Default Judgment Entered Against Convicted Defendant Who Agreed to Penalty (2/27/19)

In  United States v. Sarshar, 2019 U.S. Dist. LEXIS 27845 (C.D.Cal.2019), the court rendered default judgment against Masud Sarshar in the Government's FBAR collection suit to recover a willful FBAR penalty of $18,242,537.65 plus interest.  (I don't provide a link because it is a straight default judgment after the defendant had already agreed to the penalty at sentencing (see below).)

Sarshar had previously pled for conspiracy and tax obstruction and was sentenced to 24 months in prison.  See my prior blogs (reverse chronological order):

• Taxpayer with Israeli Bank Accounts Sentenced to 24 Months (Federal Tax Crimes Blog 3/13/17; 3/18/17), here.
• Another Plea to Offshore Account Tax Crimes (Federal Tax Crimes Blog 8/1/16), here.

The sentencing blog entry notes from the DOJ Press Release:

 In addition to the term of prison imposed, Sarshar was ordered to serve three years of supervised release and to pay more than $8.3 million in restitution to the IRS, plus interest and penalties. Sarshar also agreed to pay an FBAR penalty of more than $18.2 million for failing to report his Israeli bank accounts.

Since Sarshar had already agreed to the FBAR penalty, the suit was just a formality required by the 2 year period to file the suit.

11th Circuit Holds Relevant Conduct Loss for Guideline Calculation Can Be Less Than Loss Within Scope of Criminal Conspiracy (2/27/19)

In United States v. Anor, 2019 U.S. App. LEXIS 4858 (11th Cir. 2019), here, Anor was a relatively low level employee in a tax preparation office which prepared and filed hundreds of false and fraudulent tax returns.  She pled guilty to conspiracy to conspiracy to commit wire fraud, in violation of 18 U.S.C. §§ 1343 and 1349.  In calculating the loss for Sentencing Guidelines purposes, the district court included all the losses related to conspiracy -- being all the losses involved.  The Court of Appeals reversed because the Guidelines' discussion of relevant conduct would be less than the losses within the scope of the criminal conspiracy.  Here is the discussion:

However, "[t]he limits of sentencing accountability are not coextensive with the scope of criminal liability." United States v. Hunter, 323 F.3d 1314, 1319 (11th Cir. 2003). Under the guidelines, liability for the reasonably foreseeable acts of others is limited by the scope of the criminal activity the defendant agreed to jointly undertake. See U.S.S.G. § 1B1.3, cmt. n.2. Therefore, "to determine a defendant's liability for the acts of others, the district court must first make individualized findings concerning the scope of criminal activity undertaken by a particular defendant." Hunter, 323 F.3d at 1319 (quotation marks omitted). "In determining the scope of the criminal activity, the district court may consider any explicit agreement or implicit agreement fairly inferred from the conduct of the defendant and others." United States v. Petrie, 302 F.3d 1280, 1290 (11th Cir. 2002). Once that individualized finding is made, the court can proceed to determine reasonable foreseeability. Hunter, 323 F.3d at 1319. 

Our decision in Hunter illustrates the limits of sentencing accountability for low-level defendants who are convicted of participating in a broader conspiracy. The defendants in Hunter were participants in a counterfeit corporate check-cashing ring that operated in South Florida. Id. at 1316. The ring was composed of three "levels" of participants—two individuals at the top who were responsible for printing the counterfeit checks; three individuals who were responsible for recruiting and occasionally driving the check-cashers (called "runners") to cash the checks; and, at the bottom, nineteen runners. Id. At sentencing, the district court held the three defendants, who were runners, responsible for the total loss of the entire conspiracy, stating that the losses associated with the broader conspiracy were reasonably foreseeable to them. Id. at 1318. 

On appeal, we held that reasonable foreseeability alone was not enough and that the district court erred by failing to "first determine the scope of the criminal activity [the defendants] agreed to jointly undertake." Id. at 1320 (quotation marks omitted). We explained that "the Guidelines establish that the fact that the defendant knows about the larger operation, and has agreed to perform a particular act, does not amount to acquiescence in the acts of the criminal enterprise as a whole." Id. Thus, the fact that the defendants cashed multiple checks, which made them responsible for those checks, did not "automatically" or "necessarily" support a finding that they knew the scale of the conspiracy, "let alone that [they] agreed to the full extent of that criminal activity." Id. at 1320-21. Similarly, the mere fact that one of the defendants identified other runners working for a mid-level operative was "not enough to make her accountable for their conduct" without some other evidence "from which an agreement can be inferred." Id. at 1320. Cautioning that the defendants' "involvement and agreement in the conspiracy may be limited to the checks each actually cashed," we vacated the application of a loss enhancement and remanded for the court to make individualized findings as to the scope of criminal activity each defendant agreed to undertake. Id. at 1322. 

Hunter further elaborated on the types of evidence showing agreement in a larger criminal scheme. See id. at 1321-22. One "relevant factor in determining whether an activity is jointly undertaken is whether the defendant assisted in designing and executing the scheme." Id. at 1321; cf. United States v. McCrimmon, 362 F.3d 725, 732-33 (11th Cir. 2004) (holding a defendant responsible for the entire amount of loss where the defendant, though he did not "design" the scheme, actively recruited investors to further the scheme and had a role equivalent to a higher-level operative). Another is "evidence of sharing or mutuality from which an agreement in the larger criminal scheme can be inferred." Hunter, 323 F.3d at 1322. For example, in United States v. Hall, we affirmed a court's determination that the defendant's relevant conduct included fraud losses caused by others in a telemarketing-type conspiracy where each of the participants knew each other and was aware of the others' activities, and they aided and abetted one another by sharing lead sheets of potential victims and sharing telephones. 996 F.2d 284, 285-86 (11th Cir. 1993).

Willful Blindness - Is It An Inference of Knowledge or Intent or Is It a Substitute (2/21/19)

I am back on one of my pet peeves -- deliberate ignorance.  (Deliberate ignorance is also called willful blindness or conscious avoidance; in an instruction context it is also called the ostrich instruction.)  I just picked up United States v. Maitre, 898 F.3d 1151 (11th Cir. 2018), here. The Court rejected a claim that the trial court should not have given the deliberate ignorance instruction.  In the course of doing so, the Court said (p.1157):

This Court considers "deliberate ignorance of criminal activity as the equivalent of knowledge."

I just think that is wrong.  If the ultimate element of the crime is actual knowledge or specific intent, a defendant's willful blindness should do no more than permit a jury to infer the required knowledge or intent.  In other words, it is circumstantial evidence of the ultimate element of actual knowledge or specific intent.  A finding that the defendant was willfully blind should not compel a finding that the defendant has actual knowledge or specific intent element of the crime.  Congress has not said that when it requires actual knowledge or specific intent as an element of the crime, anything less will do.

I have written on this before, but just wanted to vent again.

Other blog entries on this:

• Interesting NonTax Case on Willful Blindness (Federal Tax Crimes Blog 10/3/17), here.
• The Willful Blindness Concept -- What Does It Do? (Federal Tax Crimes Blog 1/23/17), here.
• Willful Blindness / Conscious Avoidance and Crimes Requiring Intent to Violate a Known Legal Duty (Federal Tax Crimes Blog 7/21/14), here.
• More on Conscious Avoidance (Federal Tax Crimes Blog 1/21/13), here.
• Third Circuit Decision in Stadtmauer - Willful Blindness (Conscious Avoidance) (Federal Tax Crimes Blog 9/10/10), here.

10th Circuit Reverses Tax Money Laundering Conviction For Lack of Sufficiency of Evidence (2/21/19)

In United States v. Christy, ___ F.3d ___, 2019 U.S. App. LEXIS 4594 (10th Cir. 2019), here, the Court opens with this summary:

On May 21, 2014, CNB auditors conducted a surprise audit of the Burlington, Kansas Central National Bank ("CNB" or "Bank") vault. The vault was missing $764,000. When they began to suspect Ms. Christy, she forged documents to purport that she had sent the missing cash to the Federal Reserve Bank of Kansas City ("FRB"). A grand jury indicted her on one count of bank embezzlement, six counts of making false bank entries, six counts of failing to report income on her taxes, and 10 counts of money laundering. After a six-day trial, a jury found Ms. Christy guilty of all charges except four money laundering counts. 

On appeal, Ms. Christy argues that (1) cumulative prosecutorial misconduct violated her due process rights, (2) the evidence was insufficient for her money laundering convictions, and (3) the jury instructions improperly omitted a "materiality" element for the false-bank-entry charges.

Of these three issues identified by the Court, I address on the second -- the money laundering because it is tax money laundering, not commonly encountered.  The prosecutorial misconduct issue is interesting but so long (from p. 9 to p. 39) that I did not delve deeply into it.

I also address an issue discussed by the majority in the first footnote (spanning from p. 2 to p. 3) regarding whether, even with counts of conviction reversed because the Guidelines calculations would be the same.

Tax Money Laundering.

The Court offers this additional procedural background (p. 40):

The jury found Ms. Christy not guilty of the four money laundering counts based on loan payments the Christys made before 2014 (Counts 14-17). The cash payments underlying Ms. Christy's six money laundering convictions (Counts 18-23) were made on two loans in the Christys' names at the Farmers State Bank in Aliceville, Kansas. 

Count 18 charged Ms. Christy with money laundering for making a $1,000 payment on March 17, 2014 on Loan 7521, a home loan that originated in 2011 and called for a minimum monthly payment of $600. With one exception, a payment of $1,848 that was not charged in the indictment, every one of the Christys' payments on Loan 7521 in 2013 and 2014 was $1,000. Counts 19-23 concerned cash payments on Loan 7962, a refinancing agreement for the Christys' home loan. n13 Ms. Christy was convicted based on five cash payments on this loan made between March 17, 2014 and May 12, 2014, ranging from $834.49 to $3,200 and averaging approximately $2,167. 

Ms. Christy filed a motion for acquittal on the money laundering counts at the close of the Government's case, arguing there was insufficient evidence to show that her loan payments were made with embezzled funds. She did not argue that [*45]  there was insufficient evidence of specific intent. She renewed her motion at the end of trial. The district court denied the motion, stating, 

A reasonable jury could infer from the circumstantial evidence presented at trial that the cash used to make these loan payments came from funds that Ms. Christy had embezzled from the vault at CNB and that Ms. Christy conducted the financial transactions with the intent to file a false income tax return in violation of 26 U.S.C. § 7206(1).

The issue was whether the evidence was sufficient to show that Christy had the required "intent to engage in conduct constituting a violation of section 7201 or 7206 of the Internal Revenue Code of 1986."  Section § 1956(a)(1)(A)(ii).  The Government argued that two types of acts were sufficient:

UBS Fined $4.2 Billion for Its French Foreign Account Escapades Raiding France of Taxes (2/20/19)

Liz Alderman, French Court Fines UBS $4.2 Billion for Helping Clients Evade Taxes (NYT 2/20/19), here.

Excerpts

The lavish spending caught up with UBS on Wednesday, when French judges ordered it to pay a record 3.7 billion euro fine, about $4.2 billion, for carrying out what prosecutors said was a long-running scheme to help French clients hide huge sums of money from the authorities. 

The penalty, the largest in French history, included €800 million to be paid to the government, which said it had lost revenue as a result of UBS’s helping French citizens evade taxes from 2004 to 2012. 

UBS said in a statement that it “strongly disagrees with the verdict” and that it planned to appeal. “The bank has consistently contested any criminal wrongdoing,” the statement said, adding that the judgment was “not supported by any concrete evidence.” 

The ruling coincides with crackdowns on tax evasion in France and other countries that have put Swiss banks in particular on the defensive. 

UBS paid a $780 million fine in the United States in 2009 to resolve accusations that it had helped rich clients dodge taxes, and pledged to divulge the names of over 4,450 people with Swiss bank accounts. Credit Suisse was fined $2.6 billion by the Justice Department in 2014, and €300 million by France in 2017 in similar cases

Federal Tax Procedure Book Update on Tax Crimes (2/20/19)

Today, I completed revisions to the Tax Crimes section of my Federal Tax Procedure Book so that I could circulate to Jim Malone's Tax Practice and Procedure class to UVA Law School where I will guest teach the subject next week.  I have  circulated it to class members.  Readers of this blog can download it here.  A related spreadsheet is available here.

As always, I would appreciate feedback from readers for improvement.

The next editions of the FTPB will be published in early August 2019.

D.C. Circuit Rejects Defendant's Post Conviction Claims of Selective Prosecution, Actual Innocence and Attorney Conflict (1/23/19)

In United States v. Bertram, 2019 U.S. App. LEXIS 1899 (D.C. Cir. 2019), here, the Court entered Judgment with an opinion immediately below the judgment.  Bertram pled guilty to a crime for failure to pay over trust fund tax.  See Sentencing for Failure to Pay Over Trust Fund Taxes (Federal Tax Crimes Blog 5/6/15), here.  Bertram moved to vacate his conviction  under 28 USC 2255. The district court denied the motion.  The Court of Appeals affirmed the district court.

Some interesting points:

1.  The Court rejects Bertram's selective prosecution claim based upon allegations that he was prosecuted because (i) he worked for Republican candidates and conservative organizations, (ii) that similarly situated Democrats were not prosecuted, and (iii) IRS agent audited him because he was among the "President's enemies" (the President would be Obama).

2.  The Court rejects his actual innocence claim (that might not even be cognizable with a knowing and voluntary plea), finding that the record forecloses the claim.

3. The Court rejects his final argument that an attorney representing Bertram before the plea agreement was conflicted.  That attorney was Cono Namorato, here, who is a giant in the criminal tax defense bar.  I found this the most interesting in the case, so I quote it in full:

Finally, Bertram's argument that one of his attorneys-Cono Namorato-had a conflict of interest gets him nowhere. Bertram alleges that Namorato developed a conflict of interest when he was considered for a position as Assistant Attorney General of the Department of Justice's Tax Division-the very Department that was prosecuting Bertram-and failed to alert Bertram to the conflict. Because Namorato served as outside counsel rather than counsel of record, Bertram has to show that Namorato had an "actual conflict" that "adversely affected" Bertram's decision to plead guilty. See United States v. Wright, 745 F.3d 1231, 1233 (D.C. Cir. 2014) (finding no evidence to support defendant's allegation that conflicted counsel had coerced him into pleading guilty). 

Bertram has not plausibly alleged that his decision to enter the guilty plea was adversely affected by Namorato's alleged conflict. As Bertram has admitted, Namorato did not advise him about the plea he ultimately accepted. Attorneys from Jenner & Block, including his counsel of record Jessie Liu, alone counseled him about that plea agreement. And Bertram said on the record that he was satisfied with Liu's performance. App'x 22. 

Bertram argues instead that Namorato failed to investigate several "exculpatory" witnesses. But the "exculpatory" witnesses to whom Bertram points are the same lawyers and IRS agent whose anticipated testimony he invoked in support of his actual innocence claim. Bertram was aware of those witnesses at the time of his plea, and the district court specifically advised Bertram that he had a right to present witnesses in his defense if he went to trial. He chose not to do so. And then his sentencing memorandum, (presumably) written by counsel of record, admitted that Bertram's actions taken pursuant to those same witnesses' advice did not negate the willfulness of his actions, but merely provided "[c]ontext." S.A. 10.  n1
   n1 The district court's holding that non-appearing counsel cannot be constitutionally ineffective was disputable. Other courts of appeals have recognized that, in rare instances, the actions, omissions, or conflicts of a non-appearing or secondary member of a defendant's team can so "taint" the defendant's representation as to constitute ineffective assistance. See Rubin v. Gee, 292 F.3d 396, 405 (4th Cir. 2002) (representation of two conflicted attorneys "ultimately tainted and adversely affected" defendant's representation by three trial lawyers); Stoia v. United States, 22 F.3d 766, 769 (7th Cir. 1994) (counsel need not have appeared in court to give rise to ineffective assistance of counsel claim); United States v. Tatum, 943 F.2d 370, 379 (4th Cir. 1991) (representation "tainted" by conflict of one of defendant's counsel who was relied upon heavily). But that issue is of no moment because Bertram has made no showing of taint, and the ineffective assistance claim fails on the merits. 

Bertram also argues that Namorato failed to investigate a selective prosecution claim or to explain to him the mens rea element of the offense under 26 U.S.C. § 7202. Because those arguments were made for the first time on appeal even though the relevant facts were fully known to Bertram when he was before the district court, we will not entertain them. See Chichakli v.Tillerson, 882 F.3d 229, 234 (D.C. Cir. 2018); United States v. Rice, 727 F. App'x 697, 702 (D.C. Cir. 2018). Bertram's separate argument that his plea was involuntary because of asserted shortfalls in his Rule 11 colloquy will not be addressed either because it is raised for the first time on appeal and is outside the scope of the certificate of appealability. See 28 U.S.C. § 2253(c)(1); Waters v. Lockett, 896 F.3d 559, 571-572 (D.C. Cir. 2018).

Court Applies Willful Blindness and Rejects Reliance on Friends Defense to FBAR Willful Penalty but Relieves Wife for One Year (1/23/19)

In United States v. Horowitz, 2019 U.S. Dist. LEXIS 9484 (D. Md. 2019), here, the district court granted summary judgment (i) sustaining the FBAR assessments against husband and wife but (ii) rejected the assessment against the wife for one year because she lacked a reportable relationship with respect to the account upon which the penalty was based.  The docket entries are here.

A quick overview of the facts:  The husband and wife had offshore accounts for a number of years (back to 1988) when he went to practice medicine in Saudi Arabia.  They alleged that "their friends told them they did not need to pay taxes on the interest in their foreign accounts."  Therefore, they did not.  In 1994 they created an account with Union Bank of Switzerland (the infamous, in this context, UBS) and moved some of the funds there.  After 2001, they solely had the UBS account, which the husband monitored by calling every year or two, but otherwise did not withdraw or deposit.  In 2008, after "reading troubling news articles concerning UBS," the husband traveled to Switzerland to transfer the funds to another Swiss bank, Finter, and close the UBS account.  The news, of course, was that the IRS and DOJ were cracking down on UBS' crimes in assisting U.S. taxpayers evade tax.  Readers of this blog should know that trajectory for UBS.  For the account at Finter Bank, husband tried to set up the account as a joint account, but Finter by then somewhat circumspect about helping U.S. taxpayers cheat would not do so without the wife's presence.  He then tried to give her authority over the account, filling out the paperwork but not having her sign (she was not present).  Hence, he was the person with sole power to deal with Finter until 2009 when she signed the documents to make her joint owner (although, it appeared to me she was the beneficial owner of one-half the account).  The Finter bank account was a numbered account with "hold mail" instructions.  The Horowitz's filed tax returns answering the Schedule B foreign account question "No" but did finally file their first FBAR for 2009 identifying the Finter account.

At some date (presumably before the due date for the 2009 FBAR), the Horowitz's joined OVDP and filed FBARs for 2003 through 2008 and 1040Xs for 2003 through 2008.  (The Court notes in a footnote, p. 9 n3 that "Curiously, in their Answers, the Horowitzes had denied that he participated in the program or even was aware of the program. P. Horowitz Ans. ¶ 25; S. Horowitz Ans. ¶ 25.")  There is no discussion, but I presume that the Horowitz then opted out of the OVDP penalty structure and underwent the opt out audit.

The IRS then asserted and assessed the willful FBAR penalties for two years--2007 and 2008.  There is some discussion of administrative commotion about whether the penalty was prematurely assessed while the Horowitz pursued an appeal.  Basically, the Horowitzes asserted untimely assessment because, they asserted, the IRS withdrew the timely assessments and then made a replacement assessments after the statute of limitations barred the assessments.  The Court rejected that argument, so I won't deal with it hear (the recitation of facts and conclusions suggest that it is one off and likely not to recur).

The Court then moved to the merits of the FBAR penalties.  Basically, the Court first relieved the wife of liability for the FBAR willful penalty for the Finter account in 2008 (apparently the only account for which there was an assessment presumably because the high amount occurred after the transfer from UBS to Finter and because the Finter account was the only account open on 6/30/09 when the 2008 FBAR was filed).  (That is an assumption.)  The Court held that the wife did not have a reportable relationship with the account until 2009 when she was formally put on the account.  (I am not sure about that holding.)

The Court next turned to the 2007 liabilities and husband's 2008 liability, holding consistent with the Fourth Circuit's Williams opinion that their "No" answers on Schedule B and other circumstances made them at least willfully blind as to the duty to file, hence establishing willfulness.  The key paragraph after reiterating the Fourth Circuit law (which most readers of this blog know by heart) is the final one immediately before the conclusion:

The Horowitzes argue that their friends told them they did not need to pay taxes on the interest in their foreign accounts. Maybe so, but their friends' credentials are not before the Court, nor is there any information from which I could assess whether it was reasonable for them to have accepted what their friends told them as legally correct. And, in any event, their friends' views would not override the clear instructions on Schedule B, which, as noted, requires a "Yes" answer if the taxpayer has an interest in a foreign account, regardless of whether the funds within it constituted taxable income. Moreover, the fact that the Horowitzes discussed their tax liabilities for their foreign accounts with their friends demonstrates their awareness that the income could be taxable. Their failure to have the same conversation with the accountants they entrusted with their taxes for years, notwithstanding the requirement that taxpayers with foreign accounts complete Part III of Schedule B, easily shows "a conscious effort to avoid learning about reporting requirements." Williams II, 489 Fed. App'x at 658 (quoting Sturman, 951 F.2d at 1476). On these facts, willful blindness may be inferred. See Poole, 640 F.3d at 122 ("[I]n a criminal tax prosecution, when the evidence supports an inference that a defendant was subjectively aware of a high probability of the existence of a tax liability, and purposefully avoided learning the facts pointing to such liability, the trier of fact may find that the defendant exhibited 'willful blindness' satisfying the scienter requirement of knowledge." (quoted in Williams II in the context of civil liability)). Thus, even without the additional evidence that was present in Williams II, I find based on these undisputed facts that the Horowitzes recklessly disregarded the FBAR filing requirement. See Williams II, 489 Fed App'x at 659. This suffices for a finding of willfulness. See id.; Safeco, 551 U.S. at 57.

Ex UBS Banker Who Sold Client Data to Germany Convicted of Money Laundering and Acquitted of Bank Secrecy Violation (1/21/19)

A former Swiss Banker has been convicted and sentenced to 40 months in prison for money laundering charges but was acquitted of bank secrecy violations.  I give some of the detail that I think interesting in the excerpts of the articles below.

• John Miller, Ex-Swiss banker convicted for selling secret tax data to Germany (Federal Tax Crimes Blog 1/21/19), here.  Excerpts:

Rene S., as the 45-year-old ex-banker was called during court proceedings, was sentenced to 40 months in prison and must pay fines and court costs totaling more than 125,000 Swiss francs ($125,300) after being found guilty of charges that included spying and money laundering. 

Rene S., who according to court documents has moved to a small town in Germany just across the Rhine River from Switzerland, did not attend the proceedings in Bellinzona this month. 

He was acquitted of breaking Swiss banking secrecy laws. It was not immediately clear whether Switzerland would seek his extradition, with Swiss officials in Berne saying such a decision would come only after the appeals process had been exhausted and the judgment finalised. 

* * * * 

Prosecutors said that between 2005 and 2012, when Rene S. worked for UBS, he illegally collected data about Germans with accounts at the bank and sold the information for 1.15 million euros ($1.31 million) to tax authorities in North Rhine-Westphalia who were seeking to root out tax dodgers. 

* * * * 

Lawyers for UBS, which paid some $300 million in 2014 to settle claims it helped wealthy Germans evade taxes, had contended during the trial that its former employee’s actions had undermined Switzerland as a financial center. 

* * * * 

A decade ago, Germans were believed to be hiding about 150 billion francs in secret accounts in Switzerland and Liechtenstein. 

But thousands began declaring their assets after North Rhine-Westphalia, with the federal government’s blessing, started buying covertly collected data. 

North Rhine-Westphalia has spent some 17.9 million euros since 2010 on data that helped it recover nearly 7 billion euros ($7.97 billion) in tax revenue. 

In turn, Switzerland fought to protect its banking secrecy laws by prosecuting several people, including Rene S., in separate cases where it accused them of illegally handing over documents.

The dispute has included several twists, including the Swiss filing criminal charges in 2012 against three German tax collectors, accusing them of buying account information from informants. 

And in 2017, Germany arrested a Swiss man they accused of spying on North Rhine-Westphalia's tax authority, forcing Switzerland's spy agency to defend its practices against friendly neighboring countries. The accused Swiss spy got a suspended prison term.

• Ex-UBS Worker Guilty of Money Laundering in Data Theft Case (SWI swissinfo.ch 1/21/19), here.  Excerpts:

Reminder of Key Differences Between Civil Fraud Penalties (1/17/19)

I picked up an offering, with a good reminder for Tax Crimes enthusiasts, from Procedurally Taxing Blog's regular reporting of Tax Court designated orders.  Samantha Galvin (Guest Blogger), The Tax Court’s Tenacious Stance on 280E: Designated Orders 12/17/2018 – 12/21/2018 (Procedurally Taxing Blog 1/17/19), here.

First a reminder on what the Designated Order category is.  The following is from the current working draft of my Federal Tax Procedure book that will be published in August 2019; it appears after discussing the usual Tax Court opinions, T.C.'s and T.C.M.'s (footnotes omitted):

Another Tax Court case document of potential importance is designated simply “Order.”  A court may resolve disputed issues by some type of order – either oral (such as bench opinions or written – in any number of ways short of what is formally designated as an opinion.  The “Orders” are available on the Tax Court’s web site in a searchable database, with a subset of orders published daily as “Designated Orders.” The designation status is determined by the judge issuing the order, presumably because the judge feels that there is something in the order that should be called to the attention of practitioners.  Although the Tax Court Rules say that Orders, including Designated Orders, are not precedential, sometimes, the Designated Orders offer practitioners insight into particular Judge’s thinking on substantive and procedural issues.

Now turning to the Designated Order (Durand v. Commissioner (T.C. Dkt., 16273-17 Order dated 12/18/18), here, in the Procedurally Taxing Blog, rather than recreate the wheel, I just cut and paste the discussion in the blog (although the order itself is almost as short so readers might just want to click the link to the order above):

Docket No. 16273-17, Roger H. Durand, II, v. CIR (here)
In a win for petitioner and lesson for respondent, the Court highlights the difference between a section 6663 penalty and a section 6651(f) penalty in this designated order.
This case was already tried in October of 2018 and the parties are in the process of preparing post-trial briefs. The Court addresses IRS’s motion to leave to amend its answer to conform to proof. Petitioner objects.
Petitioner is a reverend who did not timely file for several years beginning in 2006, but eventually filed all years in 2014 and 2015. The IRS issued a notice of deficiency which included a 75% fraud penalty for each tax year under section 6663. Petitioner petitioned the Court, and respondent answered detailing the allegations of fraud and praying that the 6663 penalties be approved.
Neither the deficiency notice nor respondent’s answer referenced the section 6651(f), the “fraudulent failure to file” penalty, but now the IRS wants to amend its answer to include the section 6651(f) penalty – after the trial has taken place and the case has been submitted.
Petitioner argues that different timeframes govern the analysis of whether the penalties should apply and respondent tries to minimize this argument, but the Court sides with petitioner. The Court implies that respondent may not understand the difference between a 6663 and 6651(f) penalty and cites its analysis Mohamed v. Commissioner, T.C. Memo. 2013-255, on this issue.
Section 6663 authorizes a penalty for filing a fraudulent return, and section 6651(f) authorizes a penalty for fraudulently failing to file a return.
Section 6663 can only be imposed if a return is filed, and on that return the taxpayer fraudulently misrepresents the amount of tax due. Under section 6663 the fraud occurs when a return is actually filed, not when it is due.
Section 6651(f) is imposed when a taxpayer deliberately fails to file a return to conceal the existence of income in order to evade tax. Under Section 6651(f) the fraud occurs when a return is due, not when it is actually filed.
The taxpayer’s intent at the appropriate times (date return was due and date of actual filing) is critical to determining if each penalty should be imposed. Because the trial has concluded and the IRS failed to include a section 6651(f) penalty, the reverend never had the opportunity to present facts about his intent at the time the returns were due, which is when the 6651(f) fraud would have occurred, so the Court denies respondent’s motion. 

JAT Comment:  Note that the civil fraud determination is important not only for these penalties but for the unlimited statute of limitations under § 6501(c)(1).  Of course, if no return has been filed, there is an unlimited statute of limitations under § 6501(c)(3).

Court Dismisses 7 of 8 Counts Because of a Tolling Agreement Ambiguity (1/17/19)

In United States v. Brattain, 2019 U.S. Dist. LEXIS 6494 (E.D. Mich. 2019), here, the defendant was charged in the superseding indictment, here, for with 7 counts of aiding and assisting, § 7206(2), and 1 count of the defraud / Klein conspiracy.  The Court dismissed the 7 counts of aiding and assisting because the tolling agreement, drafted by the Government, was ambiguous as to whether it covered aiding and assisting and therefore, since tolling agreements are construed against the drafter, it did not cover aiding and assisting.

The tolling agreement provided in relevant part that (i) the U.S. Attorney was prepared to seek an indictment alleging  "that defendant made or subscribed a false tax return in violation of Title 26, United States Code, Section 7206;" and (ii) that Brattain "agree[s] that the running of the statute of limitations applicable to the offenses described above will be tolled ..."

Tax crimes enthusiasts should spot the problem immediately.  The text refers to § 7206(1) (which I refer to as tax perjury) but the code section cited in the tolling agreement is § 7206 without limiting to § 7206(1), the provision for making or subscribing a false return.  The Government indicted for § 7206(2), which is for aiding and assisting of a false return.  That made the tolling agreement ambiguous.  Hence, the tolling agreement did not cover the charges and those counts are dismissed.

For those with access to Court Listener (free), the opinion docket entries are here where the superseding indictment and the opinion may be downloaded.

JAT Comments:

1.  The tolling agreement also covered allegations of FBAR violations -- failure "to report foreign bank and financial accounts in violation of Title 31, United States Code, Sections 5314 and 5322."  The superseding indictment does not cover those charges.  There is no indication why those charges are omitted.

2.  The dismissal of the 7 aiding and assisting counts leaves the sole count of the defraud / Klein conspiracy.

3.  The allegations in the complaint generally and particularly in the defraud / Klein conspiracy count seem to me to be fairly skinny.  There are no allegations about who the defendant is or as to venue.  More importantly, the overt acts are presented crisply, and included the filing of original and amended returns for some years.  In a conspiracy count, particularly for a defraud / Klein conspiracy, the allegations will give paint a detailed and damning picture of the overall conspiracy.  The picture is presented in a statement of the manner and means and the overt acts.  In the Brattain superseding indictment the indictment alleges the overt acts without manner and means allegations.

4.  If Brattain is convicted on the conspiracy count, his maximum sentencing exposure is 5 years which will likely be more than ample to cover his Guidelines sentence.  In this regard, the dismissed counts are likely related to the conspiracy and would be relevant conduct, the tax loss from which would be included in Brattain's guidelines calculations.  Hence, his Guidelines sentencing range would be the same as if he were convicted of all relevant conduct crimes (including the dismissed counts, counts beyond the statute of limitations).  The dismissal of the 7 counts will only help if the sentencing judge considers that dismissal favorably to the defendant in a Booker variance.

Two Cases Involving Marinello (1/15/19)

I report here on two Marinello related developments.

1.  In United States v. Adams (D. D.C. No. 15-44 (JEB) Dkt. 94), here, the district court vacated Adams' (called Heru-Bey in the opinion) conviction for tax obstruction, § 7212(a).  The case was at the district court level because the Court of Appeals remanded the case sua sponte after the Government conceded that "the jury instructions — which did not contain the nexus requirement or detail the nature of the requisite IRS proceeding — were error, and that error was plain at the time of appellate consideration.” (Cleaned up.)  In its opinion, the district court (Judge Boasberg) found that there was there was error, the error was plain, the error affected Adams substantial rights, and Adams had been prejudiced.  The Court accordingly vacated the conviction and permitted "the Government to retry the case if it so elects."

Some comments:

a.  Somewhat echoing Judge Kozinski's analysis in United States v. Caldwell, 989 F.2d 1056 (9th Cir. 1993) (answering no to the question "whether conspiring to make the government's job harder is, without more, a federal crime"?), it reasons that the Government's claim for nexus was overbroad and said:

Again, Marinello does not countenance such a broad understanding of § 7212. See 138 S. Ct. at 1107. The Court there specifically rejected as overbroad the argument the Government now presses — namely, it reasoned that § 7212 is “not . . . a ‘catchall’ for every violation that interferes with what the Government describes as the ‘continuous, ubiquitous, and universally known’ administration of the Internal Revenue Code.” Id. (citation omitted).

b.  The Court also poked the Government because it has declined a special instruction that might have solved the issue:

The Court notes, finally, that the Government declined a special unanimity instruction at trial. See 5 Tr. at 84. That is, it did not ask that the jury, to find Defendant guilty, be instructed that it must be unanimous as to which one or more of the Government’s three theories of obstruction was the basis. As a result, even were one of these theories valid, there would be no way for this Court to know that the jury meant to convict on that one and not the invalid others.

2.  In United States v. Flynn,  (D. Minn. 2018 No. 16-347 ADM/KMM), here, the Court denied Flynn's motion to withdraw his guilty plea to a defraud/Klein conspiracy count and a tax perjury count.  Among Flynn's arguments was that the Second Superseding Indictment to which he pled did not properly state a conspiracy to defraud because of the decision in Marinello v. United States, __ U.S. ___, 138 S. Ct. 1101 (2018).  The following is the pertinent portion of the opinion:

Tax Crimes History -- The Fall of Vice-President Spiro Agnew and the Role of Tax Crimes (1/10/18)

I listened to this podcast covering a moment history where the President and Vice-President were each under separate unrelated criminal investigations.  This focuses on the Vice-President.  Everybody knows about the outcome of the President -- resignation and pardon by his sucdessor, Gerald Ford (I do summarize the key background below).  For most of us, if we know VP Spiro Agnew at all, it is as a footnote and most of us (like one famous Supreme Court Justice at least claimed) don't read footnotes.  We ought to.  Sometimes.  Terry Gross and her guests lift this footnote and brings it to general public attention because it is relevant to today.  Bad Behavior By People In High Office': Rachel Maddow On The Lessons Of Spiro Agnew (NPR Fresh Air 1/9/19), here.

And, not only is it history, there is a federal tax crime involved which is the excuse for this posting.

The Fresh Air presentation is a good summary podcast (43 minutes) of a larger podcast series called Bagman, here, a Rachel Maddow presentation (without blatant political rhetoric).  Bagman is a 6 episode series.  I listen to the larger series next on my daily walks, but I can highly recommend the Fresh Air presentation because Terry Gross is a good guide to get to the essentials in a single podcast of 43 minutes.  Many of you may not want to go into the details after the Fresh Air presentation.

But, I will give my own shorter summary of this event and its historic setting - Watergate (Wikipedia here).

The Watergate break-in had occurred.  It looked like some hacks of no consequence breaking into the Democratic National Committee headquarters.  But, as the facts dribbled out, it turned out to be a political operation orchestrated from the White House.  The ripples from that were slow to start.  But built to a crescendo that eventually led to President Nixon's resignation.  But before getting there, there was a grand jury investigation.  Some persons (including the infamous John Dean) pled guilty.  The grand jury indicted former White House aides, including Presidential top level assistants Haldeman and Ehrlichman, and the Attorney General, John Mitchell.  Nixon appointed Elliot Richardson to replace Mitchell as Attorney General.  Richardson then named Archibald Cox as special counsel to investigate the Watergate scandal.

The Senate Watergate Committee then uncovered Nixon's taping of Oval Office conversations.  Cox, as special counsel, was keenly interested in the tapes and issued a subpoena.  Nixon refused to produce and fought all the way to the Supreme Court.  The Supreme Court ordered him to produce.  Nixon ordered Cox to drop the subpoena.  Cox refused.  On October 20, 1973, Nixon ordered Richardson to fire Cox in order to stop the compulsion of the subpoena.  Richardson refused and resigned.  Nixon then ordered the next in line, the Deputy Attorney General, William Ruckelshaus, to fire Cox.  Ruckelshaus refused and resigned.  Nixon then ordered the next in line, Solicitor General Robert Bork (yes, that Robert Bork), to fire Cox.  Bork fired Cox.  That culminating event, happening on a weekend and now enshrined in history as the Saturday Night Massacre, shocked the country and led to Nixon's resignation.

A few days before the Saturday Night Massacre, the Vice-President, Spiro Agnew resigned and immediately thereafter pled nolo contender to a single tax crime.  A nolo contendere plea is sometimes accepted by courts for defendants who will take the punishment but do not want to formally admit that they committed the crime(s).  Agnew could have been indicted for a slew of other crimes, all unrelated to Watergate and stretching back to corruption before he was VP (but continuing while he was VP).  Because of the crisis the country was in, Richardson agreed (over the objection of the federal prosecutors involved) to permit Agnew to plead nolo contendere to a single count of tax evasion with an agreement that he would serve no time and be sentenced only to three years of unsupervised vacation.

The podcast discusses the events leading to the Spiro resignation and plea of nolo contendere to tax evasion in the midst of the Watergate crisis sweeping over Nixon's administration that would soon lead to Nixon's resignation.

Richardson and the prosecutors had to deal with such issues as to (i) whether a sitting VP could be indicted (sound familiar) and (ii) whether, since the evidence of mass corruption by Agnew seemed so strong, should DOJ insist on some jail time either by plea or after indictment and conviction or, on the other hand, was it important to the country to get his resignation which required the sweet deal nolo contendere plea.

I highly recommend the Fresh Air offering.  After listening to the full podcast series, I may offer more.

JAT Comments:

On Restitution, Jury Factfinding and Original Meaning (1/8/19)

Restitution is a common feature in criminal tax convictions.  Although statutory restitution excludes the Title 26 tax crimes, restitution is allowed for the ubiquitous Klein conspiracy (the defraud conspiracy under 18 U.S.C. 371).  And, where statutory restitution is not available, DOJ Tax commonly requires contractual restitution in plea agreements.  I provide materials on restitution in tax cases at the end of this blog entry.

Today, I write two justices dissent to denial of certiorari yesterday in Hester v. United States (Sup. Ct. No. 17-9082), here.  The dissenting justices were Gorsuch, who drafted the dissent, and Sotomayor, who joined the dissent.  The dissent felt that the full court should consider whether a jury must determine restitution.  Current practice is that the judge determines restitution (unless the restitution is contracted by the parties).  Here are key excerpts (cleaned up except for key cases):

If you’re charged with a crime, the Sixth Amendment guarantees you the right to a jury trial. From this, it follows that the prosecutor must prove to a jury all of the facts legally necessary to support your term of incarceration. Apprendi v. New Jersey, 530 U. S. 466 (2000). Neither  is this rule limited to prison time. If a court orders you to pay a fine to the government, a jury must also find all the facts necessary to justify that punishment too. Southern Union Co. v. United States, 567 U. S. 343 (2012). 

But what if instead the court orders you to pay restitution to victims? Must a jury find all the facts needed to justify a restitution order as well? That’s the question presented in this case.  

* * * * 

[T]he government argues that the Sixth Amendment doesn’t apply to restitution orders because the amount of restitution is dictated only by the extent of the victim’s loss and thus has no “statutory maximum.”  But the government’s argument misunderstands the teaching of our cases.  We’ve used the term “statutory maximum” to refer to the harshest sentence the law allows a court to impose based on facts a jury has found or the defendant has admitted.  Blakely v. Washington, 542 U.S. 296, 303 (2004).  In that sense, the statutory maximum for restitution is usually zero, because a court can’t award any restitution without finding additional facts about the victim’s loss.  And just as a jury must find any facts necessary to authorize a steeper prison sentence or fine, it would seem to follow that a jury must find any facts necessary to support a (nonzero) restitution order. 

The government is not without a backup argument, but it appears to bear problems of its own.  The government suggests that the Sixth Amendment doesn’t apply to restitution orders because restitution isn’t a criminal penalty, only a civil remedy that compensates victims for their economic losses.  But the Sixth Amendment’s jury trial right expressly applies “[i]n all criminal prosecutions,” and the government concedes that restitution is imposed as part of a defendant’s criminal conviction.  Federal statutes, too, describe restitution as a “penalty” imposed on the defendant as part of his criminal sentence, as do our cases.  Besides, if restitution really fell beyond the reach of the Sixth Amendment’s protections in criminal prosecutions, we would then have to consider the Seventh Amendment and its independent protection of the right to a jury trial in civil cases. 

If the government’s arguments appear less than convincing, maybe it’s because they’re difficult to reconcile with the Constitution’s original meaning.  The Sixth Amendment was understood as preserving the historical role of the jury at common law.  And as long ago as the time of Henry VIII, an English statute entitling victims to the restitution of stolen goods allowed courts to order the return only of those goods mentioned in the indictment and found stolen by a jury.  In America, too, courts held that in prosecutions for larceny, the jury usually had to find the value of the stolen property before restitution to the victim could be ordered.   And it’s hard to see why the right to a jury trial should mean less to the people today than it did to those at the time of the Sixth and Seventh Amendments’ adoption.

Doug Berman's Sentencing Law and Policy Blog, Purported SCOTUS originalists and liberals, showing yet again that they are faint-hearted, refuse to consider extending jury trial rights to restitution punishments (1/7/19), here, has this to say after describing Gorsuch's dissent as "this lovely little opinion"):

So why does the jury trial still mean less to the people today facing restitution punishments than it did to those at the time of the Sixth and Seventh Amendments’ adoption?  The only answer I can provide is hinted in the title of post.  Supposed SCOTUS originalists like Chief Justice Roberts and Justices Thomas and Kavanaugh apparently do not want to here follow originalist principles to what would appear to be their logical conclusion.  Supposed SCOTUS liberals like Justices Ginsburg and Kagan do not want to here protect a certain type of right of a certain type of criminal defendant. (Justice Sotomayor, who never shrinks from following constitutional rights wherever she thinks they must extend, joined Justice Gorsuch's dissent here). 

Although Berman does not discuss it, I think Justice Alito's concurring opinion, here, is also worthy of note.  It is short and I quote it all:

The argument that the Sixth Amendment, as originally understood, requires a jury to find the facts supporting an order of restitution depends upon the proposition that the Sixth Amendment requires a jury to find the facts on which a sentence of imprisonment is based. That latter proposition is supported by decisions of this Court, see United States v. Booker, 543 U. S. 220, 230–232 (2005); Apprendi v. New Jersey, 530 U. S. 466, 478 (2000), but it represents a questionable interpretation of the original meaning of the Sixth Amendment, Gall v. United States, 552 U. S. 38, 64–66 (2007) (ALITO, J., dissenting). Unless the Court is willing to reconsider that interpretation, fidelity to original meaning counsels against further extension of these suspect precedents

JAT Further Offerings:

Ninth Circuit Rejects Spousal Testimonial Privilege for Foreign Bank Records (1/4/19)

In In re Grand Jury Subpoena, Dated March 21, 2018 (9th Cir. 12/28/18) (unpublished), here, the Court affirmed a district court order of contempt for compelling the wife of a grand jury target to produce records of her foreign bank activity for the years 2011 through 2016.  She asserted that the spousal testimonial privilege protects her from compelled production of the documents.  The district court rejected her claim of spousal testimonial privilege and held her in contempt for her continuing refusal to produce.  The Ninth Circuit held that the spousal testimonial privilege was not applicable.

The Ninth Circuit's analysis is contained in one paragraph with one footnote, so I just cut and paste them.

Doe asserts that the spousal testimonial privilege protects her from producing documents responsive to the subpoena because the grand jury is currently investigating possible federal tax crimes committed by her husband. n1  For the spousal testimonial privilege to apply, “the anticipated testimony ‘[must] in fact be adverse’ to the nonwitness spouse.” United States v. Van Cauwenberghe, 827 F.2d 424, 431 (9th Cir. 1987) (citation omitted); see also United States v. Fomichev, 899 F.3d 766, 771 (9th Cir. 2018) (“[T]he witness-spouse alone has a privilege to refuse to testify adversely.”) (emphasis added) (citation omitted). Here, “the testimonial aspect of [Doe’s] response to a subpoena duces tecum does nothing more than establish the existence, authenticity, and custody” of any responsive foreign bank account records. United States v. Hubbell, 530 U.S. 27, 40–41 (2000). Because this bare testimonial aspect of Doe’s act of production does not itself adversely affect her husband’s case, Doe is not relieved of her obligation to produce foreign bank account records over which she has care, custody, or control.
   n1 Although Doe also raised claims of privilege under the Fifth Amendment, and the marital communications privilege, before the district court, these arguments were not raised on appeal and are therefore waived. Smith v. Marsh, 194 F.3d 1045, 1052 (9th Cir. 1999) (“[O]n appeal, arguments not raised by a party in its opening brief are deemed waived.”). 

JAT Comments:

Court of Federal Claims Holds that Not Reading The Schedule B Foreign Account False Answer Justifies FBAR Willful Penalty (12/28/18)

In Kimble v. United States, 2018 U.S. Claims LEXIS 1761(CFC 2018), here, the Court of Federal Claims (Judge Braden) drank the Government's kool aid on FBAR willful penalties, holding Kimble liable for the maximum willful penalty.  (The drank the kool aid analogy may be a little strong for some uses of the term, see Urban Dictionary, here.)

I won't recount the facts but, suffice it to say, they were not good facts for Kimble.  Some of the facts are recounted in the excerpts from the legal discussion below.

Key holdings:

1.  Kimble was reckless sufficient to invoke the FBAR civil willful penalty.  Here are the key excerpts (bold-face supplied by JAT):

The relevant stipulated facts in this case are as follows: 

• Plaintiff did not disclose the existence of the UBS account to her accountant until approximately 2010. Stip. ¶ 43.
• Plaintiff never asked her accountant how to properly report foreign investment income. Stip. ¶ 44.
• Plaintiff did not review her individual income tax returns for accuracy for tax years 2003 through 2008. Stip. ¶ 46.
• Plaintiff answered “No” to Question 7(a) on her 2007 income tax return, falsely representing under penalty of perjury, that she had no foreign bank accounts. Stip. ¶ 48. 

In the court’s judgment, stipulations ¶¶ 46 and 48 together evidence conduct by Plaintiff, as a co-owner of the UBS account that exhibited a “reckless disregard” of the legal duty under federal tax law to report foreign bank accounts to the IRS by filing a FBAR. See Godfrey, 748 F.2d at 1577; see also Norman v. United States, 138 Fed. Cl. 189, 194 (Fed. Cl. 2018) (determining that a taxpayer, Mindy Norman, was “put on inquiry notice of the FBAR requirement when she signed her tax return”) (internal quotations omitted), appeal docketed, No. 18-2408 (Fed. Cir. Sept. 18, 2018); see also Jarnagin, 134 Fed. Cl. at 378 (“A taxpayer who signs a tax return will not be heard to claim innocence for not having actually read the return, as he or she is charged with constructive knowledge of its contents.”) (citations omitted). n23 Although Plaintiff had no legal duty to disclose information to her accountant or to ask her accountant about IRS reporting requirements, these additional undisputed facts do not affect the court’s determination that Plaintiff’s conduct in this case was “willful.”
   n23 A May 23, 2018 Memorandum the IRS Office of Chief Counsel distributed to IRS program managers states that, “[t]he standard for willfulness under 31 U.S.C. § 5321(a)(5)(C) is the civil willfulness standard, and includes not only knowing violations of the FBAR requirements, but willful blindness to the FBAR requirements as well as reckless violations of the FBAR requirements.” Burden of Proof and Standard for Willfulness Under 31 U.S.C. § 5321(a)(5)(C), PMTA-2018-13, at 1 (May 23, 2018). For a comprehensive discussion of how other federal courts have construed whether a FBAR violation is “willful,” see Hale E. Sheppard, “What Constitutes A ‘Willful’ FBAR Violation?,” 129 J. TAX’N 24 (Nov. 2018) (collecting cases). 

For these reasons, the court has determined, viewing the evidence in the light most favorable to Plaintiff, that there is no genuine issue of material fact that Plaintiff violated 31 U.S.C. § 5314 and that her conduct was “willful.” See 31 U.S.C. § 5321(a)(5) (2004); see also RCFC 56.

Practitioners should note that this rather cryptic holding seems to put at risk all taxpayers who on the Forms 1040 checked "No" in the foreign account box on Schedule B.  Of course, Kimble's facts beyond that Schedule B check mark were consistent with the willful penalty but as the Court posited its conclusion perhaps the "No" answer only would suffice.

2.  The Court rejected the Colliot and Wadhan holding s that the willful penalty was limited to $100,000 because the FBAR regulations had not been revised.  The Court held that the IRS could impose the willful penalty in the maximum amounts allowed by the statute.

JAT Comments:

Article on Ethics Issues in Referring Clients to Foreign Aggressive Tax Planners/Enablers (12/27/18)

Tax Crimes enthusiasts may be interested in this law review article:  Heather M. Field, Offshoring Tax Ethics: The Panama Papers, Seeking Refuge From Tax, and Tax Lawyer Referrals,, St. Louis U L.J.  62 St. Louis U. L.J. 35 (2017), here.  Excerpts (footnotes omitted):

Despite the investigative research and scholarly analyses of the Panama Papers, many questions remain, including: How did U.S. clients get to the Panamanian law firm of Mossack Fonseca? What were the ethical responsibilities of the individuals (particularly lawyers) who connected these U.S. clients with MF, especially in cases where the U.S. clients sought offshore assistance in order to avoid or evade U.S. taxes? And what, if anything, should individuals in similar situations do differently in the future? 

This Essay starts to answer these questions, and in doing so, fills a gap in the literature. Existing literature on lawyer referrals is relatively limited and generally focuses on referral fees, lawyer referral services, and malpractice actions for negligent referral. And while there is literature about professional responsibility in cross-border matters, discussions of referrals to foreign counsel are relatively brief and tend to focus on malpractice risk for negligent referral or on aiding and abetting the unlicensed practice of law. This Essay considers a specific, and previously unaddressed, type of cross-border referral—one for clients seeking help with offshore tax avoidance or evasion. This situation raises different ethical concerns and implicates tax-specific penalty provisions and standards of conduct. 

This Essay argues that, although the rules governing ethical tax practice generally do not prevent a U.S. lawyer from referring a client to a firm like MF for potentially aggressive tax planning, a lawyer who does so without very careful reflection “passes the buck” for ethical tax practice onto the next lawyer. Rather than expatriating responsibility for the tax practice ethics of representing the client, each lawyer should internalize more of that responsibility and should not blithely provide referrals. 

This Essay proceeds by describing what the Panama Papers reveal about client referrals to MF, after which the Essay briefly explains how the general ethical rules, tax-specific standards of practice, tax penalty provisions, and other constraints apply to a U.S. lawyer making a referral to a firm like MF. The Essay then argues that lawyers should adhere to higher standards when considering such referrals.

* * * * 

CONCLUSION 

Tax Court Case Shows That the IRS Burden to Prove Fraud by Clear and Convincing Evidence Is Formidable Indeed (12/17/18)

In Matthews v. Commissioner, T.C. Memo. 2018-212, here, the taxpayer represented himself "pro se" to contest a deficiency with a year that was open based on the IRS determination of civil fraud.  The taxpayer prevailed because, the Court (Judge Vasquez) concluded, the IRS had not proved civil fraud by clear and convincing evidence, despite some acknowledged bad acts, including  lying to the agents, along the way.  The story is interesting because it shows just formidable the clear and convincing standard is.

The civil tax years in the Tax Court case were 2007 & 2008.  Previously, Matthews was originally indicted for tax evasion under section 7201 and subscribing to a false return under § 7206(1) for tax years 2004 through 2008.  A new prosecutor abandoned the tax evasion charges in a superseding indictment that charged (i) § 7206(1), tax perjury, for 2004 through 2008 and (ii) impeding the lawful function of the IRS, 7212(a) (tax obstruction).  Matthews was convicted of all charges, sentenced to a 27-month prison term, and the conviction was affirmed on appeal.  United States v. Mathews, 761 F.3d 891 (8th Cir. 2014), here.

According to a footnote (p. 17 fn 8), "SA Williams testified that the new prosecutor believed the sec. 7206(1) charges would make for a “cleaner case” than the sec. 7201 charges. As discussed infra, sec. 7206(1) does not require the Government to prove that the defendant intended to evade tax."  Note  to students and practitioners, this easier case to prove criminally beyond a reasonable doubt is often the reason that DOJ Tax foregoes a tax evasion charge ab initio, but one would have thought that DOJ Tax would have made the decision earlier.  Still, some prosecutors, particularly a new one on the block, could see the case differently and convince DOJ Tax to permit the "lesser charge" of tax perjury under § 7206(1).  (And, to close that loop, I have even had local prosecutors (AUSAs) with some gravitas with DOJ Tax convince DOJ Tax to forego criminal charges previously authorized based on their different assessments of the case.)

In the ensuing civil examination, the IRS determined that Matthews had unreported income and, based on the assertion of fraud, opened the statute of limitations and asserted the civil fraud penalty.  Matthews petitioned for redetermination to contest the fraud determination.  If successful, Matthews would owe no tax because the assessment statute of limitations had expired.

The fraud issue required that the IRS prove fraud by clear and convincing evidence.  The Court held that the IRS had failed to do so.  The Court held:

1.  Based on assessment of Matthews' credibility, the Court determined (pp. 22-31) that the IRS had failed to established fraud by clear and convincing evidence.  The aspect of the case turned upon credibility determinations.  I enclose below extended excerpts related to this credibility determination.

2.  The Court held (30-31) that the Section 7206(1) conviction was not issue preclusive on fraud.  This is a standard holding.

3.  Matthews was not bound to stipulations of fraudulent intent because contrary to record (pp. 31-33.)

Here are key quotes of interest to tax crimes practitioners who must be concerned with civil liabilities.