Sometimes Booker Works Against the Taxpayer (12/22/09)

Booker now gives the sentencing court considerable discretion to vary from the Guideline Sentence calculation. In tax cases, such variances are usually defendant-friendly -- i.e., the sentencing court sentences below the Guidelines range. If the Government is unhappy with the downward variance and appeals, the court of appeals will give considerable deference to the sentencing judge in the application of 18 U.S.C. § 3553(a). This works in reverse as well -- i.e., the sentencing court can impose an above-Guidelines sentence that will receive considerable Booker deference on appeal. See particularly United States v. Tomko, 562 F.3d 558, 564, 567 (3d Cir. 2009) (en banc). An above Guidelines sentence does not happen often in tax cases, but it does happen.

In a recent nonprecedential decision, the Court of Appeals addressed this type of above guidelines sentence. In United States v. Evans (3d Cir. No. 08-2528), the sentencing judge sentenced a tax protestor to an above guidelines sentence. The defendant was not pleased and appealed. The Court said (footnote omitted):

Finally, Evans argues that the District Court improperly relied on the two civil tax suits filed by Evans against the United States in its consideration of the 18 U.S.C. § 3553(a) factors. This is Evans' only complaint regarding his sentencing; he does not challenge the calculation of the Guidelines range or the Court's consideration of the § 3553(a) factors in general.

We review the District Court's sentence for reasonableness under an abuse of discretion standard. United States v. Tomko, 562 F.3d 558, 564, 567 (3d Cir. 2009) (en banc). "Where, as here, a district court decides to vary from the Guidelines' recommendations, we 'must give due deference to the district court's decision that the § 3553(a) factors, on a whole, justify the extent of the variance.'" Id. at 561 (quoting Gall v. United States, 128 S. Ct. 586, 597 (2007)).

The Guidelines range was 15 to 21 months. The District Court imposed an above-Guidelines sentence of 36 months. It discussed at length the factors set forth at 18 U.S.C. § 3553(a). We do not think it was improper for the Court, in evaluating those factors (including the nature and circumstances of the offense), to consider that, despite several courts' unequivocal rejection of Evans' claims that his income was not subject to taxation, Evans continued to violate the law. The Court noted Evans' disrespect for the court process, his disdainful interactions with IRS agents, the need for him genuinely to appreciate the authority of the law, and the need to deter the public. We have no hesitancy in concluding that it rationally and meaningfully considered the § 3553(a) factors, and the sentence of 36 months was reasonable in this case.

Heavy Handedness in Charging and Forcing Pleas

I point readers to an excellent article in yesterday's Wall Street Journal, John A. Emshwiller and Nathan Koppel, Plea Bargains Get Renewed Scrutiny (WSJ 12/19/09). I previously blogged here that the Judge had dismissed indictments against some broadcom defendants for prosecutorial abuse. At the same time, the Judge voided a prior guilty plea in the case. Here is the article's intro:

A surprise twist in the criminal case against Broadcom Corp. co-founder Henry Samueli again raises questions about plea bargains, one of the most important and controversial aspects of the justice system.

In a Santa Ana, Calif., court last week, federal Judge Cormac Carney dismissed the criminal complaint charging Mr. Samueli with lying to the Securities and Exchange Commission in its investigation of whether Broadcom misstated its earnings by improperly accounting for executive stock options. Judge Carney's dismissal came even though Mr. Samueli had stood before him in 2008 and pleaded guilty to that very crime.

Mr. Samueli did what lawyers and legal scholars fear a disturbing number of other people have done: pleaded guilty to a crime they didn't commit or at least believed they didn't commit. These defendants often end up choosing that route because they feel trapped in a corner, or fear getting stuck with a long prison sentence if they go to trial and lose.

I have previously blogged on facets of this matter here. The major aspect of the problem is the combination of the Government's virtually unlimited charging decisions permitting the piling or stacking on of counts and the large amounts involved in some white collar crimes. The defendant is at risk of major incarceration if he does not plea and, as in Samueli, may be convinced that he is guilty when he is really not in order to make the required allocation.

I obvserved this phenomenon in the KPMG criminal case. The defendants through their own alleged conduct and Pinkerton conspiracy concepts faced draconian Guidelines calculations driven principally by the alleged tax loss. Pre-Booker that was a major problem that the Government sought to exploit by offering a plea first to two counts and then to one. The Government forced out one guilty plea while sentencing was in flux. Even after Booker, the problem was only mitigated by the discretion given judges, because they started with the Guidelines calculations.

Fortunately, as in the broadcom case, Judges can mitigate that Government's abuse of power in forcing plea agreements. For Samueli, the Judge simply overturned the guilty plea. In KPMG criminal tax case, the Judge sentenced David Rivkin to one year of probation, using the Booker discretion to effectively nullify all but the collateral consequences and stigma of the guilty plea.

Requirement to Notify Attorney General of Foreign Proceedings

This item is a bit late in the cycle of tax crime news, but I thought I would post it anyway as a resource for readers since the issue may arise in later cycles of offshore account advice and maneuverings. Readers will recall that 18 U.S.C. § 3506 requires that U.S. persons contesting in a foreign country a U.S. request to that foreign country for information must notify the Attorney General of the foreign proceeding. Readers desiring further information on this issue will find a good resource on the web in the form of a Pillsbury Winthrop Shaw Pitmann LLP memorandum from Stephan E. Becker to Michael Leupold and Suzanne Kuster dated 9/6/09. The memorandum is here.

Tax Loss Estimations for Sentencing Purposes

In United States v. Poltonowizc (3rd Cir. 2009), an unreported, nonprecedential decision, the court approved tax loss estimations for a convicted return preparer (former IRS CI analyst). His tax evasion scheme was unsophisticated. In a sting operation,

Although the agent never mentioned charitable contributions, and provided him with no evidence whatsoever of any such contributions, he included $2,190 in cash ontributions to charity and $495 in non-cash contributions to charity on the agent's return. As a result, the agent's tax return showed that she was entitled to a $12 refund, instead of reflecting that she owed $1,012 in additional taxes. Subsequently, the agent requested a meeting with Poltonowicz to discuss a letter she received from the IRS informing her that she would be audited. Again, the agent wore a recording device. He admitted to the preparation of a false tax return and that he included the false deductions to save her from paying additional taxes (as he operated under the assumption that she would not be audited). He reassured her that she would not get in trouble for the fraudulent return.

Poltonowicz pled to one count of filing a false tax return. He thereafter continued his pattern of conduct through another company in the name of a female, described as his "long-time roommate and housekeeper." In a second trial, a jury convicted him of unspecified tax crimes. Moving to the sentencing phase, the defendant's position was that a particularized inquiry should be made into the dollars included in the estimated tax loss calculation under the Sentencing Guidelines. The Government, however, calculated the tax loss in a less precise way. The Government's calculations included only tax losses for returns personally prepared by Poltonowicz. (Specifically, it excluded returns prepared by employees who had, according to the testimony, claimed similar false deductions at Poltonowicz's direction or teaching.) Of that set,

Of that subset of tax returns, the government included only those that contained one of the methods of falsifying tax returns established at trial, such as fictitious cash and non-cash charitable contributions, employee non-reimbursed expenses, and claims of eligibility for the earned income tax credit. The government filtered that subset to include two types of returns: (1) returns for which the IRS had conducted an audit and had subsequently assessed the taxpayer with additional tax liability based on the tax payer's inability to substantiate their return, or (2) returns for taxpayers interviewed, who confirmed that they did not provide any evidence of the deductions at issue or request that they be included. The estimate of $419,853.20, in the manner calculated, was actually under inclusive.

Addressing Poltonowicz's arguments on appeal, the court of appeals said:

The district court relied on evidence presented at trial and the sentencing hearing to reach its conclusion. The government established the modus operandi -- preparing tax returns with fictitious data for charitable contributions, employee non-reimbursed expenses, and claims of eligibility under the earned income tax credit. It did not err in including tax returns in the tax loss calculation which had been subject to and had failed an audit by the IRS, even if the government did not interview the tax payer. Poltonowicz is on audiotape informing a potential client that he knew exactly how to claim fictitious deductions without getting caught. Indeed, the evidence suggests a much larger tax loss. He personally prepared 20,000 to 25,000 tax returns, yet the government calculated its tax loss based on just 225 of those returns. One former employee testified that at least 25% of the returns Poltonowicz filed contained fictitious deductions. The government excluded from its calculation any returns that were prepared by employees, even though several employees testified that he directed them to add fictitious deductions to the returns they filed. On average, 50-54% of returns claim charitable contributions; whereas, 98% of Poltonowicz's clients claimed such deductions. Notably, his clients uniformly claimed to donate in one of three precise amounts: $490, $495, and $500.

Poltonowicz also challenges the government's calculation of additional losses by comparing his average claims for certain deductions, such as the charitable deduction, with that of the national average. He asserts that it was improper to compare his clients to the national average because his clients were not average tax payers; rather, his clients consisted of blue-collar, religious, conservative tax payers who were far more likely to make charitable contributions than the average tax payer. He makes a similar argument with respect to the government's comparative information on employee non-reimbursed expenses. These arguments lack merit. The District Court did not rely on the government's comparative data in reaching its conclusion that the tax loss exceeded $ 400,000. The District Court based its conclusion on the audited returns and mentioned the additional statistical evidence in noting that the government's calculation was extremely conservative. There is no error with a District Court's consideration of statistical evidence in a case involving upwards of 20,000 tax returns.

This type of estimation would appear to be appropriate under the Guidelines in setting a reasonable minimum tax loss for sentencing purposes. There is a related, but quite different, issue of whether anything less than actual proof of a substantial tax loss due for purposes of the evasion element of tax due and owing is appropriate in the case in chief. I have previously argued in my blogs in the context of criminal prosecutions of tax enablers where the taxpayers are absent such estimations are not appropriate.

Civil Tax Statute of Limitations for Fraudulent Tax Shelters (12/19/09)

I address in this blog the civil statute of limitations for tax shelters. I start with the basics:

1. General. The general statute of limitations is 3 years. § 6501(a).

2. 25% Omission. In the case of a 25% omission of income, the statute of limitations is 6 years. § 6501(e). Many of the shelters exploited basis overstatements which, the cases have held, do not invoke this section, but the IRS may have put the quietus on those holdings by Regulation. See T.D. 9466, 2009-43 I.R.B. 551.

3. False Return. "In the case of a false or fraudulent return with the intent to evade tax," the statute of limitations is unlimited. § 6501(c)(1).

4. Willful Attempt to Evade Tax. "In case of a willful attempt in any manner to defeat or evade tax," the statute is unlimited. § 6501(c)(2).

I focus here on the third and fourth exceptions – principally the third – because the IRS imagines many of these abusive shelters -- the poster child being Son-of-Boss in its various iterations -- as fraudulent and somebody in the mix among the enablers and taxpayers had fraudulent intent to evade tax and thus necessarily willfully attempted to evade or defeat tax.

In Allen v. Commissioner, 128 T.C. 37 (2007), here, the Tax Court held that a tax return preparer's fraud would invoke the unlimited period of limitations in § 6501(c)(1) even if the taxpayer had no fraudulent intent. The court applied what it called a plain meaning interpretation of the statutory language quoted above.

The question in the case of fraudulent tax shelters is whether the taxpayer's standard defense that other professionals were involved so that he or she lacked fraudulent intent will avoid the application of the unlimited statute of limitations. Of course, the Government imagines that the taxpayers (or at least most of them who were not comatose) intended to defraud the Government of tax, but has not chosen so far to indict the taxpayers. I hear that the Government simply missed or did not timely pursue many of the abusive tax shelters within the applicable period -- 3 years or 6 years, as appropriate. Can the Government now pursue these shelters under an unlimited civil statute of limitations inspired by the Allen decision? Although certainly not authoritative, the Tax Notes publication of Allen was under the caption "Limitations Period Extended Regardless of Who Commits Fraud." I think a more technical analysis would get there also under Allen.

Guilty Plea in SLOTS Tax Shelter (12/19/09)

On December 1, 2009, Michael Parker pled guilty to one count of Klein conspiracy in a tax shelter scheme using the ubiquitous tax shelter trademark -- an acronym, in this case SLOTS for Sale Leaseback of Tenant Improvements Strategy. According to the DOJ press release for the original indictment in October, two parties were indicted -- David Haynor, an accountant/tax partner with KPMG, and Jon Flask, a lawyer. Parker, COO of a "tax-advantaged investments company," was named in a contemporaneous criminal information and entered a plea agreement. The original DOJ Tax press release is here.

According to the DOJ Tax press release on the guilty plea on December 1 here:

According to the plea agreement and statements made during the hearing before United States District Judge Sandra S. Beckwith in Cincinnati, Parker admitted to conspiring with Daryl Haynor, an accountant who was a tax partner at KPMG LLC, in its Tysons Corner, Va., office, and Jon Flask, an attorney for TransCapital, who was a partner at a law firm in Vienna, Va., to defraud the IRS with regard to tax shelter transactions. Parker admitted that he was both a CPA and an attorney, but acted as the Chief Operating Officer of TransCaptial Corporation. In October 2009, Haynor and Flask were indicted for conspiracy to defraud the IRS and for corruptly endeavoring to obstruct and impede the due administration of the internal revenue laws.

According to the plea agreement and statements made during the hearing, from 1998 through 2006, Parker, Haynor and Flask marketed and implemented a tax shelter to KPMG clients called the Sale Leaseback of Tenant Improvements Strategy (SLOTS), which enabled various U.S. corporations to claim tax deductions totaling more than $240 million on corporate income tax returns filed with the IRS. During 2002 through 2004, the IRS audited three U.S. corporations that had claimed losses generated by SLOTS transactions, including The Kroger Company. Parker identified Kroger as the Fortune 500 corporation which did the largest SLOTS tax shelter transaction, and which claimed over $178 million in loss deductions, causing over $64 million in tax loss to the IRS. Parker admitted that he, Haynor and Flask conspired to impede and impair the IRS by making false and misleading statements to IRS agents and attorneys during these audits, including the Kroger audit. Additionally, Parker admitted that he, Haynor and Flask concealed certain aspects of the tax shelter transaction from SLOTS clients, including Kroger, for the purpose of impeding and impairing the IRS. Parker further acknowledged that the SLOTS tax shelter and related transactions were themselves nothing more than devices to disguise and conceal mere financing transactions.

A Lesson for Practitioners?

A recent tax shelter civil case presents a fact pattern that should be considered by criminal tax attorneys. In Palm Canyon X Investments LLC v. Commissioner, T.C. Memo. 2009-288, decided 12/15/09, the court rejected the claimed tax benefits for a variation of a Son-of-Boss transaction that exploited what some practitioners imagined was offered by the Helmer decision. I have blogged previously on Helmer (see here), so want digress on Helmer in this blog. (I do note that the Court in Palm Canyon deferred addressing whether the Helmer claim was technically sufficient, because it decided the case based on lack of economic substance, and meted out penalties accordingly.) What I want to focus on is the taxpayer's consideration of the shelter transaction.

The individual, one Hamel, behind the TEFRA entity (Palm Canyon) had a lot of tax to shelter, of course (a given in this type case). (As an aside, the individual was married to Suzanne Sommers aka Suzanne Somers, an actress featured in the advertisements for the Thighmaster, the cash cow generating the need for shelter.) The infamous Notice 2000-44, 2000-2 C.B. 255, was issued on August 13, 2000. This pretty much put the quietus on Son-of-Boss deals. KPMG, for example, throttled back on its variations after this notice. Nevertheless, some did not quite get it.

In 2001, the taxpayers' CPA began looking for shelter for Hamel and latched onto two promoters more than willing to accommodate the need by presenting "high end tax products for big losses." We call such products tax shelters. The promoters discussed "foreign markets and foreign currencies." (Apparently a variation of the FX shelter and certainly a kissing cousin to BLIPS, but both relying on the perception of magic in Helmer.) Although I was not familiar with the promoters (the Skyline Group and their lawyers, Cantley & Sedacca, LLP), the others quickly joining the adventure, Deutsche Bank AG and Craig Brubaker, were active players in the abusive tax shelter market.

Hamel's CPA had the initial reaction that the proposed Son-of-Boss strategy was "too good to be true." But, the CPA then reviewed a "tax opinion by the law firm of Bryan Cave, LLP." Bryan Cave is a national law firm of some general good repute. But, as I have noted elsewhere, a distinguishing feature of this round of tax shelters was that the brand name law firms which eschewed participating in earlier rounds of tax shelter excesses were attracted to and did lend a hand in this round drawn by the siren song of fees directly proportional to the mega tax needing shelter this round.

Taxpayers then instructed their CPA to contact Kenneth Barish an attorney with a well known local tax firm. The CPA faxed Barish his notes of his review of Bryan Cave's penalty discussion. Barish then investigated the promoters, including hiring a private investigator. (Notwithstanding, the Court later says that "Barish conducted only a superficial investigation of the parties involved.") Barish then reviewed the Bryan Cave opinion.

Taxpayer's CPA then met with another attorney, Marc Kushner of Pryor, Cashman, Sherman & Flynn, LLP, who had been referred by the promoter. Pryor Cashman had issued an opinion on the tax shelter. Barish and a promoter had a telephone call with Kushner. The promoter also gave Barish a copy of the Pryor Cashman 6662 penalty discussion. The Court later found that Barish relied on this Pryor Cashman opinion as well as the Bryan Cave opinion (the suggestion is that he relied on the full opinion, which presumably he received later in the process of consideration.)

The CPA then recommended that the taxpayers proceed with the transaction. Then something strange occurred. The court had earlier found as follows:

Through 2001 none of the Hamel [taxpayers’] companies operated a business or owned any manufacturing, storage, or sales facilities in a foreign country. In 2001 the Hamel companies' international activities consisted primarily of sales through the Internet. The Hamel companies also ordered a significant portion of the materials used to make their products from Asia and had some of their products manufactured there.

None of the Hamel companies' businesses had any contracts due in 2001 or 2002 that required payments in foreign currencies. Additionally, Thighmaster had no direct or indirect ownership interest in any foreign entity or bank account and paid no foreign taxes.

Then, later in the findings of fact, the court found that:

Following [certain meetings], Mr. Lamb [the CPA] recommended that Mr. Hamel proceed with the proposed MLD transaction. Mr. Barish noted that the MLD strategy represented an "aggressive tax opinion" that worked "from a technical standpoint", and he recommended creating a paper trail memorializing discussions concerning offshore expansion and currency transactions before executing the MLD strategy. On October 4, 2001, Thighmaster held a management meeting for which Herb Schmidt, Thighmaster's chief financial officer (CFO) and director of operations, prepared a memorandum regarding "Business Opportunity/Business Plan" and Jim England, Thighmaster's president, prepared a memorandum regarding International Marketing". The memoranda recommended expanding the Hamel companies' business operations into foreign markets and outlined potential strategies. n21 Around this time, Mr. Hamel decided to proceed with executing the MLD transaction.

n21 The only recommendation contained in the memoranda that the Hamel companies implemented in 2001 was a recommendation in Mr. Schmidt's memorandum related to measures designed to guard against foreign currency fluctuations.

Do the readers see any issues in this fact pattern?

There are many analogs as to this type of advice that I have encountered over the years. The classic is perhaps documenting future business plans in order to mitigate the possibility of an accumulated earnings problem. (Of course the one that practitioners studiously avoided in the old contemplation of death days was having a donor write a letter to a donee stating the "This gift is not in comtemplation of death.") The question, of course, is what the practitioner can do to create a contemporaneous paper trail that may, particularly in hindsight, be viewed as other than a straightforward recounting of the truth. Although the judge does not say so explicitly, I infer that the judge had some concerns about the action.

[I caution my readers that the foregoing is taken from the opinion as reported. I take no position on whether the facts and law recounted in an opinion have any necessary relationship to a fair and balanced recounting of the truth; take the facts as recounted only for purposes of discussion.]

More Shenanigans by the Swiss

I have previously blogged here comparisons of UBS and the Swiss banking system general as engaged in a form of piracy. (The Swiss are not the only pirates, of course, but the Swiss are in the news now.) Today's WSJ reports here another form of piracy, or at least assisting foreign clients stay under the U.S. radar screen with their financial activities. This is not specifically a tax issue, although I suspect that some U.S. tax was avoided in this current round of shenanigans. But it is just amazing to me how a citizenry of a civilized country can think that it is its right -- a right fueled by greed -- to assist others commit crimes or hide the fruits of crimes. I don't mean to indict all Swiss citizens, but it is like the holocaust crimes: enough of the German citizenry knew this was going on and chose to close their eyes. I guess also to put this in context, this is the same bunch that tried to make off with holocaust victims' deposits. See here and here.

Prosecutorial Misconduct Leads to Yet Other Dismissals

I picked this item up from the White Collar Crime Prof Blog here. The item is not not a federal tax crimes item but I include it because federal tax crimes is a subset of white collar crime generally and the genre of conduct in this item is seen in tax cases (most notably the United States v. Stein case which I have discussed previously here).

In this option backdating case, a district judge has dismissed the indictments for what appears to be the same genre of abuse, although perhaps worse, than encountered in Stein. I will let the court and the facts speak for themselves. The full opinion is here, but the following is the guts of the order as it was read into the record:

Omit Needless Words - A Legal Writing Reminder

The professor and litigator made me post this item from the WSJ Law Blog that is not a tax crimes item, but reminds those of us who play in this area that writing is important. The WSJ Law Blog had this article on rules of writing issued by federal bankruptcy judge Kressel in Minnesota.

His first guideline is not about writing style but is a pet peeve of mine. He first requires submission of proposed orders in pdf electronic format generated from the word processor rather than produced by scanning. In the guidelines, he reminds the lawyers to write as they would speak and cut out the superfluous. That ought to be a no brainer, but I routinely see lawyers filing documents that are scanned rather than computer generated and also get scanned documents in other contexts.

And, of course, the Law Blog refers to the venerable standard for clear writing -- Strunk & White, The Elements of Style -- stating the standard "Omit needless words." There are so many iterations of this book, so I refer you by link to the Amazon search of Strunk & White here. Strunk & White, of course, do not give the last word on good style, but they sure give a good first word.

Audit Avoidance as Tax Obstruction (12/16/09)

Today's Tax Notes had this article that grabbed my attention: Sam Young, Estate Tax Officer Provides Hints for Audit Avoidance, 2009 TNT 239-5. I have written ad nauseum on the potential for audit avoidance to be viewed as a tax crime. See my previous blogs here. The title was titillating so I read the article. Not really much there in terms of juicy tips, but the tips provided were clearly designed to lower the chance of audit. Key points were:

1. "Every estate tax return is reviewed by hand for audit potential." I presume that "by hand" means visually reviewed rather than just handled by hand.

2. Include relevant documents with the return.

3. Provide substantiation for claims with the return rather than awaiting an audit.

4. Be sure and report previous gifts, because the IRS associates gift tax returns with the estate tax return. I suppose he means that discrepancies can be caught, so it is important from an audit potential standpoint to address this up front.

5. One practitioner offered that "the appearance of the return is important. Sloppy returns attract attention, so 'neatness matters.'" (Some quotation marks omitted.)

All of these "tips" although appearing rather mundane are really intended to lessen the chance that the IRS will audit the estate tax return. In that sense, they may at least in theory come within the scope of potential criminal activity, particularly if there is some aggressive item reported in the return that the additional disclosures or even the neatness are intended to divert attention. I don't think the particular items here really could turn into a problem alone, but packaged with other bad facts could be part of the ambiance of a tax obstruction charge.

Bizarre Plea in Quellos - Plea Not Surprising but Facts Are Bizarre

Matthew Krane, a tax attorney, who took a large, very large kickback on a large, very large client investment in an allegedly abusive / criminal Quellos tax shelter has pled guilty. The announcement from USAO EDWA is here and a Law.com article with more of the background than in the USAO announcement is here. I do not have a copy of the plea agreement so some information provided in this blog is incomplete and may be updated when and if I get the plea agreement.

I previously blogged the larger indictment of Krane and two others involved with Quellos here.

The gravamen of the claim against Krane, a tax attorney is that he received a kickback, perhaps shared with the two other defendants, of some 35 million + on the sale of the shelter designed to shield over $1 billion in gain realized by one of his clients. Quellos and its principals designed the shelter. Krane did not advise his client of the kickback.

The guts of this news is as follows:

1. As to Krane, the plea is to "Tax Evasion and False Statement in a Passport Application." The announcement says: "KRANE will serve up to five years in prison for his two convictions." (As an aside, it is unclear why Krane will serve only up to 5 years; given the amounts the tax evasion plea generates a Guideline sentence of; I have not seen the calculation that would make the Passport conviction moot in terms of sentencing.)

2. As to the remaining defendants (Wilk and Greenstein), Krane will assist the Government in making its case. May not be a pretty picture for them. The trial is tentatively scheduled for September 2010.

Honest Services Supreme Court Cases Might Portend Constriction of Scope of Tax Obstruction Crimes

I was reading a White Collar Crime Prof Blog's summary here of the two "honest services" cases argued before the Supreme Court today and was struck by the report that the Justices' concerns are so strikingly similar to concerns expressed by courts as to the amorphous reach of the tax obstruction crimes (§ 7212(a) and the Klein / Defraud Conspiracy in 18 USC § 371. In part material, the WCCPB summary includes the following:

4. Two primary concerns stand out from today's argument: (1) all justices expressed unease with identifying what sort of "bad conduct" is covered by the statute in the absence of any meaningful guidance from Congress; and (2) the Solicitor General's proposed test is not going to sufficiently narrow the statute. No one, in fact, seemed particularly inclined to adopt the SG's interpretation of the statute. At one point, Justice Breyer suggested that 140,000,000 people throughout the country had probably violated the honest services law as the SG described it, by fibbing to an employer in order to do something his or her boss wouldn't like. Justice Scalia described a similar scenario in which an employee tells the boss he is going to work hard all afternoon if the boss leaves him alone, but makes this misstatement so the boss will go away and he can sit at his desk and read the racing form. The government had a very hard time explaining why this conduct would not fall within the statute as it had defined it, and ultimately suggested that prosecutors wouldn't bring those sort of cases and/or jurors wouldn't convict. That answer did not engender a positive response. No one seemed comfortable with leaving such broad, undefined discretion in the hands of prosecutors and juries.

I discuss this genre of concern in my article on the tax obstruction crimes -- John A. Townsend, Tax Obstruction Crimes: Is Making the IRS's Job Harder Enough?, 9 Hous. Bus. & Tax L.J. 260 (2009). The article may be reviewed or downloaded here, and the related online appendix may be reviewed or downloaded here. Two prominent cases discuss this concern in the context of the defraud conspiracy (the Klein conspiracy in a tax setting): Hammerschmidt v. United States, 265 U.S. 182 (1924) and United States v. Caldwell, 989 F.2d 1056, 1058 (9th Cir. 1993). If this concern continues into the decisions in the pending Supreme Court cases, we might see some real and very helpful restrictions on the Government's imagination as to the expansive scope of the tax obstruction crimes. Stay tuned!

Update on 12/12/2009: I refer readers to Tom Kirkendall's Houston Clear Thinkers discussion here of Jeff Skilling (Enron fame) SCOTUS brief on honest services fraud and recommend readers with the inclination substitute Tax Obstructions Statutes for the Honest Services Statute. Frightening!

Congress Watch -- The Political Theater

It is nice to know that our Congressmen are on the watch. Here is a press release from Congressman John R. Carter, R-Texas, on his new bill titled the Geithner Penalty Waiver Act. The Act would impose the same penalty rate for persons joiniing the special voluntary disclosure program as imposed on Timothy Geithner, the Secretary of Treasury. The rhetoric is interesting; seems to me more for political theater than being a serious proposal.

DOJ Tax Seeks John Doe Summons for Stanford Group Investors

The Stanford Group maintain offshore financial accounts for its investors / depositors. It is thus not surprising that DOJ Tax is seeking that information via a John Doe Summons. Here is the press release. More business for the tax enforcers and for the lawyers who assist taxpayers caught up in the mess. According to the preliminary internet chatter, the investors who already feel aggrieved think -- or at least assert -- the Government is piling on.

These taxpayers with offshore Stanford accounts already had the opportunity to join the special voluntary disclosure initiative which ended 10/15/09. This bunch who have lost much or all of their offshore investment (at least those who did not pull out before the end) may truly not have anything left to make the type of payments required under the earlier initiative, much less any more onerous amounts that may be required of late comers.

Article on Stein Dismissals for Constitutional Violations from DOJ Forcing Withdrawal of Attorneys Fees

There is a good recent article on the important tax / white collar crime case of United States v. Stein, 541 F.3d 130 (2d Cir. 2008), here. The article is Christopher McNamara, How the Decisions in Favor of the Stein Thirteen Will Affect the Litigation of Corporate Crime and Department of Justice Policies and Expand the Sixth Amendment Right to Counsel, 78 Fordham Law Rev. 933 (2009). The article is available here. The following is from the introduction. Footnotes, except for identfying the author, are omitted.

[*933]

HOW THE DECISIONS IN FAVOR OF THE STEIN THIRTEEN WILL AFFECT THE LITIGATION OF CORPORATE CRIME AND DEPARTMENT OF JUSTICE POLICIES AND EXPAND THE SIXTH AMENDMENT RIGHT TO COUNSEL

Christopher McNamara*

The U.S. Court of Appeals for the Second Circuit became the first appellate court in nearly thirty years to uphold the dismissal of criminal indictments for a Sixth Amendment right-to-counsel violation. United States v. Stein is a unique case that intertwines constitutional interpretation, constitutional remedies, white collar crime, and U.S. Department of Justice (DOJ) policy. The immediate effects of the Stein decisions not only reflect the changing attitudes at the DOJ on how to prosecute white collar crime but have simultaneously caused the DOJ to implement such changes. As the Sixth Amendment has developed and augmented, so has the interpretation of remedies when there is a right-tocounsel violation. This Note explores the Stein decisions in light of existing doctrines, and concludes that while certain parts of the decisions are legally sound, other parts—right or wrong—may present direct challenges to existing jurisprudence.

Good Summary of IRS Offshore Account Initiative

Some readers may be interested in this post here by Duane Morris, a national law firm, on the status of the IRS' offshore account initiative. I think the material in the post is quite good and recommend it to my readers.

Those of us who practice in this area are currently facing a number of inquiries by UBS account holders (as well as other foreign account holders) who did not get into the program. The iniquiries are most acute for those UBS account holders who have been notified that their account information will be turned over to the IRS. The Duane Morris post discusses this circumstance at the end of the linked page, but I quote the relevant part below. I note that the context is the traditional IRS voluntary disclosure and the requirement that the voluntary disclosure be timely.

How can these restrictions on "timeliness" of a disclosure impact taxpayers with offshore accounts in the current environment? This question may present concerns in the context of the U.S.-Swiss Treaty Request. The request is directed at U.S. account holders, and in some cases account records have already been produced to the SFTA for a determination on whether the account information should be roduced in response to the Treaty Request. Some customers have been notified that their accounts appear to be within the scope of the Treaty Request. If a taxpayer receives this notification, is it too late to make a voluntary disclosure?

The IRS has provided no formal guidance on this issue. However, it appears that a disclosure after the receipt of the notice would be timely. The taxpayer recipient of the notice is not under examination or investigation; the IRS has not yet received any information on the taxpayer from the SFTA, the bank or any criminal enforcement agency; and there is no examination or investigation directly related to the specific taxpayer's noncompliance.8 Voluntary-disclosure coordinators have advised some practitioners that receipt of the notice does not make the disclosure untimely.

Therefore, voluntary disclosure is still available, but not under the same conditions as the OVDP. The primary benefit of "no referral for criminal prosecution" is still present. However, differences exist in the "traditional" disclosure and the now-expired OVDP disclosure:

• The days of "silent" or "stealth" voluntary disclosure appear to be over. Given the protocol for making a disclosure under the OVDP (i.e., direct contact with and disclosure to the IRS) taxpayers will be unable to find comfort in simply filing an amended return and paying the bill—as was frequently the practice before the OVDP was announced.

• The scope of the civil penalties that will be imposed under traditional voluntary disclosure are stiffer than those imposed by the OVDP. Traditional-disclosure taxpayers face civil-fraud penalties of as much as 75 percent of the additional tax liability versus 20 percent under the OVDP. FBAR penalties can also amount to as much as 50 percent of the account value for multiple years, as opposed to 20 percent of the highest value of the account for a single year. Experience shows however that negotiation of these penalties may still be possible.

JAT Comments.
1. I agree that the traditional voluntary disclosure program should still be available generally for foreign account holders.
2. I think also that, provided that there is prompt voluntary disclosure before the SFTA delivers up the names and provided that there are no most unusual wrinkles, the IRS will provide the benefit of the voluntary disclosure program - no criminal prosecution. As noted, of course, the expectation is that the civil penalties imposed (an income tax penalty and an FBAR or in lieu of FBAR) will be higher than available under the special program ending 10/15/09.
3. I speculate that the range of the FBAR or in lieu of FBAR penalty will be from 20% for the highest year (the amount available under the program) and 50% for the highest year (the amount that has been imposed in the criminal cases that have pled to date). In this regard, I wonder whether an IRS attempt to impose a larger penalty, particularly where the income is legal income, not subject to forfeiture, and the amount of income tax evaded is relatively low may have some potential for violating the Constitution's prohibition against excessive fines. See United States v. Bajakajian, 524 U.S. 321 (1998).
4. I wonder whether, unless the IRS makes some public announcement, the days of the quiet disclosure are over. See my earlier discussions of quiet disclosure here. I doubt that it is in the IRS or the country's interests (hopefully they are the same) to shut off (or discourage) quiet disclosures even with respect to foreign bank accounts. Of course, when the CI agent at the service center reviews the amended return reporting foreign bank account income or the delinquent or amended FBAR reporting or correcting reporting for foreign accounts, the process might turn noisy, but I would hope that the IRS would not start criminal prosecutions against those taxpayers who in good faith opened the kimono via amended returns and delinquent or amended FBARs. I just think the IRS (and the country) has more to lose than gain from that tactic. Of course, where the taxpayer has not been totally forthcoming on the amended 1040s or delinquent or amended FBARs or doesn't participate cooperatively in any investigation that may follow, the IRS may decide to launch a full bore criminal investigation and prosecution, but where squeaky clean full and fair quiet disclosures occur, I think it would be counterproductive to do that. But, hay, that's not my call and my skin is not in that game, so these are nothing more than speculations and perhaps idle ones at that.

Convicted UBS Banker May Get Whistleblower Reward

Here's some irony. The New York Times reports today here that Bradley Birkenfeld, a former UBS banker who was convicted as an enabler for U.S. tax cheats, may get a substantial whistleblower reward. (For my other posts on whistleblowers, see here) According to the post, he is seeking at least several billion dollars.