally, Grimm faces up to six months of imprisonment for engaging in a pattern or practice of hiring and continuing to employ unauthorized aliens, as well as forfeiture, restitution, and fines.

It is hard to imagine that, even if convicted of all counts, the sentence will exceed 10 years -- certainly won't exceed 15 years.

Obviously, cherishing the opportunity for a press sound bit, it is reported that the US Attorney said that Grimm "never met a tax that he did not lie to evade."

The Beanie Baby Man, The Tax Evader Adult Man, Ty Warner, Gets Probation! (1/14/14; Updated 1/18/14)

This is breaking news.  Ty Warner has been sentenced to probation -- no incarceration.  See Beanie Babies creator Ty Warner gets 2 years probation for tax evasion (Chicago Tribune 1/14/14), here.

I offer the key documents as follows:

• Docket No 24 Defendants Sentencing Memorandum.zip - here.
• Docket No 24 Defendants Sentencing Memorandum-Exh A.pdf - here. (This is a spreadsheet of convictions and sentencing in offshore matters that the defense team believed most relevant to their proffered request for no incarceration.)  I have posted a subsequent blog on this spreadsheet:  Sentencing Tales Told in Spreadsheets (6/28/14), here.
• Docket No 26 Govt Sentencing Memorandum.zip - here.
• Docket No 28 Defendant's Supplement to Sentencing Memorandum.zip - here.
• Docket No. 30 Judgment in Warner case.pdf - here.

I do not yet have the transcript from sentencing wherein the Judge presumably would have announced his reasons for the sentence.  I also do not know whether the judge will write an opinion for his reasons, particularly since I suspect the Government will appeal.  I want to understand why the sentencing judge, Judge Kocoras, would have imposed that sentence. I want to hear what the reasons were before I pass judgment on that judge's judgment (of course Judge Kocoras is the judge and I am not; I can only pass judgment on the judge.)  Judge Kocoras' Wikipedia entry is here.  Right off hand, I only know one member of the defense team, Mark Matthews, here, so I offer him my kudos here.  (My kudos are probably worth less than Mr. Warners' kudos, which should be substantial!)

These cases are by their nature fact dependent and each party -- even the judge -- puts his spin on the facts.  But, the advisory Guidelines calculations were essentially agreed.  The key numbers in the Guidelines calculations were as follows:

• Tax loss (including relevant conduct) - $5,594,877 -- with resulting tax table level of 24.
• Adjustment  for sophisticated means - +2;
• Acceptance of Responsibility - -3
• Resulting offense level for sentencing table - 23 -- with sentencing range of 46-57 months.

Accordingly, from the bottom of the guideline range, the judge departed 46 months.  Quite a departure.  One day when (more likely, if) I have time, I would like to include a stat showing the number of months of downward departure from the bottom of the indicated sentencing range.  I would suspect -- but it is only a suspicion -- that this was the largest departure simply because his tax loss numbers which drove the calculation were so high.

Other aspects of the sentencing judgment:

• Probation: 2 years.
• Community Service:  500 hours at Leo, Tilden and Richards High Schools
• Fine:  $100,000
• Costs of prosecution:  $500

Restrictions on International Travel: None, but requires approval of court of probation officer to leave the district.

Readers of this blog will know that this result echoes the sentencing of Mary Estelle Curran.  See Sentencing Judge on Offshore Prosecution Chastises the Government for Lack of Judgment (4/25/13), here.

I do ask the question that comes immediately to mind.  What is it about the very rich that seems to resonate with sentencing judges?

And, of course, the obvious question is whether the Government will appeal.  It can appeal the sentence.  And, is not the Government practically required to appeal when the lesser wealthy are treated more harshly?

From an early article:  Janet Novack, No Jail Time For Beanie Babies Billionaire Tax Evader Ty Warner (Forbes 1/14/14), here.  Excerpts (emphasis supplied by JAT):

Principal Comments on Unclaimed Deductions and Losses in Sentencing Tax Loss Determinations (3/16/13)

The Sentencing Commission has received comments and testimony from principal constituents as to the issue of whether unclaimed deductions and credits should be permitted to reduce the tax loss in the critical tax loss calculation for sentencing purposes.  The sentencing tax loss, like the loss in other financial crimes, is the most influential determinant in the sentencing guidelines calculations in most cases.  I have previously discussed this and cited to an article by Messrs. Toscher and Perez.  See The Role of Unclaimed Deductions in Computing Tax Loss For Sentencing (3/1/13), here.

I offer the following comments principally to DOJ Tax's comments urging that unclaimed deductions and credits not be considered for the tax loss determination.  Here are some key excerpts from the DOJ Tax letter that should set the stage for persons generally familiar with the issue:

"Tax loss" under the Guidelines is distinct from a tax deficiency in a civil tax case or an order of restitution. Tax loss, by definition, should address the entirety of the harm intended by the defendant, including for example the harm caused by concealment through omitting certain deductions. It is only through civil enforcement that the government should be charged with determining the correct tax liability, and restitution serves merely as an aid in the collection of that liability. 

The Tax Division, along with the sentencing courts, has extensive experience in considering claims concerning uncharged expenses in Guidelines calculations. As demonstrated by several examples included below, any attempt to determine whether and when to allow a  deduction that the defendant did not report on an original tax return will require inappropriate speculation, and may implicate complex tax issues and result in unjust anomalies. At a minimum, it will turn routine sentencing hearings into tax mini-trials. Further, in civil tax enforcement, the taxpayer bears the burden of claiming and substantiating deductions, and the IRS's determinations are accorded a presumption of correctness - fundamental principles that are not incorporated into Options 1 or 3. Either of these proposed amendments runs the risk of giving convicted tax evaders advantages over taxpayers with honest disputes with the IRS.