Chicago Lawyer Enjoined From Promoting Fraudulent Tax Schemes (11/7/13)

According to this DOJ Tax Press Release, here, by consent, Gary J. Stern has been "permanently barred Gary J. Stern from promoting tax fraud schemes and from preparing related tax returns."  Key Excerpts from the press release:

According to the complaint, Stern designed at least three tax-fraud schemes that helped hundreds of customers falsely claim over $16 million in improper tax credits and avoid paying income tax on at least $3.4 million.  Stern allegedly promoted the schemes to customers, colleagues, and business associates.  The complaint alleges that his customers included lawyers, entrepreneurs and professional football players, and some of the latter, including NFL quarterback Kyle Orton, have sued Stern in connection with the tax scheme, alleging fraud, breach of fiduciary duty and professional malpractice.

Federal law allows an income tax credit with respect to certain sales of fuel from non-conventional sources (FNS), including methane produced from landfills.  According to the complaint, beginning in the early 2000’s Stern created a web of partnerships, companies and other entities to serve as a conduit for sham transactions designed to funnel false FNS credits to his customers.  Stern allegedly funneled over $11.4 million of these bogus FNS credits to customers and used a bogus trust arrangement to fraudulently distribute an additional $5.34 million in FNS credits to his customers.

Finally, according to the complaint, Stern promoted an abusive income-shifting technique to help his wealthiest customers illegally avoid taxes.  Stern and his business associates allegedly kept most of the money that customers contributed to this scheme.  The court has barred Stern from using any entity to assist others in illegally shifting income for the purpose of avoiding tax.   

The only question I have is whether his consent resolves or mitigates the criminal exposure implicated by the allegations in the complaint (as recounted in the press release).  The press release states that he consented to the injunction but did not admit the allegations.  That perhaps is a fine line.

The Justia entry is here.

The effect of this injunction is that Mr. Stern can be held in contempt and jailed if he violates the injunction by promoting fraudulent schemes or preparing fraudulent returns.  But, then that conduct would be criminal under a host of statutes.  So, it is unclear what exactly an injunction does in terms of compulsion to avoid the conduct.  The contempt proceeding on the injunction would be more summary than criminal charges, but other than that I am not sure what this does.

Readers comments will be appreciated.

I did a Google search on "Gary J.Stern" and identified a lawyer in Chicago with that name.  I am not sure it is the same lawyer, so I decided not to post a link.

Should You Opt Out of OVDI/P? (11/5/13)

I point readers to this new article:  Robert W. Wood, Should You Opt Out Of IRS Offshore Amnesty? (Bloomberg BNA 11/5/13). here.

The author is a very good lawyer.  See his bio here.  He is well respected in the tax community and I, sometimes a member of the sames community, respect him.

Still, I think an article of this nature must be taken with a grain of salt.  Opting out is a larger issue than, I think, can be presented in a article, certainly a short article, outside the context of specific facts (that comment should make readers wary of my own blogs).  That's basically it.

But I will point out one mistake he makes in the article,  He says:

Even criminal prosecution is conceivable after opting out, although that has evidently not happened to anyone. 

That is not true, as presented.  Opting out of an otherwise good OVDI/P presentation and thereafter cooperating in the opt out audit achieves the same "amnesty" from criminal prosecution as if the taxpayer had not opted out.  Let me state that strongly:  Assuming an otherwise good submission of documents and full cooperation, a taxpayer does not increase his or her risk of prosecution by opting out.  I disagree with putting unnecessary fear into this equation.

The author is correct that "once outside the program, the IRS may assess the civil fraud penalty or information return penalties."  And, the willful FBAR penalty can apply.  And, as he later notes, civil fraud can open up an otherwise closed statute of limitation.  Those considering opt out must take those factors into account.

But, I don't think and certainly have not experienced his comment that "Some say the IRS may apply rough justice by calculating FBAR penalties that approximate the 27.5% miscellaneous offshore penalty within the OVDP."  He attributes that to some unnamed others and not to himself.  I don't think the IRS is that petty.  Certainly have not experienced it.

He is, of course, correct that "[t]he OVDP is predictable."  I tell my clients that the only certainty in this offshore account universe is the OVDP penalty structure (including, under the current iteration, the 27 1/2 % penalty for noncompliant foreign assets).  But, for experienced practitioners, there is less uncertainty in the opt out than might otherwise be perceived.  Wise counsel is what is needed.  It is not for the faint hearted or those with inexperienced counsel.

Isreali Bank Depositor Pleads to Conspiracy (11/5/13)

According to a DOJ press release, here, yesterday, David Raminfard pled guilty to one count of defraud / Klein conspiracy related to his deposits, through a nominee Turks & Caicos entity, in an Israeli Bank.  

Key facts:

Defendant:  David Raminfard
Count of Conviction (By Plea):  Conpiracy
Maximum sentence: 60 months.
Tax Loss:  $145,880 (estimated based on omitted income times 28%)
High balance in account:  $3 million (app.)
FBAR Penalty: 50% of high balance.
Court: CA-CD
Judge: ________________

Key excerpts from the press release are:

According to court documents, Raminfard, a U.S. citizen, maintained undeclared bank accounts at an international bank headquartered in Tel Aviv, Israel, identified in court documents as Bank A. The accounts were held in the names of nominees in order to keep them secret from the U.S. government. One of the accounts was held in the name of Westrose Limited, a nominee entity formed in the Turks and Caicos Islands. To further ensure that his undeclared accounts remained secret, Raminfard placed a mail hold on his accounts. Rather than having his account statements mailed to him, Raminfard would receive them from an international accounts manager with Bank A in Israel, who brought the statements to Los Angeles and reviewed them with Raminfard during meetings at a hotel. 

In or about 2000, Raminfard began secretly using the funds in his undeclared accounts as collateral for back-to-back loans obtained from the Los Angeles branch of Bank A. Raminfard used one of the loans to purchase commercial real estate in Los Angeles. By using back-to-back loans, Raminfard was able to access his funds in Israel without the U.S. Government finding out about his undeclared accounts. These loans also enabled Raminfard to claim the interest paid on the loans as a business expense on his companies' business tax returns, while not reporting the interest earned in Israel as income on his individual income tax returns filed with the IRS. For tax years 2005 through 2010, Raminfard failed to report approximately $521,000 in income. The highest balance in Raminfard's undeclared accounts was approximately $3 million. 

Raminfard is the latest in a series of defendants charged in the U.S. District Court for the Central District of California with conspiring to defraud the United States in connection with using undeclared bank accounts in Israel to obtain back-to-back loans in the United States. 

* * * * 

Raminfard faces a potential maximum prison term of five years and a maximum fine of $250,000. In addition, Raminfard has agreed to pay a civil penalty to the IRS in the amount of 50 percent of the high balance of his undeclared accounts for failing to file FBARs.

India Signs OECD Multilateral Convention on Mutual Administrative Assistance in Tax Matters (11/3/13)

Nigam Nuggehalli, Artful dodges in Swiss tax pacts (Business Standard 10/30/13), here.  Excerpts of the introduction are:

The Swiss banking regime is in the news again with the announcement that Switzerland finally decided to sign, on October 16, the Organisation for Economic Co-operation and Development-sponsored Multilateral Convention on Mutual Administrative Assistance that provides for a liberal exchange of information between countries on potential money launderers and tax dodgers. 

As usual, appearances are deceptive. Switzerland will not be subject to a liberalised information exchange regime without a further discussion in and eventual ratification by the Swiss parliament. Therefore, the scope and timing of Switzerland's participation in a regime that enables transparent exchange of information remain uncertain. 

Until then, in order to access information on Indian-source money stashed by tax dodgers and money launderers in Swiss banks, India has to depend on the double taxation avoidance agreement (DTAA) that went through certain revisions in 2000 and 2010. The original and revised versions present a fascinating insight into, on the one hand, the evolution of India as a country attractive to foreign investment and, on the other hand, India's traditional obsession with untaxed money in Swiss banks.

The article then provides a nice summary of the events leading to this new agreement and the immediate effect of the new agreement.

New, Outlier Sentencing in Case Involving Export Crimes with Tax and FBAR Problems (11/3/13)

According to an FBI press release, here:

Qiang “John” Wu, 47, of Dublin, Ohio has been sentenced to six months in prison, followed by three years under court supervision, for making a materially false statement relative to the exportation of laser technology to the People’s Republic of China. Wu was also ordered to pay approximately $282,000 in fines and fees, as well as to pay back taxes due for several years. 

* * * * 

According to court documents, the investigation identified seven shipments Wu sent to China through his business, known as Adv-Tech International LLC, between October 17, 2007 and August 31, 2010. Wu knowingly failed to disclose the true end-user on the U.S. Customs and Border Protection Shippers Export Declaration (SED). The items exported, including laser equipment, are considered dual-use technologies with both military and civilian applications. 

The investigation revealed two of the true end-users in China as state-owned institutions involved in laser and optical research with military applications. Wu was found to have knowingly filed inaccurate export declarations to deter scrutiny of these shipments by U.S. authorities. Wu is a citizen of China and a legal permanent resident of the United States. 

Wu failed to report to the IRS a significant portion of the proceeds of these transactions, some of which were deposited into a U.S. bank account and some of which were diverted to accounts held by Wu in the People’s Republic of China. As a result, Wu has been ordered to file amended tax returns for the tax years 2006 through 2011 and pay any additional taxes due. A civil Foreign Bank Account Reporting (FBAR) penalty of $100,000 was also ordered for failing to report money Wu held in foreign bank accounts.

This appears to be an outlier case driven by crimes other than the tax and FBAR crimes.  I will incorporate the information in the spreadsheet tomorrow.

It is not clear from the press release that he was actually convicted of income tax or FBAR crimes.  An earlier report of his guilty plea mentions the income tax and FBAR problems and states that they are discussed in the plea agreement, but also is inconclusive as to whether there was a plea for these tax related crimes.  I infer from the combination of the statements that he did not plea to tax or FBAR crimes, but did agree that the Court could order him to cooperate with the IRS and file the required amended and delinquent FBARs.

U.K., Austria Exact Their Pound of Flesh from Switzerland for Enabling Tax Cheating (11/3/13)

As reported in Swiss Pay $1.6 Billion to U.K., Austria in Tax Agreements (NASDAQ Dow Jones 11/1/13), here.

Switzerland's tax authority Friday said it has transferred around 1.5 billion Swiss francs ($1.6 billion) to the U.K. and Austria this year as part of deal to settle untaxed assets held in Swiss banks. 

The payments are part of the Swiss government's goal of settling long-standing tax disputes over funds held in Swiss bank accounts, with the U.K. and Austrian governments agreeing deals last year, taxing undeclared assets in return for ongoing anonymity.

Sentencing Leniency for Offshore Tax Cheats (11/3/13)

In an earlier blog (Ty Warner, Beanie Babies Creator, Pleads Guilty (Federal Tax Crimes Blog 10/2/13; Updated 10/5/13), here, I noted:

Observers of the tax sentencing scene have noted for some time now that offshore account tax cheats fare better in sentencing than do ordinary tax cheats with similar sentencing characteristics.  See e.g., Lower Sentences For Offshore Tax Cheats - Role of 5K1 Departures (Federal Tax Crimes Blog 9/28/13), here.  (I am currently updating the master spreadsheet that will contain some nonoffshore sentencing data to compare to the offshore sentencing data.)  As noted in my blog, the apologists for this phenomenon assert that it is perhaps related to the 5K1 substantial assistance downward departure.  Note that there is no such down departure provided in the Warner plea agreement.  Hence, this case will test whether these offshore cheats really get treated better.  Warner is the poster child for the big fish that got caught.

On that theme is a recent article, David Voreacos, Beanie Baby Billionaire Sentence Comes Amid Tax Leniency (BloombergBusinessweek 11/1/13), here.  Key excerpts are:

The U.S. has prosecuted 103 people, securing 62 guilty pleas and five trial convictions. Of 49 sentenced, most received probation or home confinement, according to a Bloomberg analysis of the cases, which included criminal filings and transcripts of sentencings. 

Only 18 got prison time. Four of those were sentenced to a year and a day, and just two got longer terms. In almost every case examined, the defendants received sentences that were below the guideline range set at sentencing. 

JAT Comment:  I think this is consistent with the data I have compiled and analyzed in my spreadsheet.  I will check the numbers tomorrow and bring my spreadsheet up to date for posting, hopefully by tomorrow afternoon.   Then, from another part of the article is the following:

“The wide variety of sentences in offshore tax evasion cases -- ranging from probation to home confinement to substantial prison terms -- reflects the general difficulty of predicting how any one particular district judge might sentence a specific defendant in any case,” said Daniel W. Levy, who prosecuted federal tax cases before joining McKool Smith LLP.

Daniel Levy (bio here) was one of the chief prosecutors of these cases in USAO SDNY, so he knows of what he speaks.  Nevertheless, it is important to note that the heaviest sentences were in cases that went to trial and some of those few, those very few, cases going to trial were atypical cases.  So, the proper universe to compare is the cases that pled rather than going to trial.  It is difficult to predict what a judge might do, particularly if he or a fellow judge in the district have not sentenced in this context before.

NYT Op-Ed on Delaware, Wyoming & Nevada as Haven for Criminal Activity (11/2/13)

John A. Cassara, a former IRS CI agent, wrote this op-ed in the New York Times:  Delaware, Den of Thieves? (NYT 11/1/13), here.  He opens the piece with:

As a special agent for the Treasury Department, I investigated financial crimes like money laundering and terrorism financing. I trained foreign police forces to “follow the money” and track the flow of capital across borders. 

During these training sessions, I’d often hear this: “My agency has a financial crimes investigation. The money trail leads to the American state of Delaware. We can’t get any information and don’t know what to do. We are going to have to close our investigation. Can you help?" 

The question embarrassed me. There was nothing I could do. 

In the years I was assigned to Treasury’s Financial Crimes Enforcement Network, or Fincen, I observed many formal requests for assistance having to do with companies associated with Delaware, Nevada or Wyoming. These states have a tawdry image: they have become nearly synonymous with underground financing, tax evasion and other bad deeds facilitated by anonymous shell companies — or by companies lacking information on their “beneficial owners,” the person or entity that actually controls the company, not the (often meaningless) name under which the company is registered. 

Our State and Treasury Departments routinely identify countries that are havens for financial crimes. But, whether because of shortsightedness or hypocrisy, we overlook the financial crimes that are abetted in our own country by lax state laws. While the problem is concentrated in Delaware, there has been a “race to the bottom” by other states that have enacted corporate secrecy laws to try to attract incorporation fees.

And he concludes the piece:

While officials in Delaware, Wyoming and Nevada talk about their corporate “traditions,” I am unimpressed. Business incorporation fees have accounted for as much as a quarter of Delaware’s general revenues. It’s no surprise that officials in Dover and Wilmington want to protect their state’s status as a corporate registry, but if that means facilitating criminal activity, their stance is a form of willful blindness. America must require uniform corporate-registration practices if it is to persuade other nations to cooperate in the fight against financial crimes.

I hope readers will offer their comments.

On Retrial, Daugerdas Convicted and Field Acquitted (11/1/13)

On retrial, Paul Daugerdas has been convicted of tax crimes related to his tax shelter activities.  In the same triial, Denis Field, former CEO of Seidman was acquitted.  See Nate Raymond, CORRECTED-Lawyer guilty, accounting firm CEO cleared in tax shelter case (Reuters 10/31/13), here.  Excerpts:

A federal jury in Manhattan convicted Paul Daugerdas, the lawyer, on seven of 16 counts including conspiracy, tax evasion and mail fraud following an eight week re-trial in his criminal case. 

But the jury acquitted Denis Field, the one-time accounting firm head, on all seven counts against him including conspiracy and tax evasion.

The USAO SDNY press release, titiled Jenkens & Gilchrist Attorney Found Guilty In Manhattan Federal Court Of Multibillion-Dollar Criminal Tax Fraud Scheme, is here.  Key excerpts from the press release are:

Preet Bharara, the United States Attorney for the Southern District of New York, Ronald A. Cimino, Deputy Assistant Attorney General for the Tax Division of the Department of Justice, and Richard Weber, the Chief of the Internal Revenue Service, Criminal Investigation (“IRS-CI”), announced today that PAUL M. DAUGERDAS was convicted in Manhattan federal court for his role in a tax shelter scheme in which he and his co-conspirators designed, marketed, and implemented fraudulent tax shelters used by wealthy individuals to avoid paying taxes to the IRS. The 10-year scheme generated over $7 billion of fraudulent tax losses and netted DAUGERDAS approximately $95 million in profits. DAUGERDAS was convicted following a seven-week jury trial, presided over by U.S. District Judge William H. Pauley III. 

* * * * 

From 1994 through 2004, DAUGERDAS, a lawyer, certified public accountant, and the former head of the Chicago office of the Jenkens & Gilchrist law firm (“J&G”) and its tax practice, participated in a scheme to defraud the IRS by designing, marketing, implementing, and defending fraudulent tax shelters. 

As part of the scheme, DAUGERDAS and others undertook to prevent the IRS from: (i) detecting their clients’ use of these shelters; (ii) understanding how the transactions operated to produce the tax results reported by the clients; (iii) learning that the shelters were marketed as cookie-cutter products designed to eliminate or reduce large tax liabilities; (iv) learning that the clients were not seeking profit-making investment opportunities, but were instead seeking huge tax benefits; and (v) learning that, from the outset, all the clients intended to complete a pre-planned series of steps that had been designed to lead to the specific tax benefits sought by the clients. DAUGERDAS and others created, and assisted in creating, transactional documents and other materials that falsely and fraudulently described their clients’ motivations for entering into the tax shelters and for taking various steps in order to yield the tax benefits. 

As a result of the scheme, the defendant and his co-conspirators made millions of dollars in fees and bonuses. Specifically, DAUGERDAS made $95 million in profits but used tax shelters to reduce the taxes he paid to less than $8,000; without the shelters, he would have owed over $32 million in taxes.

Does Our Criminal Justice System Find Truth Well And What is the Tolerance for Error? (10/28/13)

Today, I address a larger question than one about federal tax crimes.  The question is whether our traditional criminal justice system for finding truth by triers of fact -- usually juries but sometimes judges -- really do it well and how much confidence can we have that they do it well.  At the outset, we all recognize that no system is perfect.  Our system requires proof of guilt beyond a reasonable doubt -- not proof beyond any doubt, but proof beyond a reasonable doubt.  So, as articulated -- beyond a reasonable doubt -- suggests the possibility that some are wrongly convicted even though a jury could find that they were guilty beyond a reasonable doubt.  But, even the concept of what is proof beyond a reasonable doubt is uncertain, further exacerbating the possibility of a wrongful conviction.  See Reasonable Doubt - What is It? (Federal Tax Crimes Blog 10/16/09), here.

I point readers interested in this topic to a recent article:  Mark Godsey, We Are Naturally Bad Sleuths..and Frequently Fail to Find the Truth (10/25/13), here.  Mr. Godsey offers a good introduction to problems of memory as they play out in our judicial system, referring principally to Elizabeht Loftus's Ted Talks:  The Fiction of Memory (6/13, posted 9/13), here.    Her talk is an outgrowth of the Innocence Movement.  See the web site for the innocent project here.

Readers interested at any level in the criminal justice system should be familiar with the phenomena discussed in these postings.

Outlier Foreign Account Conviction Affirmed; Making a Witness Unavailable to the Defense (10/27/13)

I previously reported on the conviction and sentencing of Artistotle "Rick" R. Matsa for a melange of offenses, including an FBAR violation.  See Outlier Conviction for FBAR and Many Other Tax-Related Crimes (Federal Tax Crimes Blog 4/21/12), here; and Outlier Foreign Account Case Sentencing (Federal Tax Crimes Blog 11/3/12), here.  Matsa's conviction has been affirmed on appeal.  United States v. Matsa, 2013 U.S. App. LEXIS 21930 (6th Cir. 2013), here.  The Court opens the nonprecedential opinion as follows:

I. Background 

Matsa was a licensed real-estate broker and lawyer in Ohio. He routinely reported losses or minimal income from his businesses, such that from 1985 to 2006 he paid a total of $107 in federal income tax. His legal troubles began when Chrissoula Matsa, his wife at the time with whom he was undergoing divorce proceedings, tipped off law enforcement to his shady dealings. A subsequent investigation by the federal grand jury revealed a number of dubious practices, including the use of phony trusts to mask personal assets, the failure to report rental income, and the transfer of property (though not actual control) to friends and relatives. During the investigation, Matsa failed to comply fully with the government's subpoena of his records. Based on this conduct, the grand jury indicted Matsa for one count of corrupt interference with administration of the internal revenue laws, 26 U.S.C. § 7212(a); fifteen counts of assisting preparation of false tax returns, 26 U.S.C. § 7206(2); one count of failing to report a foreign bank account, 31 U.S.C. §§ 5314, 5322(b); one count of conspiracy to obstruct justice, 18 U.S.C. § 371; two counts of witness tampering, 18 U.S.C. § 1512(b); one count of making a false statement, 18 U.S.C. § 1001; and one count of obstruction of justice, 18 U.S.C. § 1503(a). The grand jury also indicted Matsa's mother for conspiracy to obstruct justice and tried them together. A jury found Matsa guilty on all counts after a five-week trial, and the court sentenced him to a term of 85 months' imprisonment. This appeal followed.

The Court then rejects his various arguments.  None of them appear to offer anything new or exceptional for readers of this blog so I just outline the arguments rejected and let readers go to the opinion for further review:

II. Removal of Counsel
III. Prosecutorial Misconduct
A. Pretrial Conduct
1. Witness intimidation
2. Obstruction of access to a witness.
3. Threats toward defense counsel.
4. Attorney-client privilege
B. Conduct at Trial
1. Commentary and facial expressions
2. Questioning of Ross Gillespie
C. Cumulative Effect

I will comment briefly on the witness intimidation argument.  The Court describes the argument and its rejection as follows (bold-face is supplied to emphasize a point discussed after the quote):

Can Restitution Be Reduced by Payments on the Tax Liability Subject to Restitution? (10/26/13)

I wrote yesterday on restitution.  See More on the Relationship Between Tax Liability and Tax Restitution Assessed as a Tax (Federal Tax Crimes Blog 10/25/13), here.  Today I carry that discussion a little farther based on a recent case.  I ask this question.  What if a preparer is ordered to pay restitution for the tax due for returns the perparer prepared and the taxpayers thereafter pay some or all of their liabilities?  Q&A 10 of CC-2011-018 (8/26/11), here, answers a different question but it offers reasoning for developing the issue.  Q&A 10 is:

Question 10: If the amount of criminal restitution ordered and the subsequent restitution-based assessment is determined to be excessive by a subsequent examination, can the Service abate any portion of the assessment? 

Answer 10: If the Service determines, pursuant to examination, that the restitution amount ordered is excessive, the Service should contact the Justice Department's Tax Division or the proper U.S. Attorney's Office and request a modification of the restitution order. When the restitution order is amended, the Service may abate the related assessment under section 6404 to bring it in line with the amount in the amended order. Although the taxpayer is not precluded from seeking abatement under section 6404 before the restitution order is modified (notwithstanding the restrictions of section 6404(b)), a valid and meritorious section 6404 request by the taxpayer still requires the taxpayer or the Service (through the Justice Department) to seek modification of the restitution order in order to reduce the amount because the Service is bound by the actual terms of the restitution order in making an assessment under section 6201(a)(4)(A).

Q&A 10 is then modified by CC-2013-012 (7/31/13), here, which reasons:

The treatment of a restitution-based assessment as separate and distinct from an actual determination of tax liability for the same tax period requires clarification and revision of Question and Answer 10 in Chief Counsel Notice CC-2011-018, The Assessment and Collection of Criminal Restitution. The answer to question 10 in that document addressed the situation where restitution ordered "is excessive" compared to the amount of tax liability determined by civil examination for the same tax periods. By using the term "excessive," Question 10 erroneously assumed that the amount of restitution is directly related to, comparable with, or an aspect of tax liability as determined by the Service's examination. On the other hand, Question and Answer 10 properly concluded that the Service may only abate a restitution-based assessment to bring it in line with an amended restitution order from the sentencing court. Regardless of whether the civil examination for the same tax period covered by the restitution order results in deficiency determination greater or lesser than the amount of restitution, the Service shall assess and collect the full amount of restitution ordered.

More on the Relationship Between Tax Liability and Tax Restitution Assessed as a Tax (10/25/13)

Tax Notes Today had a new IRS publication, a Program Manager Technical Assistance, today on the issue of restitution assessed under Section 6201(a)(4)(A), here.  That section as I have noted before (see blogs collected below) authorizes the IRS to assess as a tax the amount rewarded as restitution in a criminal tax case.  This new PMTA 2013-002 (1/13/13), reproduced at 2013 TNT 206-17 addresses the effect of an NOL carryback to a tax year for which restitution has been assessed.  The conclusion the PMTA reaches is:

NOL carrybacks or carryovers to, or other deductions in, a tax period for which an amount of restitution was ordered and assessed pursuant to section 6201(a)(4)(A) reduce a taxpayer's civil tax liability for that tax period. Such deductions, however, do not in any way affect the Service's assessment or collection of the amount of restitution itself. Regardless of the amount of civil tax liability for that period, the Service must collect the entire amount ordered as restitution under section 6201(a)(4)(A).

The reasoning is, in steps:

1.  Section 6201(a)(4)(A) provides in material part (emphasis supplied):

The Secretary shall assess and collect the amount of restitution under an order pursuant to section 3556 of title 18, United States Code, for failure to pay any tax imposed under this title in the same manner as if such amount were such tax.

2.  "Criminal restitution and civil tax liability are separate and distinct."  This may be a difficult proposition to grasp immediately, so I quote; the entire paragraph backing up that opening sentence:

Criminal restitution and civil tax liability are separate and distinct. Section 6201(a)(4)(A) recognizes the distinction in requiring the Secretary to collect the amount of restitution ordered pursuant to 18 U.S.C. § 3556 in the same manner "as if such amount were such tax." The distinction between criminal restitution and tax liability is perhaps most starkly presented when a return preparer convicted of aiding and assisting in the preparation of the false returns, in violation of 26 U.S.C. § 7206(2), is ordered to pay restitution calculated with reference of the tax owed by his clients, a tax for which the return preparer is not civilly liable. The distinction is further illustrated by the fact that the amount of restitution ordered may differ depending on how the criminal case is resolved. Restitution determined under the Mandatory Victim Restitution Act of 1996, Pub. L. No.1 04-132, § 204(a), 111 Stat. 1227 (1996) (codified as amended at 18 U.S.C. § 3663(A)), applies to certain tax cases and directs that the amount of restitution is generally the amount of property taken from the victim (an actual loss to the government in a tax case) under 18 U.S.C. § 3663A(b)(1)(A) and (B), whereas restitution ordered pursuant to a plea agreement may be "to the extent agreed to by the parties in a plea agreement" for any amount greater or less than the loss attributable to the criminal offense. 18 U.S.C. § 3663(a)(3). See, e.g., Sloan, 505 F.3d at 695; Cooper, 498 F.3d at 1158. Restitution ordered in a criminal case may vary depending on how the case was ultimately resolved,independent -- at least in part -- of the defendant's actual tax liability for the tax period at issue.

This seems to be the gravamen of the PMTA's conclusion.  The two are just different.  The restitution based assessment may or may not be the tax due for the period, although, at least in my mind, when restitution is assessed it should be the unpaid tax for the period (setting aside the effects of any carryovers).

Another UBS U.S. Depositor Convicted (10/25/13)

DOJ announces, here, that Dr. Patricia Lynn Hough has been convicted

convicted today by a jury in Fort Myers, Fla., of conspiring to defraud the Internal Revenue Service (IRS) by concealing millions of dollars in assets and income in offshore bank accounts at UBS and other foreign banks, and of filing false individual income tax returns which failed to report the existence of those foreign accounts or the income earned in those accounts."  

Key Facts:

Defendant:  Dr. Patricia Lynn Hough
Counts of Conviction:  Conspiracy (1); Tax Perjury (4)
Maximum Sentence on Counts of Conviction:  204 months
Bank:  UBS
Entities:  Yes
Court:  MD FL
Judge:  John E. Steele (Wikipedia entry here)

Key excerpts from the press release are:

According to court documents and court proceedings, Hough owned two Caribbean-based medical schools – The Saba University School of Medicine located in Saba, Netherlands Antilles, and The Medical University of the Americas located in Nevis, West Indies. Hough conspired to defraud the IRS with her husband, Dr. David Fredrick, who is awaiting trial.  They carried out the conspiracy by creating and using nominee entities, including a foundation, and undeclared accounts in their names and the names of nominee entities at UBS and other foreign banks to conceal assets and income from the IRS.  Both schools and associated real estate were sold on April 3, 2007, for more than $35 million, all of which was deposited into undeclared accounts in the name of the nominee entities.  The majority of the sale proceeds were not reported to the IRS on their tax returns and no tax was paid.  

The evidence at trial further proved that Hough and her co-conspirator used emails, telephone calls and in-person meetings to instruct Swiss bankers and asset managers to make investments and transfer funds from their undeclared accounts at UBS. The evidence established that Hough and her co-conspirator caused funds from the undeclared accounts in the names of the medical schools to be transferred to undeclared accounts in their individual names or in the names of nominee entities.  Hough and her husband then used the funds in their undeclared accounts to purchase an airplane, two homes in North Carolina and a condominium in Sarasota, Fla.  
Hough was also convicted of four counts of filing false tax returns for 2005, 2006, 2007 and 2008.  The evidence at trial established that Hough filed false tax returns that substantially understated her total income because she failed to report substantial interest and investment income and in 2007  because she failed to report her half of the proceeds from the sale of the medical schools.  In addition, Hough failed to report on Schedule B of the tax returns that she had an interest in or signature or other authority over bank, securities or other financial accounts located in foreign countries.  

On Restitution, Count of Conviction and Tax Loss (10/24/13)

In United States v. Berkowitz, 732 F.3d 850 (7th Cir. 2013), here, the Seventh Circuit affirmed an award of restitution that the sentencing judge had based on the tax loss amount.  Tax loss and restitution are related but different concepts.  At its most basic, tax loss can include all tax loss that was the object of the crime whether or not the actual tax loss was less.  Restitution can only include the actual loss to the person harmed (here the IRS). As the Seventh Circuit noted (fn 3, citations omitted):

District courts can get into trouble if they rely unquestioningly on these figures [the equation of tax loss and restitution], however, because the loss amount for sentencing considers not just the conduct underlying the conviction but "relevant conduct"  accompanying it. Calculations for restitution are not so permissive. They are rigidly compartmentalized to the actual losses resulting from the conduct of the convicted offenses.  

The defendant in Berkowitz made an interesting textual argument base on the Mandatory Victims Restitution Act of 1996 ("MVRA"). 18 USC § 3663A, here.  Section 3663A(a)(2) provides:

[A] person directly and proximately harmed as a result of the commission of an offense for which restitution may be ordered including, in the case of an offense that involves as an element a scheme, conspiracy, or pattern of criminal activity, any person directly harmed by the defendant's criminal conduct in the course of the scheme, conspiracy, or pattern.

The defendant's argument on appeal was based upon the bold-faced language.  The defendant argued that the harm that could be subject to restitution was only the harm resulting from his own conduct and not the conduct of co-conspirators.

Just a little background.is necessary to develop the context for the argument.  The defendant on this appeal was Yair Berkowitz.  The Court refers to him as Yair.  The defendant "together with a host of others, participated in a massive tax fraud scheme with the object of filing false tax returns in the names of over 3,000 unknowing, incarcerated, or deceased people."  The scheme -- or some aspects of it -- stretched from 2003 to 2007.  The defendant and others were charged in a 51 count indictment.  The defendant "was named in several counts, but pleaded guilty only to Count 51, wire fraud."  The wire fraud statute is 18 USC 1343, here.  The specific act of wire fraud was a transfer between accounts.  Despite this limited plea to a single count based on a single act, in the plea agreement, the defendant admitted and accepted responsibility for "his part in the conspiracy."  The defendant did not admit to a count charging conspiracy, however.  The Court of Appeals described the sentencing process as follows:

The district court calculated the restitution award using loss figures provided in the PSR. The Government argued that the intended losses from the overall scheme were roughly $65 million and that the actual losses were around $10 million. But the PSR recommended—and the government agreed—to narrow these amounts for Yair [the defendant]. The PSR concluded that  when the universe of losses was limited to the dozen or so people that Yair interacted with or directed regularly in the course of the scheme, the intended loss amount was around $19 million and the actual loss $4,069,091.06.

Switzerland as Club Fed for Swiss Enablers of U.S. Tax Crimes (10/24/13)

Following through on the arrest and detention of Raoul Weil (see Ex Top UBS Banker Arrested; Likely to be Extradited (10/21/13), here), Reuters has an interesting article on the effect of the U.S. criminal initiative against Swiss enablers of U.S. tax cheats.  See Michael Shields and Katharina Bart, Arrest chills Swiss bankers' travel plans (Reuters 10/23/13), here.  Some excerpts are:

Seeing one of their select number hauled in handcuffs before a foreign court may prompt Swiss bankers to call their lawyers before they ring travel agents to book a winter break. 

* * * * 

"Maybe we'll all be taking our vacations in Ticino and Graubuenden," one senior private banker told Reuters, making light of concerns among his peers about travelling abroad by talking up the charms of Switzerland's picturesque mountains. 

* * * * 

It is unclear why Weil, 54, chose to cross the border, five years after he was publicly indicted by U.S. prosecutors. Switzerland does not extradite its own citizens in cases of tax fraud. But Italy, which acted on an Interpol warrant, has given the United States six weeks to seek Weil's transfer for trial. 

* * * * 

It is unclear how many Swiss risk arrest. Some may be the subject of U.S. indictments not made public. The U.S. Justice Department did not answer a request for the figures. Martin Naville, chief executive of the Swiss-American Chamber of Commerce in Zurich, thinks the number may be in the low dozens. 

Yet, he says, hundreds more have curbed their itineraries, avoiding setting foot on U.S. territory if not others, for fear of being caught up in the Justice Department's dragnet. 

"I would say there are 1,000 people who are currently not travelling to the United States because they are afraid," said Naville, whose forum maintains close ties to both Swiss and American business leaders and senior bankers. 

* * * * 

Naville said Swiss bank staff who had had few dealings with U.S. clients probably had little to fear. "But," he added, "If you have somebody who had 200 of those clients, had been very aggressive in pushing and peddling specific structures in overseas dominions and everything, that person is at risk."

Court of Appeals Reverses Acceptance of Responsibility Downward Adjustment After Trial (10/23/13)

In United States v. Melot, 732 F.3d 1234 (10th Cir. 2013), here:

After a jury trial, appellant Bill Melot was convicted of one count of corruptly endeavoring to impede the administration of the Internal Revenue Code, one count of attempting to evade or defeat tax, six counts of willful failure to file, and seven counts of making false statements to the Department of Agriculture. Melot was sentenced to a term of sixty months' imprisonment, a significant downward variance from the advisory guidelines range of 210-262 months. He was also ordered to pay $18,493,098.51 in restitution to the Internal Revenue  Service.

His underlying misconduct, he claimed, arose from his belief in various tax protestor positions that he was not subject to tax.  The jury did not believe him and convicted.  On appeal:

His appellate argument is confined to an assertion the Government failed to prove he did so willfully. He argues he had a good-faith belief he was not violating the law. See Cheek v. United States, 498 U.S. 192, 201-02 (1991).

The Court of Appeals rejected the argument summarizing:

In sum, the Government's evidence showed Melot routinely concealed income and assets from the IRS; used cash extensively, informing others that this was a means to avoid the payment of income taxes; and acted in a manner inconsistent with his asserted belief he is not subject to federal income taxes because he is not a citizen of the United States. All of the Government's evidence, together with the reasonable inferences that can be drawn from it, is amply sufficient to support the jury's finding that Melot was aware of his obligation to file returns and pay federal taxes and negates any inference Melot acted in good faith. n9
   n9 Melot points to his own testimony that (1) he genuinely believed the information presented in the "tax protestor snake oil" documents he read, (2) did not read the disclaimers associated with that literature, and (3) did not understand the Internal Revenue Code because it was "too complex" for him, as support for his assertion he held a good-faith belief that he was not violating the law. Based on its verdict, however, the jury clearly disbelieved Melot's testimony. To the extent Melot also relies on the testimony of Dr. Samuel Roll, that reliance is misplaced. Dr. Roll, a psychologist, testified  at the sentencing hearing, not the trial.

The defendant also argued that his sentencing Guidelines calculation was incorrect because the tax loss should not have included federal and state fuel excise taxes.  Those taxes were included as relevant conduct.  The Court of Appeals affirmed their inclusion.  From my perspective, the opinion offers nothing really new on relevant conduct, so I do not discuss that aspect of the Tenth Circuit opinion.

The Government cross-appealed the sentencing calculation.  That cross-appeal is the focus of this blog on acceptance of responsibility.  I quote this portion of the opinion in full:

Ex Top UBS Banker Arrested; Likely to be Extradited (10/21/13)

Raoul Weil, a fugitive from U.S. justice [Wikipedia entry here], was arrested in Italy.  See Guy Dinmore and Daniel Schäfer, Former UBS banker faces US extradition (Financial Times 10/21/13), here.  Excerpts:

A prominent Swiss asset manager is facing extradition to the US after being arrested while holidaying in Italy on charges he helped American clients with $20bn of assets to evade US taxes during his previous job at UBS. 

Police in Bologna said Raoul Weil was arrested early on Saturday after he registered at a hotel and his name appeared on a police list of international arrest warrants. Mr Weil was transferred to Bologna’s prison where the next step would be for the US authorities to request his extradition, police said. 

Under Swiss laws, a suspect has to consent to an extradition, making it all but impossible for foreign authorities to succeed with such a request. Under Italian law, however, Mr Weil could be extradited within weeks or months, according to a US official following the case.

Tax Notes Today has the following article:  Kristen A. Parillo and Andrew Velarde, Fugitive Swiss Banker Wanted by U.S. Arrested in Italy, 2013 TNT 204-3 (10/22/13).  Excerpts:\

Weil was indicted by the DOJ in 2008 for conspiring to defraud the United States by helping U.S. clients conceal taxable assets. The indictment alleged that Weil and others conspired between 2002 and 2007 to help about 17,000 Americans conceal about $20 billion in assets in Swiss bank accounts. In January 2009 Judge James Cohn of the U.S. District Court for the Southern District of Florida signed an order declaring Weil a fugitive after he failed to surrender himself to U.S. authorities. (Prior coverage 2009 TNT 10-7: News Stories.) 

Bryan C. Skarlatos of Kostelanetz & Fink LLP told Tax Analysts that the latest development highlights the DOJ's long reach. "Swiss banks, bankers, and other professionals who claim to have no connection to the U.S. still have real risks because the U.S. can and will indict them on charges of conspiring to help U.S. citizens evade U.S. tax," he said. 

Not only do Swiss banks face the prospect of paying stiff fines and potentially going out of business, but the individual bankers or professionals are effectively imprisoned in Switzerland for fear of being picked up on an international arrest warrant, Skarlatos said. "The lesson here is that the DOJ does have real leverage in forcing banks and bankers to comply with U.S. demands for information," he said, adding that this is why so many Swiss banks are considering making a voluntary disclosure to the United States under the recently announced DOJ settlement program for Swiss banks.  

* * * * 

Weil likely doesn't have a lot of settlement options given that the UBS probe is completed and other UBS bankers entered into plea deals with the DOJ, [Peter D.] Hardy said. "Perhaps there are some individuals out there that he can provide information on, but at this point I wouldn't be surprised if we saw a trial," he said. "And based on the indictment, he'd be looking at significant jail time.

Attorneys quoted in the foregoing excerpts are Bryan C. Skarlatos, here, and Peter D. Hardy, here.

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