Two Cases Sustaining FBAR NonWillful Penalties on Per Unreported Account Basis (4/26/19)

I write today on two cases which are the first I am aware of that has sustained FBAR NonWillful penalties on a per account basis rather than per FBAR basis.  One of the cases is a default judgment case that did not discuss the issue of whether the NonWillful penalty should be per account or per FBAR.  United States v. Gardner, 2019 U.S. Dist. LEXIS 68032 (CD CA 2019), here.  I will not discuss that decision (but those who do read it will see that there is some odd wording in it.)

In United States v. Boyd (CD CA CV 18-803-MWF) Order (4/23/19), here, the Court did directly address the issue.  Boyd joined OVDP and then opted out.  The IRS then assessed a mitigated NonWillful penalty for 2010 on each of 13 accounts, for an aggregate NonWillful penalty of $47,279.

Just pausing right there, it appears that Boyd's opting out of OVDP penalty structure achieved a substantial savings.  Even at the lowest OVDP rate of 20%, the OVDP penalty would have been $155,943 (considering 2010 as the high unreported year with $779,716 aggregate high amount in the accounts).

Boyd felt that the penalty exceeded the amount legally allowed based on the purely legal claim that the NonWillful penalty statute required that the pertinent violation on which the maximum $10,000 penalty is based is the FBAR rather than per account.  The statute, 31 U.S.C. 5321(a)(5)(A), bases the penalty on the violation.  The maximum penalty is $10,000 per violation.  § 5321(a)(5)(B)(i). So the question is what is the violation -- the failure to file the FBAR or the failure to report each account on the FBAR not filed.

The Court resolves the issue as follows:

Fifth Circuit Sustains Willful Blindness / Deliberate Ignorance Jury Instruction As Harmless Error (4/26/19)

In United States v. Martinez, 921 F.3d 452 (5th Cir. 2019), CA5 here and GS here, "the defendants were convicted of conspiracy to commit health care fraud and several substantive counts of health care fraud. Individual defendants were convicted of different additional offenses."  Id. at 462. They raised several arguments on appeal.  I address here only the deliberate ignorance instruction.  I usually in this blog use the term willful blindness rather than deliberate ignorance, but both terms refer to the same concept; accordingly, I will use the term willful blindness except when quoting.

Readers of this blog will recall that I have expressed concern about the willful blindness instruction.  In summary, my concern is whether the willful blindness instruction should require that the jury find the requisite specific knowledge element of a crime where the jury only determines facts of acts of willful blindness. I believe that, more properly, the willful blindness instruction should permit the jury to infer the requisite knowledge but not require the jury to find the requisite knowledge.  In other words, the acts of willful blindness are circumstantial evidence that the defendant had the requisite knowledge, but are not a substitute for a jury to find the requisite knowledge from finding only the acts of willful blindness.

The Martinez court addresses some of my concerns but I am not certain  that it got it right.

The Court starts with the Fifth Circuit pattern jury instruction which, I think, gets it right (pp. 477-478, bold face supplied by JAT):

You may find that a defendant had knowledge of a fact if you find that the defendant deliberately closed his eyes to what would otherwise have been obvious to him. While knowledge on the part of the defendant cannot be established merely by demonstrating that the defendant was negligent, careless, or foolish, knowledge can be inferred if the defendant deliberately blinded himself to the existence of a fact.

Notice that willful blindness permits the finding of knowledge but does not compel that finding.

The district court did not give that Fifth Circuit pattern instruction but fashioned its own as follows (469):

The defendants must be found to have acted knowingly and willfully. "Knowingly" means that an act was done intentionally and not because of mistake, accident, or another innocent reason. "Willfully" means an act was done with a conscious purpose to violate the law.
. . . .
Circumstantial facts tend to be the only kind available [*41]  for subjective facts, something about which the jury lacks direct access to the defendant's mind. For instance, the jury may infer knowledge and intent from conduct or context.
Attempts to eliminate or minimize evidence of knowledge may justify an inference of it. Knowledge does not require certainty. The law permits inferred, expected judgments to count as knowledge. These inferences must be beyond a reasonable doubt.

The defendants claimed that this instruction, as given, permitted conviction for negligence.  Two defendants urged that the instruction essentially directed verdicts against the defendants.  One defendant argued that there was no evidence of "purposeful avoidance."

Obstruction Conviction Affirmed for Presentation of False Documents to AUSA Serving as Attorney for Government for Grand Jury (4/26/19)

In United States v. Sutherland, 921 F.3d 421 (4th Cir. 2019), here, Sutherland was convicted of "three false tax returns and obstructing a grand jury proceeding."  The obstruction charge was under 18 U.S.C. § 1512(c)(2).  On the obstruction charge, the facts were that, through his lawyer, he submitted false documents to the AUSA who was the attorney for the government for the grand jury proceeding.  E.g., FRCrP 6(d)(1). Sutherland's argument was that the crime required a nexus to the grand jury investigation but the documents were not presented to the grand jury.  The Court easily handled the nexus argument under the key authority -- United States v. Aguilar, 515 U.S. 593 (1995) and Marinello v. United States, 584 U.S. 1 (2018).  Marinello was a tax obstruction case, but dealt with Title 18 obstruction concepts, particularly the nexus to a pending proceeding.

The Court offers an interesting discussion, probably digression, about some distinction between the AUSA's role as attorney assistant to the grand jury.  The Court starts with the proposition that an FBI investigation is not an official proceeding subject to obstruction.  A grand jury investigation is an official proceeding.  The Court said (cleaned up):

A.

Sutherland contends that the government failed to prove a nexus between his conduct and an official proceeding. He was, he says, only "attempting to influence the U.S. Attorney's Office," not the grand jury. He correctly notes—and the government does not contest—that the U.S. Attorney's investigation is not by itself an official proceeding. The term "official proceeding" is defined by 18 U.S.C. § 1515(a)(1) to include, inter alia, "a Federal grand jury" or "a proceeding before a Federal Government agency which is authorized by law." FBI investigations, for example, are not official proceedings because the statutory language including "a proceeding before a Federal Government agency which is authorized by law," § 1515(a)(1)(C), implies 'some formal convocation of the agency in which parties are directed to appear, instead of any informal investigation conducted by any member of the agency. The same logic equally applies to the investigation by the U.S. Attorney's office in this case, meaning that its investigation was not an official proceeding. 

The term "official proceeding" thus implies something more formal than a mere investigation. That limiting term prevents a statutory sprawl in which the countless communications of citizens with one agency or another of the federal government lay the groundwork for a potential obstruction prosecution. See Marinello, 138 S. Ct. at 1109-10 (reading tax obstruction statute not to extend to "routine, day-to-day work carried out in the ordinary course by the IRS," id. at 1110). This back and forth between citizens and government works as a general matter to the benefit of both. Much of this activity is a wholly legitimate effort to "influence" the government. See 18 U.S.C. § 1512(c)(2). And indeed it is not far-fetched to think that an obstruction statute encroaching too aggressively on innocent citizen/agency interactions would infringe the basic right to petition guaranteed by the First Amendment of our Constitution. See U.S. Const. amend. I ("Congress shall make no law . . . abridging . . . the right of the people . . . to petition the Government for a redress of grievances."). Then, too, a statute that chills or burdens excessively the right of persons to protest or prove their innocence in the face of a government investigation would run counter to the operation of criminal justice as we have known it. 

There are thus important safeguards to prevent the abuse of § 1512(c)(2). As the Court held in Aguilar, "it is not enough that there be an intent to influence some ancillary proceeding, such as an investigation independent of the court's or grand jury's authority." Providing materially false documents with an intent only to influence the U.S. Attorney's investigation, therefore, would not amount to a violation of § 1512(c)(2). See Young, 916 F.3d at 387 ("[T]he Government has similarly failed to provide evidence demonstrating that Young . . . designed his conduct to thwart [the grand jury] investigation, rather than designing his conduct to obstruct an FBI inquiry . . . ."). To be clear, knowingly giving false documents to a prosecutor without the intent to obstruct a grand jury may violate other federal statutes. E.g., 18 U.S.C. §§ 1001(a), 1519. Just not § 1512(c)(2). 

Section 1512(c)(2) also requires proof that a particular grand jury proceeding was "reasonably foreseeable" to a defendant who has been charged with obstructing that proceeding. While the grand jury does not yet have to be convened, it is not enough for the government to argue that a defendant could have speculated that some official proceeding lies somewhere in the offing. The Young case illustrates the point. In that case, the defendant had intentionally misled FBI agents. But this court vacated defendant's conviction because "the only way the jury could have concluded he foresaw a particular grand jury investigation would be through speculation."  

As so often in law, there is a balance to be struck. Though obstruction statutes are susceptible to abuse, they also exist for good reason. Official proceedings are crucial to the conduct of government. They are entitled to go forward free of corrupting influences that not only delay them but increase the chances of false and unjust outcomes. The federal grand jury investigation in this case is but one example of such an "official proceeding." See J.A. 1066 (jury instruction that the grand jury was an "official proceeding"). The government has every right to prosecute those who would corrupt it. Compromised proceedings in turn diminish public confidence in the workings of government and lead to the sort of creeping cynicism toward it that affects so many nations. Section 1512(c)(2) and other like statutes help to protect against that eventuality here. 

B. 

Zurich Life Enters NPA with DOJ Tax (4/25/19)

DOJ Tax announced here that it has reached a nonprosecution agreement ("NPA") with Zurich Life Insurance Company Ltd (Zurich Life), headquartered in Zurich, Switzerland, and Zurich International Life Limited (Zurich International Life), headquartered in the Isle of Man (collectively Zurich).  Zurich will pay a penalty of $5,115,000 and agrees to cooperate in any related criminal or civil proceedings.

The description of the conduct is long, but I just cut and paste:

From Jan. 1, 2008, through June 30, 2014, Zurich issued or had certain insurance policies and accounts of U.S. taxpayer customers, who used their policies to evade U.S. taxes and reporting requirements. In particular, Zurich had approximately 420 U.S. related policies, 127 with Zurich Life and 293 with Zurich International Life, with an aggregate maximum value of approximately $102 million, for which the U.S. taxpayer customers did not provide evidence that they had declared their policies to U.S. tax authorities. 

To qualify for favorable tax treatment under the U.S. tax code, insurance must meet certain minimal requirements. The policies offered by Zurich Life and Zurich International Life did not meet these requirements. The increase of the principal in these policies was therefore subject to taxation, and the policies were required to be disclosed to the Internal Revenue Service (IRS) on FinCEN Form 114 Foreign Bank Account Report, commonly referred to as an FBAR. In issuing or having undeclared U.S. related policies, Zurich knew or should have known that they were helping U.S. taxpayers conceal from the IRS ownership of undeclared assets, maintained as insurance policies or accounts. 

Zurich International Life, in particular, sold insurance products to U.S. taxpayers that were “unit linked,” meaning the cash surrender value and death benefit amount were linked to the value of specified investments. With such policies, the U.S. taxpayer had a suite of specialized investment options, allowing them to access potentially higher returns by taking on the market risk associated with the policies. Some of these unit-linked policies offered a base death benefit that was nearly equivalent to the cost of the policy itself, and in some instances was fully funded by transfers from offshore bank accounts. Upon redemption, the U.S. taxpayer would receive the premium amount plus any investment earnings on the policy less a very small percentage for putative risk and fees. 

Despite knowing that some of these policies, which had minimal-to-no risk mitigation function and specialized investment options, were held by U.S. taxpayers, Zurich International Life failed to act appropriately to ensure timely compliance by the policyholders with U.S. tax laws. In at least one instance, uncovered during the course of Zurich Life’s internal review, a former U.S. citizen, who pled guilty to a federal fraud offense after purchasing a Zurich International Life policy, used that insurance policy to hide substantial assets, despite owing approximately $900,000 in restitution to his victims. 

Following the commencement of the Department’s Swiss Bank Program, the Zurich Group initiated a global review of the life insurance, savings and pension business sold by all of its non-U.S. operating companies to identify policies or accounts with U.S. indicia. This review prompted an extensive customer outreach to current and former customers with a possible nexus to the United States to confirm the customers’ status as U.S. taxpayers, assess their compliance with applicable U.S. tax and reporting rules, and encourage participation in an IRS voluntary disclosure program. 

In July 2015, Zurich contacted the Department to inform it of the initial findings of the self-review. Prior to the self-reporting, Zurich was neither a subject nor a target of any investigation being conducted by the Tax Division. Since this self-disclosure, Zurich has conducted a thorough investigation and reported substantial findings to the Tax Division, including dozens of detailed summaries of account information and comprehensive reports for the U.S. related policies. 

In addition to these efforts, the Companies have worked closely with non-U.S. regulators to ensure full disclosure to the Department. For instance, in 2016, Zurich Life applied to the Swiss Federal Department of Finance and received approval to waive Article 271 of the Swiss Criminal Code, which restricted the disclosures that Zurich Life could make to the Department, thereby facilitating Zurich Life’s production of certain information that would have otherwise been prohibited.

Tax Court Holds that IRS on Restitution Based Assessment Is Not Subject to Restitution Schedule Ordered by Sentencing Court (4/20/19)

In Carpenter v. Commissioner, 152 T.C. ___, No. 12 (2019), here, the Tax Court held (according to the syllabus):

P pleaded guilty to violating I.R.C. sec. 7206(1) by willfully filing false returns for 2005 and 2006. At sentencing, the District Court ordered P to pay restitution to the IRS, ordered that restitution was due immediately, and set a schedule of payments. The District Court also ordered that P pay all outstanding tax as an additional condition of his supervised release. Though P made each scheduled payment, he did not pay the full restitution amount. 

R assessed against P the full amount of restitution ordered in reliance on I.R.C. sec. 6201(a)(4). When P did not pay the assessed amount R began collection action. Before the first payment was due under the schedule set by the District Court, R sent a final notice of intent to levy and filed a notice of Federal tax lien. Following a CDP hearing IRS Appeals sustained the proposed collection actions. P contends that I.R.C. sec. 6201(a)(4) does not grant R independent administrative authority to collect amounts of criminal restitution. P also contends a schedule of restitution payments limits the amount R may administratively collect absent a further order by the sentencing court.  

Held: I.R.C. sec. 6201(a)(4) grants R independent authority to collect administratively amounts of criminal restitution assessed under that section.  

Held, further, a payment schedule included in an order for criminal restitution that is due immediately does not limit R’s authority to collect administratively unpaid amounts of such restitution. 

Held, further, Appeals did not abuse its discretion in sustaining the collection actions at issue. 

The following excerpt is important:

Petitioner failed to take advantage of the opportunities made available to him through the CDP hearing. During the CDP hearing petitioner was free to propose an installment agreement whereby he would potentially end up paying a relatively small amount per month. He might even have convinced the officer that he could in fact afford to pay no more than the $100 per month set forth in the sentencing court’s order. (Petitioner is not limited to the CDP hearing and may propose an installment payment agreement anytime. See sec. 6159). In order to secure a collection alternative like this, however, petitioner needed to do three things: (1) make an actual proposal of a collection alternative, (2) submit financial information establishing that this was all he could afford to pay, and (3) become current in his tax filing obligations. Petitioner did none of these things.  

Instead of making the required factual showings, petitioner took the extreme legal position that the IRS simply could not collect from him. That was a mistake. Petitioner, like any other taxpayer in a CDP case, must affirmatively establish what is his limited ability to pay. He cannot rely on the sentencing court’s payment plan to establish that for Federal income tax purposes. In rejecting his position, we are not ruling that the IRS can always levy to collect 100% of the restitution regardless of the taxpayer’s financial circumstances. 

New Form 14457, Voluntary Disclosure Practice Preclearance Request and Application (4/16/19)

I have previously written on the IRS's revised Voluntary Disclosure Practice announced in November 2019.  See New IRS Voluntary Disclosure Procedures and Civil Resolution Framework (Federal Tax Crimes Blog 11/29/18; 11/30/18), here.  The announcement anticipated a revised Form 14457 (previously used for Offshore Voluntary Disclosure Procedure, OVDP) to be used for the general Voluntary Disclosure Practice.

The form is now out.  See Form 14457, Voluntary Disclosure Practice Preclearance Request and Application, here.  (The Form is a fillable pdf that may not show in some browsers and may need to be downloaded to actually view and fill out the form.)

The following are my quick observations.

1.  The Form consists of two Parts.  Part I is submitted as the request.  Part II is submitted after preclearance is granted.  The Form is for both domestic and offshore issues.

2.  General comments.  The disclosures required are quite robust and are of the type that can be databased with appropriate fields that will likely permit computer analytics in the process of identifying which disclosures may need extra attention by the IRS and permit some cross-checking for identified persons and entities.

3.  Part I Disclosures (L. refers to the numbered items, e.g.,L. 3):

a.  L. 3 asks for "Disclosure special features" with check boxes related to common types of noncompliance but with an  "Other Issues" check box that, if checked, need to provide a textual description.

b. LLs. 4-7 asks for detailed identity information for the taxpayer making the request plus any entities for whom the request is being made.

c.  L. 8 asks "Do you believe that the IRS has obtained information concerning your tax liability."  Since a taxpayer is not qualified for VDP if the IRS is already on the trail, this question is designed to flush out the taxpayer's knowledge about that early on.

d.  L. 9 asks "Disclose if you, your spouse or any related entities are currently under audit or criminal investigation by the Internal Revenue Service or any other law enforcement authority and if any income is sourced from an illegal activity."  This is a pretty broad question but seems to apply only to the spouse (not siblings, parents or children or others) and "related entities."  Related entities may need some definition, but certainly entities in which the taxpayer is title or beneficial owner would be included, although the quantum of the title or beneficial ownership relative to others is not stated.  Interestingly, the question as asked does not include related individuals (other than spouse), such as partners who, under prior iterations of the VDP might be a disqualified.

e.  L. 10 asks for a list of "ALL noncompliant financial accounts you owned or controlled or were the beneficial owner of, either directly or indirectly."  The period covered is the six year disclosure period.

f.  Interestingly, the taxpayer is not required on Part I to quantify the tax amounts involved.

4.  Part II Disclosures (to be completed only after preclearance based on Part I):

a.  L. 3 provides check boxes similar to Q. 3 of Part I.

b.  L. 4 asks if the taxpayer has taken a position that he or she was a bona fide resident of a U.S. territory (e.g., American Samoa, the Commonwealth of the Northern Mariana Islands, Guam, Puerto Rico, or the U.S. Virgin Islands) or did you file an income tax return with a U.S. territory?" and explain if yes.

c.  Ls. 5&6 ask about the quantum of unreported income and graduated brackets (e.g., 0-$50,000, $50,000 to $100,000, etc.) and for the high aggregated balance in offshore accounts.

d.  L. 7 for Offshore Issues only asks about "anyone including a foreign government or a foreign financial institution" advised the taxpayer "that your offshore account records, which are the subject of this voluntary disclosure, were susceptible to being turned over to the U.S. Government pursuant to an official request?"  If yes, then the taxpayer must disclose whether anyone submitted documents in opposition to disclosure and notified the Attorney general as required by 18 USC §3506.

e.  L. 8 requires, for the disclosure period, a list of ALL entities you owned or controlled or were the beneficial owner of, either directly or indirectly for which you reported noncompliant financial accounts in the Part I preclearance request.

Article on Commissioner Rettig Comments on College Admission Scandal (4/13/19)

Laura Davison, IRS Head Says College Admission Scandal Parents May Face Hefty Tax Bills (Bloomberg News 4/10/19), here. 

Excerpts:

IRS Commissioner Chuck Rettig told the Senate Finance Committee his agency anticipates that “numerous other individuals” will be charged with criminal tax violations as a result of the investigation into alleged bribes paid to test examiners and college sports coaches to guarantee spots for students at elite U.S. universities. 

People charged with criminal tax violations could be required to correct their tax returns and pay back taxes, plus interest and penalties, Rettig told the panel Wednesday. Many tax crimes carry a maximum five-year prison term and a fine of $100,000. Fines for civil tax violations can run as high as 75 percent of the unpaid tax, plus interest. 

Last month, 33 parents were charged with conspiring with college admissions strategist and confessed ringleader William Rick Singer to pay $25 million in bribes to entrance exam administrators, a surrogate test-taker and university sports coaches to get their children into Yale, Georgetown, Stanford and other exclusive schools. 

The U.S. alleges that some parents made payments to Singer through the nonprofit Key Worldwide Foundation, which they claimed as charitable contributions to get a tax deduction. 

* * * * 

The IRS’s criminal investigations unit initiated about 3,000 cases in 2017, according to agency statistics. About 66 percent of the cases it completed that year resulted in jail time for the defendant.

JAT Comments:

1.  I doubt that all of the persons who played some role in the college admission scandal will be prosecuted for crimes (either tax or other crimes).  I am sure the detailed facts will show some type of spectrum -- from the worst offenders to the less culpable offenders.  The less culpable offenders while perhaps prosecutable may be able to avoid criminal prosecution because the Government will -- at least should -- focus prosecution and systemic resources on the more culpable.

2.  The civil tax consequences, though, could be significant for all of the culpable actors and the less culpable may not be able to avoid those.  The civil tax consequences are the tax arising from the improper charitable contributions, civil fraud penalty (75%), and interest on both from the due date off the return(s).  Some, perhaps, on the less culpable end of the scale might avoid the civil fraud penalty because of the high burden the Government must bear (clear and convincing evidence of fraud), but would be liable for the accuracy related penalty (20% to 40%, depending upon how the "contribution" was structured).

3.  I also included the excerpt on the IRS CI statistics above showing about 2/3 of cases that the IRS CI "completed" resulted in incarceration.  I have not tried to break the statistic down, but I infer that "completed" means forwarded to DOJ Tax with a recommendation for prosecution (or perhaps the IRS recommended prosecution after further grand jury work).  Then, of course, not all IRS CI recommendations for prosecution result in DOJ Tax seeking indictment.  I do not recall the statistics, but perhaps 10% of IRS CI recommendations are not prosecuted.  So, those that are prosecuted have a higher percentage incarcerated than 66%.  And, of the number that are not incarcerated, we don't have the breakdown between between (i) those who were prosecuted and acquitted and (ii) those who were prosecuted, convicted but received no incarceration.

GAO Report on Foreign Asset Reporting and Related Issues (4/4/19)

GAO Released this report:  Foreign Asset Reporting, Actions Needed to Enhance Compliance Efforts, Eliminate Overlapping Requirements, and Mitigate Burdens on U.S. Persons Abroad (GAO-19-180 April 2019), here.

Excerpts from opening summary:

What GAO Found 

Data quality and management issues have limited the effectiveness of the Internal Revenue Service’s (IRS) efforts to improve taxpayer compliance using foreign financial asset data collected under the Foreign Account Tax Compliance Act (FATCA). Specifically, IRS has had difficulties matching the information reported by foreign financial institutions (FFI) with U.S. taxpayers’ tax filings due to missing or inaccurate Taxpayer Identification Numbers provided by FFIs.  Further, IRS lacks access to consistent and complete data on foreign financial assets and other data reported in tax filings by U.S. persons, in part, because some IRS databases do not store foreign asset data reported from paper filings.  IRS has also stopped pursuing a comprehensive plan to leverage FATCA data to improve taxpayer compliance because, according to IRS officials, IRS moved away from updating broad strategy documents to focus on individual compliance  campaigns. Ensuring access to consistent and complete data collected from U.S. persons—and employing a plan to leverage such data—would help IRS better  leverage such campaigns and increase taxpayer compliance. 

Due to overlapping statutory reporting requirements, IRS and the Financial Crimes Enforcement Network (FinCEN)—both within the Department of the Treasury (Treasury)—collect duplicative foreign financial account and other asset information from U.S. persons. Consequently, in tax years 2015  and 2016, close to 75 percent of U.S. persons who reported information on foreign accounts and other assets on their tax returns also filed a separate form with FinCEN. The overlapping requirements increase the compliance burden on U.S. persons and add complexity that can create confusion, potentially resulting in inaccurate or unnecessary reporting. Modifying the statutes governing the requirements to allow for the sharing of FATCA information for the prevention and detection of financial crimes would eliminate the need for duplicative reporting. This is similar to other statutory allowances for IRS to disclose return information for other purposes, such as for determining Social Security income tax withholding. 

According to documents GAO reviewed, and focus groups and interviews GAO conducted, FFIs closed some U.S. persons’ existing accounts or denied them opportunities to open new accounts after FATCA was enacted due to increased costs, and risks they pose under FATCA reporting requirements. According to Department of State (State) data, annual approvals of renunciations of U.S. citizenship increased from 1,601 to 4,449—or nearly 178 percent—from 2011 through 2016, attributable in part to the difficulties cited above.  

Treasury previously established joint strategies with State to address challenges U.S. persons faced in accessing foreign financial services. However, it lacks a collaborative mechanism to coordinate efforts with other agencies to address ongoing challenges in accessing such services or obtaining Social Security Numbers. Implementation of a formal means to collaboratively address burdens faced by Americans abroad from FATCA can help federal agencies develop more effective solutions to mitigate such burdens by monitoring and sharing information on such issues, and jointly developing and implementing steps to address them. 

The following is from the Background (some footnotes omitted):

Senate Finance Committee Begins Investigation of Abusive Conservation Easement Appraisals (4/2/19)

The Senate Finance Committee Chair and Ranking Member announced here that they have started

an investigation into the potential abuse of syndicated conservation easement transactions, which may have allowed some taxpayers to profit from gaming the tax code and deprived the federal government of billions of dollars in revenue. For several years now, the IRS has been investigating these transactions. They appear to involve promoters selling interests in tracts of land to taxpayers looking for large tax deductions. In such an arrangement, the taxpayers then get inflated appraisals of those tracts of land and grant conservation easements on that land. The resulting inflated charitable deductions are then split among the taxpayers.

The SFC sent letters to 14 "individuals who appear to be associated with these investor groups that might have unfairly profited from conservation easements."  The names are listed on the press release.

I have written on conservation easement bullshit tax shelters:

• Peter Reilly on Conservation Easement Donations as Bullshit Tax Shelters (Federal Tax Crimes Blog 7/24/17), here.
• IRS Designates Syndications Exploiting Improper Valuations for Conservation Easement Deductions (Federal Tax Crimes Blog 1/2/17), here.

Peter Reilly has a very good update on this development:  Peter J. Reilly, Grassley Wyden Take On Sketchy Conservation Tax Shelters (Forbes 3/28/19), here.

The type of investigation appears somewhat like the investigations by the Senate's Permanent Subcommittee on Investigations of the Committee on Governmental Affairs, see here.  Criminal investigations sometimes are in process when such investigations occur or, as I think occurred in the KPMG situation, arose from the commotion of the investigation.

Robert H. Jackson's Famous Speech on the Role of the Prosecutor (4/2/19)

I am on the "Jackson List," an email list by Professor John Q. Barrett, here, who studies and writes about Robert H. Jackson, former Assistant Attorney General (Tax and Antitrust), then Attorney General, then Supreme Court Justice, from which he took a break to be the Chief United States Prosecutor at the Nuremberg Trials of Nazi war criminals following World War II.  (Jackson's Wikipedia page is here.

Today, Professor Barrett sent the list Jackson's famous speech of April 1, 1940 titled "The Federal Prosecutor."  Well worth a read, so I pass it on.

The Federal Prosecutor

By Robert H. Jackson

Attorney General of the United States

April 1, 1940

            It would probably be within the range of that exaggeration permitted in Washington to say that assembled in this room is one of the most powerful peace-time forces known to our country.  The prosecutor has more control over life, liberty, and reputation than any other person in America.  His discretion is tremendous.  He can have citizens investigated and, if he is that kind of person, he can have this done to the tune of public statements and veiled or unveiled intimations.  Or the prosecutor may choose a more subtle course and simply have a citizen’s friends interviewed.  The prosecutor can order arrests, present cases to the grand jury in secret session, and on the basis of his one-sided presentation of the facts, can cause the citizen to be indicted and held for trial.  He may dismiss the case before trial, in which case the defense never has a chance to be heard.  Or he may go on with a public trial.  If he obtains a conviction, the prosecutor can still make recommendations as to sentence, as to whether the prisoner should get probation or a suspended sentence, and after he is put away, as to whether he is a fit subject for parole.  While the prosecutor at his best is one of the most beneficent forces in our society, when he acts from malice or other base motives, he is one of the worst.

            These powers have been granted to our law-enforcement agencies because it seems necessary that such a power to prosecute be lodged somewhere.  This authority has been granted by people who really wanted the right thing done—wanted crime eliminated—but also wanted the best in our American traditions preserved.

            Because of this immense power to strike at citizens, not with mere individual strength, but with all the force of government itself, the post of Federal District Attorney from the very beginning has been safeguard by presidential appointment, requiring confirmation of the Senate of the United States.  You are thus required to win an expression of confidence in your character by both the legislative and the executive branches of the government before assuming the responsibilities of a federal prosecutor.

            Your responsibility in your several districts for law enforcement and for its methods cannot be wholly surrendered to Washington, and ought not to be assumed by a centralized Department of Justice.  It is an unusual and rare instance in which the local District Attorney should be superseded in the handling of litigation, except where he requests help of Washington.  It is also clear that with his knowledge of local sentiment and opinion, his contact with and intimate knowledge of the views of the court, and his acquaintance with the feelings of the group from which jurors are drawn, it is an unusual case in which his judgment should be overruled.

            Experience, however, has demonstrated that some measure of centralized control is necessary.  In the absence of it different district attorneys were striving for different interpretations or applications of an Act, or were pursuing different conceptions of policy.  Also, to put it mildly, there were differences in the degree of diligence and zeal in different districts.  To promote uniformity of policy and action, to establish some standards of performance, and to make available specialized help, some degree of centralized administration was found necessary.

            Our problem, of course, is to balance these opposing considerations.  I desire to avoid any lessening of the prestige and influence of the district attorneys in their districts.  At the same time we must proceed in all districts with that uniformity of policy which is necessary to the prestige of federal law.

            Nothing better can come out of this meeting of law enforcement officers than a rededication to the spirit of fair play and decency that should animate the federal prosecutor.  Your positions are of such independence and importance that while you are being diligent, strict, and vigorous in law enforcement you can also afford to be just.  Although the government technically loses its case, it has really won if justice has been done.  The lawyer in public office is justified in seeking to leave behind him a good record.  But he must remember that his most alert and severe, but just, judges will be the members of his own profession, and that lawyers rest their good opinion of each other not merely on results accomplished but on the quality of the performance.  Reputation has been called “the shadow cast by one’s daily life.”  Any prosecutor who risks his day-to-day professional name for fair dealing to build up statistics of success has a perverted sense of practical values, as well as defects of character.  Whether one seeks promotion to a judgeship, as many prosecutors rightly do, or whether he returns to private practice, he can have no better asset than to have his profession recognize that his attitude toward those who feel his power has been dispassionate, reasonable and just.

9th Circuit Affirms Convictions for Tax Perjury, § 7206(1) (3/27/19)

In United States v. Hardy, 2019 U.S. App. LEXIS 8336 (9th Cir. 2019) (unpublished), here and here, the Court affirmed the Hardy's conviction for three counts of tax perjury, § 7206(1).  The opinion is short and to the point (just over 3 pages).  Students and new tax crimes enthusiasts likely would enjoy the read, because it is informative as to some basic points.

I just pick two to cut and paste:

1. "Good faith reliance on a qualified accountant has long been a defense to willfulness in cases of tax fraud and evasion." United States v. Bishop, 291 F.3d 1100, 1106 (9th Cir. 2002). We have made clear, however, that if "the trial court adequately instructs on specific intent, the failure to give an additional instruction on good faith reliance upon expert advice is not reversible error." United States v. Dorotich, 900 F.2d 192, 194 (9th Cir. 1990) (internal quotation marks and citation omitted). The district court adequately instructed the jury on specific intent, telling it that the government was required to prove both specific intent and that Hardy did not have a good faith belief that he was complying with the law. The district court therefore did not abuse its discretion by declining to give Hardy's requested instruction about reliance on the advice of an accountant. 

* * * * 

5. The district court did not abuse its discretion in denying a new trial after its post-verdict dismissal, at the government's request, of Hardy's conviction for one count of corruptly endeavoring to obstruct the due administration of the internal revenue laws, in violation of 26 U.S.C. § 7212(a). The court appropriately rejected Hardy's argument that "spillover" evidence from the dismissed count tainted the convictions on the false tax return counts. See United States v. Lazarenko, 564 F.3d 1026, 1043-44 (9th Cir. 2009) (listing relevant factors). The court's instructions—a "critical factor," id. at 1043—delineated the different elements of each charged offense. And, the jury, although returning guilty verdicts on four of the counts in the indictment, acquitted on the remaining count. "The fact that the jury rendered selective verdicts is highly indicative of its ability to compartmentalize the evidence." United States v. Cuozzo, 962 F.2d 945, 950 (9th Cir. 1992).

 I presume that the dismissal of the tax obstruction, § 7212(a), discussed in paragraph 5 was because of the lack of proof of nexus to an investigation.

11th Circuit Affirms Convictions of Promoters of Insurance Premium Scam Bullshit Tax Shelter (3/27/19)

In United States v. Donaldson, 2019 U.S. App. LEXIS 8684 (11th Cir. 2019) (unpublished), here and here, the Tenth Circuit affirmed the district court's convictions of Dionaldson and Crithfield for conspiring to defraud the United States, 18 U.S.C. § 371, and willfully aiding the submission of false and fraudulent income tax returns, 26 U.S.C § 7206(2).  Basically, they sold their clients bullshit tax shelters in the guise of a Business Protection Plan (BPP). Essentially, the customers would pay purported business insurance premiums, purportedly deductible for tax purposes, for a plan that was not insurance but returned most of the "premiums" to the clients, less the promoter's rake off.  I have previously written on the prosecutions and convictions.  Bench Trial Convictions on Offshore Business Insurance Scams (Federal Tax Crimes Blog 7/13/17), here.  That prior blog entry contains much of the detail for better understanding the scam.

The Court of Appeals held:

1. The evidence was sufficient to support the convictions, going through the facts and the elements of the crimes of conviction. The essential holding on appeal was that the BPP was a substantive sham and the defendants were willful in promoting the sham, thus supporting the conviction for the defraud conspiracy (18 USC § 371)  and aiding and assisting (§ 7206(2)).

2.  The District Court did not improperly deny the motion for acquittal or new trial.  The claim asserted on this basis related to Donaldson.  Donaldson claimed that the district court had improperly "persuaded" him not to call a witness, a lawyer who gave an opinion supporting the BPP, who might have supported his reliance on counsel defense.  The actual opinion was in evidence.  The judge simply stated, after admitting the opinion, what the lawyer's testimony would add.  Donaldson's lawyer then made a strategy decision not to call the lawyer as a witness.  No error there.  The Court of Appeals discussion includes this:

Moreover, the district court did not find, as Donaldson suggests, that the coverages offered within the BPP were superfluous for all purposes. Rather, the district court found that the coverages were superfluous for the specific customers who bought them, including one doctor's office that purchased wholly unnecessary insurance for protection against international kidnapping.

3.  The District Court properly rejected the appellants' motion to suppress evidence seized by search warrant.

JAT Comment: All in all, a fairly routine case which is why, I suppose, the opinion is nonprecedential.  However, for those wanting more about the case, please go to the prior blog linked above discussing the bench opinion convicting the defendants/appellants.

TRAC Report on Sentencing Discretion and Disparity (3/21/19)

Transactional Records Access Clearinghouse ("TRAC"), a great resource for information about the federal government (see here), has this offering, here, from yesterday, titled Seeing Justice Done: The Impact of the Judge on Sentencing.  Key excerpt:

The recent sentencing of Paul Manafort by federal judges in two different district courts has renewed interest in the sentencing practices of individual judges. Countless studies over the years have documented a basic fact: while decisions should be determined by the law and the facts, in reality there is a third very important force at work. This ingredient is the identity of the judge assigned to a given case. Again and again, court records show that the particular predilections of individual judges influence the legal decisions that they reach, including those involving sentences.

The posting has further analysis for sentencing and some good lengths.

I do want to emphasize that "particular predilections of individual judges" do affect the range of legal decisions judges reach.  Judges do not simply call balls and strikes within a well-defined strike zone (as Justice Roberts famously claimed).  Judges often, with little review, define the strike zones in ways to permit them to call balls and strikes as they wish.

I do not mean this as an indictment of the judiciary.  I think it is inevitable that giving the judge the leeway to do justice rather than simply call balls and strikes within well previously defined strike zones will also give judges some ability to do great mischief.

As to sentencing in particular, the Sentencing Guidelines were intended to narrow the range of a judge's discretion and bring some nationwide uniformity in sentencing.  The TRAC posting says:

The existence of judge-to-judge differences in sentences of course is not synonymous with finding unwarranted disparity in sentencing practices. A key requirement for achieving justice is that the judges in a court system have sufficient discretion to consider the totality of circumstances in deciding that a sentence in a specific case is just. No set of rules, including the Federal Sentencing Guidelines, can substitute for this necessary flexibility. 

But a fair court system always seeks to provide equal justice under the law, working to ensure that  sentencing patterns of judges not be widely different when they are handling similar kinds of cases.

After Booker, though, we are essentially back in the pre-Guidelines world where a judge can do what he or she wants so long the Guidelines calculation is correct and the judge states rather minimal reasons for variance from the Guidelines sufficient to avoid abuse of discretion review on appeal (if appealed).  I think that there should be some strengthening of the role of the Guidelines because, simply, justice should not depend upon which judge imposes the sentence.

And, of course that does not address the predilections that affect the outcome of the other decisions a judge makes in a case.

Eighth Circuit Affirms Tax Obstruction Conviction without Proper Marinello Jury Instructions (3/20/19)

In United States v. Beckham, ___ F.3d ___, 2019 U.S. App. LEXIS 6964 (8th Cir. 2019), here, the Court affirmed Beckham's conviction for tax obstruction, § 7212(a).  Beckham had been charged also with three counts of aiding and assisting, § 7206(2), but was acquitted of those counts.  So the only count of conviction was tax obstruction.

The facts in chronological order are:

• Beckham allegedly induced a taxpayer (Horseman) to participate in a tax loss scheme to offset the taxpayer's taxes.  Basically, the scheme was to generate false deductions by appearing to have a large investment in a business entity producing losses and to claim those losses as nonpassive losses despite not materially participating in the business.  The IRS began an audit.  Beckham filed power of attorney to represent the taxapyer, representing that he was a licensed  CPA but in fact he was not licensed because of a mail fraud conviction.
• The agent asked Beckham for documents supporting the taxpayer's material participation in the business.  Beckham responded with the taxpayer's day planner showing hundred of hours work in the business. 
• The agent then discovered that Beckham was not a licensed CPA as he had represented.  Beckham said that he was in the process of getting his license renewed.
• The agent then discovered that the taxpayer had not made the claimed large investment in the business generating the losses that he claimed on the returns.
• Suspecting fraud, the agent referred the taxpayer to IRS CI.  IRS CI then added Beckham as a target.  Beckham was then indicted for tax obstruction and aiding and assisting.
• The Supreme Court granted certiorari in the Marinello case to resolve a circuit conflict as to whether tax obstruction required that, in committing alleged obstructive acts, the defendant know of nexus to a pending IRS investigation.
• The case went to trial before the Supreme Court's decision in Marinello.  So, the jury instructions were framed without that decision.  But, at the Government's request, the trial court decided to use a special verdict form asking the jury whether the defendant had committed a corrupt act after becoming aware of the audit.  Here is the description of the instruction conference:

At the instruction conference, Beckham objected to Jury Instruction 9—the instruction on the § 7212(a) offense—because it did not require the jury to find that he knew about the IRS audit at the time that he committed a corrupt act. He also argued that the special verdict form—which directed the jurors, if they found Beckham guilty of that offense, to indicate whether Beckham committed "at least one corrupt act after becoming aware of the existence of an Internal Revenue Service audit or proceeding[,]" see Proposed Jury Instructions 25, Dist. Ct. Dkt. 96, and, if so, to identify which corrupt act they unanimously agreed Beckham committed after learning of the proceeding—did not cure the faulty instruction. Beckham did not, however, specifically object to the language of the special verdict form. The district court overruled his objection.

• The instructions thus did not include the key element later required by Marinello.
• The jury convicted of tax obstruction.  "On the special verdict form, the jury indicated that it found Beckham committed at least one corrupt act after learning of the audit and that it unanimously agreed Beckham committed the acts alleged in paragraph 10 of the Superseding Indictment—submitting Horseman's day planner to the IRS—after learning of the audit."
• The Supreme Court then decided Marinello, holding, as described by the Court.  

Six months after Beckham's trial, the Supreme Court decided Marinello v. United States, 138 S. Ct. 1101, 200 L. Ed. 2d 356 (2018). The Court held that, for a § 7212(a) offense, "the Government must show . . . that there is a 'nexus' between the defendant's conduct and a particular administrative proceeding[.]" Marinello, 138 S. Ct. at 1109. Further, that proceeding must be "reasonably foreseeable by the defendant" at the time he acted. Id. at 1110. Because "[i]t is not enough for the Government to claim that the defendant knew the IRS may catch on to his unlawful scheme eventually[,]" if the proceeding is currently pending, the defendant must be aware of that proceeding. Id.

Based on Marinello, the Government conceded that the jury instruction omitting the element of nexus to a known audit was error, but "that the district court cured the instructional error through the use of a special verdict form and that, even if the special verdict form did not cure the error, the error was harmless."

Bank Hapaolim Increases Its Reserve for U.S. DOJ Tax Investigation (3/19/19)

Israel's Bank Hapoalim Q4 net profit sinks on U.S. tax probe provision (Reuters 3/18/19), here.  Excerpt:

The bank said earlier this month it would set aside an additional $246 million in the quarter to cover a possible future settlement regarding an investigation of the bank’s business with U.S. clients. This provision will bring its total provisions to $611 million.

The excerpt does not state specifically that the $611 million relates to the U.S.tax  investigation, but that is the inference.  (See also the relative numbers reported Bank Hapoalim 2018 results: profits dip on US probe provision (Retail Banker International 3/18/19), here.)

DOJ Tax and Mizrahi-Tefahot Bank Ltd. (Israel) Reach DPA (3/13/19)

DOJ Tax announced here the DPA with Mizrahi-Tefahot Bank Ltd., (Mizrahi-Tefahot) and its subsidiaries.  I have not been able to find the underlying documents, but from the Press Release, I think the following are the key items:

• "In the DPA and related court documents, Mizrahi-Tefahot admitted that from 2002 until 2012 the actions of its bankers, relationship managers, and other employees defrauded the United States and specifically the Internal Revenue Service (IRS) with respect to taxes by conspiring with U.S. taxpayer-customers and others. Mizrahi-Tefahot employees’ acts of opening and maintaining bank accounts in Israel and elsewhere around the world and violating Mizrahi-Tefahot’s Qualified Intermediary Agreement (QI Agreement) with the IRS enabled U.S. taxpayers to hide income and assets from the IRS."  [This apparently is the defraud / Klein conspiracy.]
• Mizrahi admits the standard range of conduct by foreign banks playing in this field.
• "The DPA also requires Mizrahi-Tefahot and its subsidiaries affirmatively to disclose certain material information it may later uncover regarding U.S.-related accounts, as well as to disclose certain information consistent with the Department’s Swiss Bank Program with respect to accounts closed between Jan. 1, 2009, and October 2017."  [For that reason, I have included Mizrahi in the Category 1 for the DOJ Swiss Bank Program; Mizrahi is not technically within the program but did have a Swiss subsidiary.]
• Mizrahi will pay $195 million total, consisting of "1) restitution in the amount of $53 million, representing the approximate unpaid pecuniary loss to the United States as a result of the criminal conduct; 2) disgorgement in the amount of $24 million, representing the approximate gross fees paid to the bank by U.S. taxpayers with undeclared accounts at the bank from 2002 through 2012; and 3) a fine of $118 million."

DOJ Tax had previously offered $342 Million to settle:  Mizrahi-Tefahot Bank Rejects DOJ $342 Million Settlement Offer for NPA (Federal Tax Crimes Blog 8/10/18), here.

US DOJ Swiss Bank Program	Number	Resolved	Total Costs
U.S. / Swiss Bank Initiative Category 1 (Criminal Inv.) *	19	9	$4,376,733,560
U.S. / Swiss Bank Initiative Category 2	87	81	$1,368,983,990
U.S. / Swiss Bank Initiative Category 3	13		$0
U.S. / Swiss Bank Initiative Category 4	8		$0
Swiss Bank Program Results	127		$5,745,717,550
* Number and Number Resolved may not be same as DOJ and IRS numbers because of how related entities were counted; the Total Costs Column should be consistent.
Recoveries from Swiss Financial and Related Institutions (per above)			$5,745,717,550
Recoveries from NonSwiss Offshore Financial and Related Institutions			$298,770,542
Recoveries from All Offshore Financial and Related Institutions			$6,044,488,092

On the Manafort Sentences and Tax Crimes Sentencing (3/13/19)

I have hesitated to write on the Manafort sentencing principally because, although Manafort was convicted of tax crimes and FBAR crime that may related somewhat to tax crimes, the gravamen of the cases against him involved nontax offenses that most would consider more serious than the tax offenses.  His sentences in both cases reflected the more serious offenses.  So, I am not sure what I could  offer readers interested in criminal tax sentencing. 

I think both judges likely acted within the scope of their considerable discretion to sentence outside the advisory Sentencing Guidelines range. 

I post below some of the better discussions of which I am  aware:

• Douglas A. Berman, Rounding up some of many thoughts about Paul Manafort's (first) federal sentence (Sentencing Law and Policy Blog 3/10/19), here.  (This posting has further links.)
• Douglas A. Berman, Paul Manafort given (only?) 47 months in prison at first federal sentencing ((Sentencing Law and Policy Blog 3/7/19), here.

Now, on Tax Crimes sentencing specifically, I recommend Robert Horwitz's blog entry analyzing tax sentencing statistics:

• Robert S. Horwitz, Sentencing in Criminal Tax Cases: It’s Not What You Think (Taxlitigator.com Blog 2/26/19), here.

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.