Fourth Circuit Approves Statistical Sampling Technique for Sentencing Tax Loss (11/23/13)

In United States v. Ukwu, 2013 U.S. App. LEXIS 23513 (4th Cir. 2013), here, the Fourth Circuit affirmed a tax loss calculation based on what it viewed as a proper statistical inference from a sample of the population.  I want to address that issue in this blog.

The cases where this type of statistical inference is drawn as to the tax loss usually appear in tax return preparer prosecutions.  In these cases, the IRS discovers a pattern of errors in some number of returns prepared by the target of the investigation.  It will do some level of investigation and determine that some percentage of the errors -- usually a very high percentage -- represent the preparer's fraud. The IRS will then project that percentage over the universe of returns prepared by the preparer to determine, by statistical inference, the tax loss.  This type of inference is usually not presented in the trial to determine guilt or innocence because a more exacting standard of proof than mere inference is required but rather is presented at sentencing to determine the relevant conduct (which can include noncharged years or returns, acquitted years or returns, etc.).  From a statistical perspective, the initial inquiry is whether the sample size is adequate.  See generally the Wikipedia entry on Sampling (Statistics), here.  Let's say, for example, that the preparer prepared 1,000 returns, that the IRS audited 10 and that 9 out of 10 claimed fraudulent deductions or credits resulting in average underpaid tax of $1,000.  Can a fair inference be drawn that 90% of the remaining unaudited 990 returns not only contained fraudulent deductions but that their average amount of fraudulent deductions was $1,00?  What if the number audited were 100, with similar percentages and amounts?  What if the number audited were 200?  300? Would it be important that the taxpayers audited were randomly drawn?  And what does randomly drawn mean?

I can't write a book on statistics, but there are any number of scholarly books and articles on the subject.  One popular book is Nate Silver, The Signal and the Noise (2012), here.  I will mention Silver again below, although I can't resist saying that Silver was the "gold standard" in projecting the outcome of the 2012 presidential elections.  See Nate Silver's Wikipedia entry here.  I mention also Charles Whelan, Naked Statistics: Stripping the Dread from the Data (2012), here.

Let's see what the Fourth Circuit did in its statistical exegesis in Ukwu.  I note at the outset that  opinion is an unpublished per curiam opinion.  I won't go into a rant about unpublished opinions, not to mention unattributed per curiam opinions.  I have done that elsewhere and, besides, nobody is or should be interested in my opinions on such opinions.  I do say that it is some type of "junior" opinion deemed to be of less significance than published opinions in terms of adding to the law.  (Perhaps this could be compared to the difference between Memorandum and Regular Tax Court Opinions.)  Let's get right to to opinion:

The Court gave us the key background (but not the details) as follows:

After Mr. Ukwu's jury conviction, the government estimated how much money Mr. Ukwu took from federal and state coffers. It concluded that Mr. Ukwu's criminal behavior created tax losses of $2.1 million, which corresponds to a base offense level of 22 under § 2T4.1 of the United States Sentencing Guidelines Manual. 

On appeal, Mr. Ukwu takes issue with the $2.1 million estimate, arguing that a preponderance of the evidence shows that his ill-gotten gains amounted to less than $1 million. Specifically, he argues that the district court's method of estimating the tax shortfall was unsound because it used a small, flawed sample of tax returns to make inferences about another 1000 returns that he prepared. Based in part on its estimate, the district court sentenced Mr. Ukwu to 51 months in prison. Mr. Ukwu filed a timely appeal.

Daugerdas Retrial Jury Instructions - Part 06 Conspiracy Instructions Part 2 - Defraud / Klein Conspiracy (11/16/13; revised 11/23/13)

Judge Pauley gives standard instructions on the elements of the crime of conspiracy - to summarize:

First: that an agreement existed between two or more persons to accomplish at least one of the unlawful objectives charged in the Indictment;  

Second: that the defendant you are considering knowingly and willfully became a member of, and joined in, the conspiracy; and  

Third: that a member of the conspiracy, not necessarily the defendant whom you are considering, knowingly committed at least one overt act in furtherance of the conspiracy

The Court then explains the elements, again in fairly standard instructions.  The Court then moves to the objects of the conspiracy.  I address in this blog the defraud / Klein conspiracy object.  The defraud conspiracy in a tax setting is commonly referred to as a Klein conspiracy.  See United States v. Klein, 247 F.2d 908 (2d Cir. 1957), here.  Here are Judge Pauley's instructions on the Klein conspiracy (I have added the bold face in the text (as opposed to the caption) to make a point that I shall discuss below):

First Object: To Defraud the United States and its agency, the IRS 

The first object of the conspiracy is to defraud the United States by impeding, impairing, defeating and obstructing the lawful functions of the Internal Revenue Service in the ascertainment, evaluation, assessment and collection of income taxes. To prove the first object of the conspiracy, the Government must prove beyond a reasonable doubt that the defendant you are considering and one or more co-conspirators unlawfully, willfully and knowingly agreed to defraud the United States by fraud, deceit or other dishonest means.

I instruct you that the Internal Revenue Service is an agency of the United States Government which is responsible for the collection of tax revenue. The term “conspiracy to defraud the United States” therefore means that the defendants and other co-conspirators are accused of conspiring to impede, impair, defeat, and obstruct the IRS’s lawful functions of ascertaining and collecting tax revenue owed to the United States. It is not necessary that the United States suffer a financial loss from the conspiracy. Indeed, even if the taxpayer’s ultimate legal position on some issue (such as a tax shelter loss) is correct, and he owes no additional taxes, that is not a defense to the crime charged. One cannot use deception and dishonest means—such as making false statements to the IRS—to impede, impair, obstruct, or defeat the 8 IRS, even to protect a legitimate tax position.  

A conspiracy to impede the functions of the IRS by fraud or dishonest means may include, by way of example, such things as agreements to destroy documentation of income, to destroy records, to transfer money or take other action in an attempt to conceal ownership of income or property, to create false documentation, to attempt to influence witnesses, or to engage in any other fraudulent or deceptive conduct that would have the effect of impairing the ability of the IRS to collect tax revenue. Such conduct can also include falsifying the date of a transaction for tax purposes. In this regard, I instruct you that the income tax laws are administered on the basis of an annual accounting system which prohibits the reopening of a prior year’s tax return to take account of events occurring in later years. By citing such examples, of course, I am not suggesting that these are the only actions that could impede the IRS by fraudulent or dishonest means. Nor am I expressing any view as to whether conduct similar to the examples I have mentioned took place here.  

Moreover, it is critical for you to recognize that not all conduct that impedes the lawful functions of a Government agency is illegal. To be unlawful, the conduct must entail fraud, deceit, or other dishonest means. It is not illegal simply to make the IRS’s job harder. Only an agreement to engage in conduct that tends to impede the IRS and that also involves fraudulent, deceitful, or dishonest means, constitutes an illegal agreement to defraud the United States.

Fourth Circuit Reverses Tax Obstruction Conviction Because of Bad Instruction and Affirms Denial of Good Faith Instruction for False Claim Conviction (11/20/13)

In United States v. Jaensch, 2013 U.S. App. LEXIS 22977 (4th Cir. 2013), here, an unpublished decision, the Fourth reversed a conviction for tax obstruction, Section 7212, here, because of an erroneous instruction that did not adequately present the specific intent required for the crime.

The facts are of the tax protestor type -- failing to file returns based on tax protestor notions.  The defendant did file a return for one year -- extending his protest -- by claiming a refund of $774,052.  The IRS rejected the claim and notified him that he was required to file a return in 30 days to avoid a civil penalty.  The defendant then filed a return reporting $113 taxable income and, obviously, no tax due.

He was convicted for "one count of corruptly endeavoring to impede the due administration of the tax laws under 18 U.S.C. § 7212(a), ("Count 1"), one count of filing a false claim for a refund under 18 U.S.C. § 287, ("Count 2"), and four counts of willful failure to file a tax return under 26 U.S.C. § 7203, ("Counts 3-6")."   He appealed on several grounds.  Here are the parts of the opinion I find interesting:

Tax Obstruction / Section 7212

As noted, the court reversed this conviction because of a defect in the instructions.  Here is the Court's discussion:

In this case, the district court's instruction on Count 1 misled the jury as to the controlling law and we cannot say that the error was harmless. To prove a violation of § 7212(a), "the government must prove that the defendant: 1) corruptly; 2) endeavored; 3) to obstruct or impede the administration of the Internal Revenue Code." United States v. Wilson, 118 F.3d 228, 234 (4th Cir. 1997). To act corruptly is to act "with the intent to secure an unlawful benefit either for oneself or for another." Id.\ 

The district court's instructions do not properly explain the Government's burden to the jury. Violation of § 7212(a) is a crime of specific intent. A defendant must not only endeavor to impede due administration but must do so with the specific intent to secure an unlawful benefit. See Wilson, 118 F.3d at 234. Although the district court correctly defined "due administration," "obstruct or impede," and "corruptly," it instructed the jury that it could convict Jaensch by finding that he committed acts listed in the indictment without finding that he committed those acts with the requisite intent to secure an unlawful benefit. 

The jury instructions state, in relevant part, that: 

If the jury concludes that the government did prove beyond a reasonable doubt that one, the defendant employed at least one act set forth in Section 1-M through U of the indictment and that the defendant did commit an act identified in Section 1-V through Y of the indictment, and two, that the defendant acted knowingly and intentionally, then the jury must find the government [sic] guilty of the offenses in Count 1 of the indictment. 

J.A. 608.

Early Court Appellate Court Decision on New Sentencing Guideline Provision Regarding Unclaimed Deductions (11/19/13)

In United Sates v. Fawaz, 2013 U.S. App. LEXIS 23135 (6th Cir. 2013), here, the Sixth Circuit addressed the new Sentencing Guidelines provision, effective November 1, 2013, here, regarding unclaimed deductions.  See Further on U.S. Sentencing Commission Proposal for Unclaimed Credits, Deductions and Exemptions (Federal Tax Crimes Blog 8/10/13), here.  The new provision is in SG 2.T.1, Application Note 3, here, as follows :

3.      Unclaimed Credits, Deductions, and Exemptions.—In determining the tax loss, the court should account for the standard deduction and personal and dependent exemptions to which the defendant was entitled. In addition, the court should account for any unclaimed credit, deduction, or exemption that is needed to ensure a reasonable estimate of the tax loss, but only to the extent that (A) the credit, deduction, or exemption was related to the tax offense and could have been claimed at the time the tax offense was committed; (B) the credit, deduction, or exemption is reasonably and practicably ascertainable; and (C) the defendant presents information to support the credit, deduction, or exemption sufficiently in advance of sentencing to provide an adequate opportunity to evaluate whether it has sufficient indicia of reliability to support its probable accuracy (see §6A1.3 (Resolution of Disputed Factors) (Policy Statement)).

However, the court shall not account for payments to third parties made in a manner that encouraged or facilitated a separate violation of law (e.g., "under the table" payments to employees or expenses incurred to obstruct justice). 

The burden is on the defendant to establish any such credit, deduction, or exemption by a preponderance of the evidence. See §6A1.3, comment.

In summary, under the new Application Note, in order for a defendant to use unclaimed deductions to offset the income component of tax evasion, the unclaimed deductions must be related to the income in issue.  In Fawaz, the Court addressed the issue but remanded the issue for further consideration.  The Court said:

Sentencing Guidelines 

Sentencing Guideline § 2T1.9 applies to violations of § 371. The base offense level is the greater of the offense level as determined by § 2T1.1 or § 2T1.4, or offense level 10. U.S.S.G. § 2T1.9(a). Guideline § 2T1.1 calculates the base offense level through specified monetary ranges in Guideline § 2T4.1. U.S.S.G. § 2T1.1(a). For the purposes of Guideline § 2T1.1, "[i]f the offense involved tax evasion or a fraudulent or false return, statement, or other document, the tax loss is the total amount of loss that was the object of the offense (i.e., the loss that would have resulted had the offense been successfully completed)." U.S.S.G. § 2T1.1(c)(1). "If the offense involved filing a tax return in which gross income was underreported, the tax loss shall be treated as equal to 28% of the unreported gross income . . . unless a more accurate determination of the tax loss can be made." U.S.S.G. § 2T1.1(c)(1)(n.(A)). 

At the sentencing hearing, Safiedine and Fawaz objected to the probation officer's conclusion that JSC underreported its income by $1,020,000 n4 and estimation of the tax loss as $285,600 pursuant to the 28% default tax rate included in Guideline § 2T1.1(c)(1)(n.(A)). The probation officer's conclusions led to her recommendation that the court determine the appropriate base offense level was 18. At the sentencing hearing, Fawaz and Safiedine presented expert testimony from Michael Washenko, a private forensic accountant who previously worked 34 years for the IRS, in part assisting in investigations similar to the investigation of Safiedine and Fawaz. Washenko testified that the government did not actually incur a tax loss as a result of the underreported income and sales price of the Joy Road station; rather, Washenko testified Safiedine actually overpaid his taxes because he did not claim business expense deductions related to the payments Safiedine made in signing the Sunoco checks over to third parties.
   n4This total includes $175,000 from the sale of the Joy Road station and $845,000 from unreported Sunoco upfront consideration payments.

Watch the Refund Statute of Limitations on OVDP Payments Related to Income Tax (11/16/13)

The 2012 OVDP FAQ 25, here, requires that the full package include various documents (amended returns for the 8-year period, etc.).  Contemporaneously (or before) the taxpayer should send the following to a separate address (from  the 2012 OVDP FAQ):

A check payable to the Department of Treasury in the total amount of tax, interest, accuracy-related penalty, and, if applicable, the failure to file and failure to pay penalties, for the voluntary disclosure period must be sent along with information identifying the taxpayer name, taxpayer identification number, and years to which the payment relates to the following address.

If the taxpayer does not opt out of the OVDP penalty structure, there are no glitches in this payment system that I am aware of.  If the taxpayer opts out, however, and the IRS has posted the remittances as payments to years that, by the time of the resolution of the opt out, are closed for refund claims, the IRS takes the position that it cannot refund any tax, penalty or interest overpaid -- either overpaid with the original return or the payment under FAQ 35.

The reason for this position is that Section 6511(a) and (b), here, preclude the refund.  Readers can read the statute itself at the link.  The following is my explanation of the two statutes of limitations on refunds from the current draft of  my Federal Tax Procedure Book (footnotes omitted):

First, there is a statute of limitations for filing the claim for refund.  A claim for refund must be filed within three years from the date the return was filed or two years from the date the tax was paid, whichever is later, and, if no return is filed, within two years from the date of payment.  § 6511(a).  Read literally, this means that a taxpayer can file a return 40 years late and qualify under this first rule. I hope readers will instinctively say something must be missing here, for statutes of limitations do not normally allowing such lengthy lapses before the claim must be pursued.  The answer to that concern is in the second rule to which I now turn. 

Second, there is a statute of limitations on the amount of tax that can be refunded if the claim is timely under the first rule.  The IRS may only refund the amount of tax paid within three years  plus the period of any extension and, if the foregoing rule does not apply, then it may only refund the tax paid within two years of the date of the claim.  § 6511(b)(2).  This is called the “lookback” rule. 

The key for OVDP purposes is the second rule relating to possible refunds on the opt out arising from the FAQ 35 payments.  Taxpayers and practitioners should be alert to protect the refund statute of limitations for those payments and must act within the two year period from the date of payment.

DOJ Tax Memo Clarifying Points of Swiss Bank Initiative (11/16/13)

DOJ Tax has issued comments on its Swiss bank initiative.  See Memo of 11/5/13, here.  Excerpts I think may most interest readers are (highlighting provided by JAT):

Choosing a category. Each eligible Swiss bank should carefully analyze whether it is a category 2, 3 or 4 bank. While it may appear more desirable for a bank to attempt to position itself as a category 3 or 4 bank to receive a non-target letter, no non-target letter will be issued to any bank as to which the Department has information of criminal culpability. If the Department learns of criminal conduct by the bank after a non-target letter has been issued, the bank is not protected from prosecution for that conduct. If the bank has hidden or misrepresented its activities to obtain a non-target letter, it is exposed to increased criminal liability.

Changing from Category 3 to 2 (or 2 to 3).The Program provides that changes from category 3 to category 2 will be approved by the Tax Division only in extraordinary circumstances, and subject to the limitations set out in the Program. (Program III.C.) If a bank has submitted a letter of intent under category 2 of the Program and belatedly determines that it should have applied under category 3, a bank may withdraw its letter of intent. If the bank later submits a timely letter of intent under category 3, it should expect to be asked to describe why it initially believed that it may have committed tax-related or monetary transaction offenses as described in the Program. 

* * * 

Penalty calculation -- permitted reductions. The Program allows for the reduction of penalties with respect to three categories of U.S. related accounts. The first category -- accounts that are not undeclared -- is intended to address issues concerning lines of business that by their nature did not facilitate the evasion of U.S. taxes and reporting requirements. For example, a corporate account that was declared but had U.S. signatories who did not file FBARs is included in the definition of U.S. related accounts under the Program, but may be excluded for the penalty calculation. The second category -- accounts that were disclosed by the bank to the Internal Revenue Service -- refers only to accounts that were timely disclosed, not accounts that are disclosed under FATCA, as part of the Program, pursuant to treaty requests, as a result of other law enforcement efforts, or similar forms of later disclosure. The third category -- accounts as to which the bank notified its account holders of an announced offshore voluntary disclosure program and can establish that its account holder made a voluntary disclosure under that program -- includes only those accounts that were reported subsequent to notification by the bank. All forms of voluntary disclosure acceptable to the IRS will meet the voluntary disclosure standard of the Program, including the OVDI/OVDP procedures, the Streamlined Filing Compliance Program, and FBAR compliance under FAQs 9 and 17 of the respective IRS programs. The burden to show the application of penalty reductions rests with the bank. (Program II.H.)

Liechtenstein Will / May End Its More Blatant Forms of Tax Cheating (11/16/13)

So speaketh this report from Reuters.  Tom Bergin, Liechtenstein to end bank secrecy (Reuters 11/14/13), here.  Here are the excepts.

Liechtenstein, whose banks have been accused by the United States and other countries of facilitating tax evasion, said on Thursday it would end its practice of helping foreigners hide money from their tax authorities. 

The move highlights how Liechtenstein has moved more quickly than neighboring Switzerland, possibly the world's most important offshore financial center, in reacting to international pressure for greater transparency. 

* * * *  

The government of the tiny country of 36,000 inhabitants said in a statement that it would sign up to the Multilateral Convention on Mutual Administrative Assistance in Tax Matters, an international forum that allows tax authorities to ask their counterparts in other countries for information on taxpayers. 

The Alpine nation said it would also join up to a system of automatic information exchange being developed by the Organisation for Economic Co-operation and Development (OECD), which is expected to come into force in late 2015 or early 2016. 

Under automatic information exchange, if an individual opens a bank account in a foreign country, that country will automatically inform the tax authority in the individual's country of origin. 

Tax advisers say the automatic exchange of information will make the most common forms of tax evasion difficult, if not impossible, in those countries that agree to it.

Daugerdas Retrial Jury Instructions - Part 06 Conspiracy Instructions Part 1 (11/16/13)

I begin today the first of several blog entries on Judge Pauley's conspiracy instructions.  The complete set of the instructions is here.

Judge Pauly instructs the jury on the general concept of Conspiracy as follows:

Count 1: Conspiracy  

As mentioned earlier, Count 1 of the Indictment charges both Defendants, Paul Daugerdas and Denis Field, with a conspiracy that had three objectives: First, to defraud the United States and the Internal Revenue Service by obstructing the IRS’s ascertainment and collection of income taxes. Second, to attempt to evade income taxes allegedly owed by various tax shelter clients. And third, to defraud the IRS by committing wire and mail fraud.  

A conspiracy is a kind of criminal partnership—an agreement of two or more persons to join together to accomplish some unlawful purpose. It is an entirely separate and different offense from the substantive crime which may be the objective of the conspiracy. Indeed, you may find a defendant guilty of the crime of conspiracy, even if you find that the substantive crime which was the object of the conspiracy was never actually committed. Of course, if a defendant participates in a conspiracy and the crime or crimes which were the object of the conspiracy were committed, the defendant may be guilty of both the conspiracy and the substantive crime. The point simply is that the crime or crimes that were the objective of the conspiracy need not have been actually committed for a conspiracy to exist. 

JAT Comments:

Daugerdas Retrial Jury Instructions - Part 05 General Criminal Tax Instructions (11/14/13)

Judge Pauley's general criminal tax law instruction is:

General Instructions on Criminal Tax Law 

I will now turn to the charges in this case. The charges all relate to the federal tax laws and to the defendants’ design, marketing and implementation of the tax shelters that you have heard about at trial.  

I instruct you first that the income tax laws are constitutional and valid and everyone has a legal obligation to pay income taxes. However, as I told you at the outset, a taxpayer is entitled to arrange his or her affairs in any lawful manner to minimize the payment of taxes. One of the ways that people minimize the payment of taxes is through a tax shelter. The term “tax shelter” simply refers to a series of financial and related transactions that offer substantial tax savings as one of its main benefits. Some tax shelters are legal; others are not. It all depends on the facts about the individual taxpayer and the tax shelter involved. It is perfectly proper for a taxpayer to file his or her returns based on an aggressive or debatable tax position. If that position turns out to be incorrect, the taxpayer may be required to pay certain penalties. But this case is not about the actual collection of any income taxes that may be due to the United States or penalties imposed on any of the tax shelter clients. This is a criminal case.  

The Government brings this case to enforce laws that make it a crime to attempt to defeat or evade the payment of income taxes or to conspire to commit tax evasion or other related crimes. In a little while, I will instruct you in detail on the elements of a criminal violation of the tax laws. Overall, what you should keep in mind is that a person cannot be guilty of violating the federal tax laws if he believed that his conduct was lawful, even if it turns out that he was wrong about the law. 

JAT Comment:  The following key points are made:

1. Taxpayer can arrange his affairs to pay the minimum tax.
2. Tax shelters are defined as "simply" referring "to a series of financial and related transactions that offer substantial tax savings as one of its main benefits."
3. The jury is told that some tax shelters are legal, some are not -- with the distinction being dependent "on the facts about the individual taxpayer and the tax shelter involved."
4. The Court says that it will instruct as to the "criminal violation of the tax laws," which is presumably how the jury will distinguish between a legal tax shelter and an illegal tax shelter.
5. The Court ends with the short-form Cheek instruction.  The Court does have a Cheek "good faith" defense instruction later, after instructing about the crimes charged.  I will present a separate blog on that instruction.

The full set of jury instructions is linked here.

Daugerdas Retrial Jury Instructions - Part 04 Cooperating and Immunized Witness Testimony (11/14/13)

In a complex trial, particularly involving conspiracy charges, some of the parties who allegedly acted in concert to achieve an illegal end may have an incentive to cooperate with the prosecutors by testifying against others, an incentive that may make them biased in their recitation of the facts or, even, may make them lie (although this would be incredibly stupid for a cooperating witness to do).  The incentive for the cooperation might be an understanding, formal or otherwise, not to prosecute or a plea deal or possibility that cooperation might achieve an S.G. downward departure or a Booker variance for the cooperatinig witness.

In recognition of this phenomenon defendants will want some type of instruction to the jury to carefully consider the motives of the cooperating and immunized witnesses.  Here is the one that Judge Pauley gave in the Daugerdas retrial where cooperating witnesses testified as to their own culpability and the defendants':.

Testimony of Cooperating Witnesses  

You have heard from witnesses who testified that they were actually involved in planning and carrying out certain of the crimes charged in the Indictment. The law allows the use of cooperating witness testimony. Indeed, it is the law in federal courts that such testimony may be enough in itself for conviction, if the jury believes that the testimony establishes guilt beyond a reasonable doubt. 

However, because of the interest a cooperating witness may have in testifying, his or her testimony should be scrutinized with special care and caution. The fact that a witness is a cooperator can be considered by you as bearing upon his or her credibility. Like the testimony of any other witness, cooperating witness testimony should be given such weight as it deserves in light of the facts and circumstances before you. If you find that a witness testified falsely in one part, you still may accept his or her testimony in other parts, or may disregard all of it.  

You should ask yourselves whether a cooperating witness would benefit more by lying, or by telling the truth. Did the witness believe that his or her interests would be best served by testifying falsely or by testifying truthfully? Did this motivation color his or her testimony? If you find that the testimony was false, you should reject it. However, if you are satisfied that the witness told the truth, you should accept it as credible and act upon it accordingly.  

Finally, you have heard testimony from cooperating witnesses who pleaded guilty to charges arising in part out of the same facts that are at issue in this case. You are instructed that you are to draw no conclusions or inferences of any kind about the guilt of the defendants on trial merely from the fact that a prosecution witness pleaded guilty to similar charges. That witness’ decision to plead guilty was a personal decision about his own guilt. It in no way changes the presumption of innocence that applies to each defendant who is on trial here, a presumption that remains with them throughout the trial and into your jury deliberations unless and until you conclude that the Government has proven a particular defendant’s guilt by competent evidence beyond a reasonable doubt.

Immunized Witnesses  

You have heard testimony from two other types of witnesses. First, from witnesses who testified pursuant to a non-prosecution agreement, which means that the Government promised each of these witnesses that, in exchange for testifying truthfully, he or she would not be prosecuted for any crimes admitted either in Court or in interviews with prosecutors. And second, from witnesses who have testified under a grant of immunity, which means the witness’s testimony may not be used against him or her in any criminal case, except a prosecution for perjury or otherwise failing to comply with the immunity order.  

Now, it is perfectly acceptable for the Government to enter into non-prosecution agreements and to request orders of immunity, and it is entitled to call witnesses who are subject to these agreements or orders. However, like cooperating witnesses, the testimony of a witness who has been promised that he or she will not be prosecuted or who has been granted an order of immunity should be examined with greater care than the testimony of an ordinary witness. You should scrutinize it closely to determine whether or not it is colored in such a way as to place guilt upon the defendants in order to further the witness’s own interest; for such a witness, confronted with the realization that he or she can win his or her own freedom by helping to convict another, has motive to falsify his or her testimony. On the other hand, if you believe it to be true, and determine to accept the testimony, you may give it such weight, if any, as you believe it deserves.  

The full set of jury instructions is linked here.

IRS Indian Initiative for Persons Outside OVDP; Also on Quiet Disclosures (11/14/13)

Reporting on a California State Bar Tax Section Meeting, Tax Notes reports that the IRS will soon (as early as the week of 11/11/13) ) "begin examining U.S. taxpayers suspected of holding undeclared accounts in Indian banks, according to Nicholas Connors, a supervisory revenue agent" with SB/SE.  Kristen A. Parillo, IRS Will Soon Examine U.S. Taxpayers With Undeclared Indian Bank Accounts, 2013 TNT 219-4 (11/13/13).  Some excerpts:

After receiving account information from Indian banks, the IRS has about 100 Indian bank account cases that it is sending out for examination across the country, he said. 

"I think California, because of the large Indian population, is going to get more than its fair share of cases," Connors said. "Within the Northern California/Bay Area, we're scheduled to pick up 30 or 40 of those." 

"Looking ahead, the offshore bank investigations are just going to grow," Connors said. In addition to India, "Israel is on the list of banks that is providing information to us, and from there it just keeps going on and on," he said. "Within Examination, there's talk that this could someday become a work issue for every single revenue agent in SB/SE where everyone will be working some type of offshore case."

Regarding Quiet Disclosures, Tax Notes reports:

The SEP team continues to examine quiet disclosures as well as cases regarding taxpayers who opted out of the IRS offshore voluntary disclosure program (OVDP), said Connors. "The guidance we're getting on quiet disclosures has been extremely harsh," he said. "Essentially those taxpayers walked past compliance three times: They didn't file correctly the first time, they didn't come in under voluntary disclosure, and now they're trying to hide it by slipping it in through an amended return. Don't expect much leniency if we have a quiet disclosure case; agents are being told to be aggressive." 

Again, I will repeat my mantra that the IRS has not said that the audit for persons who join OVDP and opt out will be more lenient than for persons who are audited after a quiet disclosure or a go-forward.  One could read the foregoing statement as hinting at that, but that is not been what the IRS has said to date.  All it has said is that those opting out of OVDP will be audited and get the audit result.  That is all that can happen to taxpayers who are audited after quiet disclosures or go-forwards.

Judge Holmes of the Tax Court Sets up the Allen Issue Conflicts (11/14/13; revised 11/16/13)

I have previously blogged on the Allen issue -- whether Section 6501(c)(1)'s unlimited statute of limitations may be triggered by fraud on the return that is not the taxpayer's fraud.  See Allen v. Commissioner, 128 T.C. 37 (2007), here.  The key blogs are listed below.  In a recent Tax Notes article summarizing some of the events at the California state bar tax section conference, the following was noted (Kristen A. Parillo, IRS Will Soon Examine U.S. Taxpayers With Undeclared Indian Bank Accounts, 2013 TNT 219-4 (11/13/13)):

Tax Court Judge Mark V. Holmes gave an overview of noteworthy judicial developments, including the Court of Federal Claims' September 30 decision in BASR Partnership v. United States, No. 1:10-cv-00244 (Fed. Cl. 2013) 2013 TNT 211-10: Court Opinions. That decision is "jurisprudentially interesting," Holmes said, because its holding is at odds with a 2007 Tax Court decision regarding whose fraudulent intent is required under section 6501(c)(1) to extend the three-year statute of limitations period for assessment of income taxes. 

In BASR Partnership, the court held that the phrase "intent to evade tax," as it is used in section 6501(c)(1), is limited to cases in which the taxpayer has the requisite intent to commit fraud. The court said that section 6501(a) is expressly limited to a return filed by the taxpayer; by implication, section 6501(c) is limited to fraud by the taxpayer, it concluded. (Prior coverage 2013 TNT 191-3: News Stories.) 

That reasoning is at odds with the Tax Court's decision in Allen v. Commissioner, 128 T.C. 37 (2007) 2007 TNT 44-11: Court Opinions, in which the court held that a preparer's fraudulent intent to evade tax is sufficient to keep the limitations period open. "Nothing in the plain meaning of the statute suggests the limitations period is extended only in the case of the taxpayer's fraud," the court wrote, adding that the statute "keys the extension to the fraudulent nature of the return, not to the identity of the perpetrator of the fraud." 

"So we have the express language canon, I suppose, going up against the plain language canon," Holmes said. "Something will have to give. Both of these opinions are relatively short, given the depth of material that one can bring to this issue." 

Holmes noted that Bryan T. Camp of Texas Tech University School of Law wrote several articles after the Tax Court's Allen decision in which he traced the legislative history of section 6501(a). According to Camp's research, the concepts of "false or fraudulent return" and "intent to evade tax" date back to the Revenue Act of 1862. Based on the legislative history, Camp concluded that "the section 6501(a) assessment limitations period represents a very strong public policy choice in favor of closure," such that "the fraud exception should be read to refer to the taxpayer's fraud and not the fraud of a third party such as a return preparer." (See "Tax Return Preparer Fraud and the Assessment Limitation Period," Tax Notes, Aug. 20, 2007, p. 687 2007 TNT 162-30: Viewpoint, and "Presumptions and Tax Return Preparer Fraud," Tax Notes, July 14, 2008, p. 167 2008 TNT 136-33: Viewpoint.)

Suspension of Criminal Statute of Limitations Upon Request to a Foreign Government for Information (11/14/13)

I have written before on 18 USC 3292, here, which which suspends the criminal statute of limitations while a request to a foreign government for information is pending pursuant to a grand jury investigation. See Eleventh Circuit Sustains Statute Suspension For Foreign Records Request Under 18 USC 3292 (Federal Tax Crimes Blog 8/17/12), here, and Court holds Application to Court for 18 USC 3292 Foreign Treaty Request Suspension Must be Made Within Statute of Limitations (Federal Tax Crimes Blog 2/11/12), here.  In United States v. Arrington, 2013 U.S. Dist. LEXIS 159549 (D NE 11/713), here [to come], the court has this discussion of this statute in a case where the defendant was charged "with conspiracy, mail fraud, wire fraud, and aiding and abetting for allegedly planning and perpetrating an investment scheme with intent to defraud, using mail and wire communications":

Under 18 U.S.C. § 3292, the suspension of a statute of limitations pending an official request for evidence to a foreign country is permitted under certain circumstances. 18 U.S.C. § 3292(a). The statute provides: 

Upon application of the United States, filed before return of an indictment, indicating that evidence of an offense is in a foreign country, the district court before which a grand jury is impaneled to investigate the offense shall suspend the running of the statute of limitations for the offense if the court finds by a preponderance of the evidence that an official request has been made for such evidence and that it reasonably appears, or reasonably appeared at the time the request was made, that such evidence is, or was, in such foreign country. 

18 U.S.C. § 3292(a)(1). The statute also provides that such a suspension may not extend beyond the time the foreign country takes final action, or, in any event, may not extend the statute for more than three years from the filing of the official request. 18 U.S.C. § 3292(b) & (c). 

Before suspending the running of the statute of limitations, the district court must find by a preponderance of the evidence that (1) an official request has been made for the evidence and (2) it reasonably appears or appeared at the time the request was made that the evidence of the crime is or was in a foreign country. United States v. Jenkins, 633 F.3d 788, 797 (9th Cir. 2011); 18 U.S.C. § 3292(a)(1). "[T]he government has some burden to establish, as opposed to being able to merely assert without support, that the foreign evidence it seeks meets the section's requirements." Id. at 798. A § 3292 application "must be supported by materials that 'include or [are] accompanied by some indicia of reliability.'" Id. (quoting United States v. Trainor, 376 F.3d 1325, 1331 (11th Cir. 2004)). Because § 3292 extends the limitations period (itself designed to ensure the reliability of evidence) and an application under § 3292 is made ex parte, the government must meet a "minimum evidentiary burden." Trainor, 633 F.3d at 1332.

Daugerdas Retrial Jury Instructions - Part 03 Credibility of Witnesses (11/14/13)

Judge Pauley's instructions on credibility of witnesses (see the full set here) is:

Credibility of Witnesses  

You have had an opportunity to observe all of the witnesses. How do you evaluate the credibility or believability of those witnesses? The answer is that you use your plain common sense. Was the witness candid, frank and forthright? Or, did the witness appear evasive as if he or she was trying to hide something?  

How much you choose to believe a witness may be influenced by the witness’s bias. Does the witness have a relationship with the Government or a defendant which may affect the witness’s testimony? Does the witness have some incentive, loyalty or motive that might cause the witness to shade the truth? Or does the witness have some bias, prejudice or hostility that may have caused the witness, consciously or not, to give you something other than a completely accurate account of the facts?  

You are not required to accept testimony even though the testimony is uncontradicted and the witness’s testimony is not challenged. You may decide because of the witness’s bearing or demeanor, or because of the inherent improbability of the testimony, or for other reasons, that the testimony is not worthy of belief.  

If you find that a witness willfully testified falsely, that is always a matter of importance that you should weigh carefully. If you find that any witness has lied under oath, you should view the testimony cautiously and weigh it with great care. It is, however, for you to determine how much of the witness’s testimony, if any, you wish to believe.  

Thus, there is no formula by which you can evaluate testimony. You determine for yourself every day and in a multitude of circumstances the reliability of statements made to you by others. You may consider the interest of any witness in the outcome of this case, and this is true regardless of who called or questioned that witness.  

Indeed, the issue of credibility may, but need not, be decided in an all-or-nothing fashion. If you find that a witness testified falsely in one part you still may accept his or her testimony in other parts, or you may disregard all of it. That is a determination entirely for you, the jury. 

Credibility is a complex issue.  I can't add anything to Judge Pauley's traditional formulation.

Although there is a large body of literature on the issue, I will point readers to two sources.

Another Contributing Factor to Low Sentences -- Age (11/14/13)

This past week I participated on a panel for the California State Bar titled Hot Topics in Criminal Tax Matters.  The panelists were Robert Horwitz, Tom Moore (AUSA San Francisco), Richard Pietrofeso (IRS Laguna Niguel), Steven Toscher (Hochman, Salkin, Rettig, Toscher & Perez, P.C. Beverly Hills,) and myself.  One issue that came up was the general recognition that offshore account sentences seem light relative to nonoffshore account sentences.  I have previoiusly blogged on this subject.  See Sentencing Leniency for Offshore Tax Cheats (Federal Tax Crimes Blog 11/3/13), here, and  Lower Sentences For Offshore Tax Cheats - Role of 5K1 Departures (Federal Tax Crimes Blog 9/28/13), here.  One of the participants at the conference, Richard Pietrofeso suggested another contributing factor -- age.  A Tax Notes article of the panel discussion reports (Kristen A. Parillo, Government Views Offshore Account Crackdown as a Success Despite Few Jail Sentences, 2013 TNT 218-4 (11/12/13)):

Richard Pietrofeso, area counsel (Laguna Niguel), IRS Criminal Investigation division, surmised that the jail sentences have been low because many of the offshore account holders were elderly and some had accounts that traced back to the Holocaust.

His point was that the demographics of the population of the more egregious offshore offenders -- the ones who are prosecuted -- are probably skewed toward older defendants who have had the opportunity to accumulate more wealth and therefore have the larger offshore accounts.  When those defendants are prosecuted, a sentencing judge might well consider advanced age in sentencing, particularly with respect to departures under the Guidelines and variences under Booker.

The Sentencing Guidelines has a policy statement related to age:

§5H1.1.     Age (Policy Statement)
Age (including youth) may be relevant in determining whether a departure is warranted, if considerations based on age, individually or in combination with other offender characteristics, are present to an unusual degree and distinguish the case from the typical cases covered by the guidelines.  Age may be a reason to depart downward in a case in which the defendant is elderly and infirm and where a form of punishment such as home confinement might be equally efficient as and less costly than incarceration.  Physical condition, which may be related to age, is addressed at §5H1.4 (Physical Condition, Including Drug or Alcohol Dependence or Abuse; Gambling Addiction).

 According to my data in the spreadsheet (admittedly not complete as to age, but probably fairly representative), the average age at conviction for taxpayers is 70 years old, with 84 years old being the oldest.

Irwin Schiff's 2255 Denial Affirmed on Appeal (11/14/13)

Irwin Schiff is a notorious tax protestor / tax defier.  See Wikipedia entry here.  I have written before about the district court's rejection of his attempt via 28 USC 2255, here, to obtain relief from his convictions for tax related offense from his activities.  Schiff, a Tax Protestor, Loses 2255 Motion to Vacate Conviction (9/29/12), here.  He appealed.  The Court of Appeals for the Ninth Circuit affirmed.  United States v. Schiff, 2013 U.S. App. LEXIS 22636 (9th Cir. Nov. 7, 2013) (unpublished), here.  Nothing particularly surprising in the affirmance, except perhaps the Court of Appeals' dismissive treatment of his Cheek argument.  That treatment is (bold-face supplied by JAT):

1. Schiff's argument, that appellate counsel was ineffective for not appealing the district court's exclusion of evidence of his bipolar disorder, fails. Schiff's claim regarding the exclusion of mental health evidence is similar to one raised by co-defendant Cohen on direct appeal, and which formed the basis for this Court reversing Cohen's conviction and remanding for a new trial. United States v. Cohen, 510 F.3d 1114, 1123-27 (9th Cir. 2007). But Schiff and Cohen were situated very differently with respect to knowledge about the validity of their beliefs. Even assuming Schiff's appellate counsel was ineffective, Schiff cannot demonstrate that he was harmed by counsel's failure to raise this issue on appeal. 

In Cheek v. United States, 498 U.S. 192, 201, 111 S. Ct. 604, 112 L. Ed. 2d 617 (1991), the Court distinguished between "innocent mistakes caused by the complexity of the Internal Revenue Code," as opposed to positions that "reveal full knowledge of the provisions at issue and a studied conclusion, however wrong, that those provisions are invalid and unenforceable." Id. at 205. With regard to the second category, the Court held that "a defendant's views about the validity of the tax statutes are irrelevant to the issue of willfulness." Id. at 206. 

On direct appeal, this Court characterized the evidence against Schiff as "overwhelming, particularly the evidence that he intended to deceive the government through the use of zero returns." United States v. Cohen, 262 F. App'x 14, 16 (9th Cir. 2007). The overwhelming evidence at trial was that Schiff was aware his claimed beliefs lacked merit and that he simply disagreed with the law. Schiff had previously been punished for filing zero returns. He knew that numerous tax returns submitted by his clients had been returned as frivolous by the IRS and had resulted in penalties upheld by courts. He also knew his positions regarding tax law were rejected in every court to consider them. 

Trial testimony also showed that, knowing his beliefs and activities did not comport with tax law, Schiff counseled his clients to undertake affirmative acts of misrepresentation. Schiff engaged in evasive conduct too — after his bank account was levied upon by the IRS, he opened bank accounts under false taxpayer identification numbers and avoided IRS seizure of his vehicle by titling it in a friend's name. 

Given the extensive evidence that Schiff knew his views of the tax law were incorrect, he cannot establish that his Cheek good-faith defense was prejudiced by counsel's decision not to raise on direct appeal the district court's suppression of evidence of his bipolar disorder.

Good Succinct Discussion of 404(b) Evidence (11/13/13)

In United States v. Anderson, 2013 U.S. App. LEXIS 22050 (11th Cir. 2013), here, an unpublished opinion, the Court discusses Rule 404(b), here, evidence, finding that the evidence in question had minimum probative value and thus perhaps should not have been admitted under Rule 403, here, titled "Excluding Relevant Evidence for Prejudice, Confusion, Waste of Time, or Other Reasons." Nevertheless, it was harmless.  Rule 404(b) provides:

(b) Crimes, Wrongs, or Other Acts.
  (1) Prohibited Uses. Evidence of a crime, wrong, or other act is not admissible to prove a person’s character in order to show that on a particular occasion the person acted in accordance with the character.
  (2) Permitted Uses; Notice in a Criminal Case. This evidence may be admissible for another purpose, such as proving motive, opportunity, intent, preparation, plan, knowledge, identity, absence of mistake, or lack of accident. On request by a defendant in a criminal case, the prosecutor must:
    (A) provide reasonable notice of the general nature of any such evidence that the prosecutor intends to offer at trial; and
    (B) do so before trial — or during trial if the court, for good cause, excuses lack of pretrial notice.

The Court's discussion is a good succinct summary of key features of Rule 404(b),. so I thought I would offer that discussion

Anderson argues that the district court improperly admitted into evidence under Federal Rule of Evidence 404(b) a pro se "letter" that she mailed to the district court before trial. In this "letter," Anderson asserted that a magistrate judge had "convert[ed]" the magistrate judge and an Assistant U.S. Attorney "into accommodated parties with respect to [a] debt," which Anderson thereby purported to "discharge." Anderson contends that this document had no probative value and was highly prejudicial, as it could only be perceived as bad-character evidence. 

We review a district court's Rule 404(b) rulings for an abuse of discretion. United States v. Matthews, 431 F.3d 1296, 1311 (11th Cir. 2005). Under this standard, we must affirm, even if we might have decided the issue differently, so long as the trial court's decision was not based on a clear error of judgment or application of the wrong legal standard. See id. at 1312. Rule 404(b) prohibits the admission of evidence of a person's crimes or other wrongful acts except in certain circumstances. Fed.R.Evid. 404(b). Nevertheless, Rule 404(b) is a "rule of inclusion," and relevant Rule 404(b) evidence "should not lightly be excluded" when it is central to the government's case. United States v. Jernigan, 341 F.3d 1273, 1280 (11th Cir. 2003) (internal quotation marks omitted); see also United States v. Sanders, 668 F.3d 1298, 1314 (11th Cir. 2012) (explaining that Rule 404(b) allows extrinsic evidence "unless it tends to  prove only criminal propensity" (internal quotation marks omitted)). In order to be admissible under Rule 404(b) the evidence must be relevant to an issue other than the defendant's character, the government must offer sufficient proof for the jury to find by a preponderance of evidence that the defendant committed the act, and its probative value must not be substantially outweighed by its undue prejudice, satisfying Rule 403. Matthews, 431 F.3d at 1310-11 (quoting United States v. Delgado, 56 F.3d 1357, 1365 (11th Cir. 1995)).

Daugerdas Retrial Jury Instructions - Part 02 Circumstantial Evidence (11/13/13)

Judge Pauley's instructions on Circumstantial Evidence and a related topic of Inferences (see full set here) are as follows:

Direct and Circumstantial Evidence  

There are two types of evidence that you may consider in reaching your verdict—direct evidence and circumstantial evidence.  

Direct evidence is evidence that proves a disputed fact directly. For example, where a witness testifies to what he or she saw, heard or did, that is called direct evidence.  

Circumstantial evidence is evidence that tends to prove a disputed fact by proof of other facts. To give a simple example, you may remember the story of Robinson Crusoe, who was marooned on a deserted island. He spent years thinking he was alone, until one day, as he walked along the beach, he noticed large footprints in the sand. Because his feet were too small to have made them, Robinson concluded that somebody else must have left the footprints, even though he had not seen anyone else—in other words, he had no direct evidence of that fact. But, it would be reasonable for him to conclude from the footprints on the beach that, in fact, he was not alone.  

That is all there is to circumstantial evidence. Using your reason and experience, you infer from established facts the existence or the nonexistence of some other fact.  

The law makes no distinction between direct and circumstantial evidence. Circumstantial evidence is of no less value than direct evidence, and you can consider either or both, and can give them such weight as you conclude is warranted. 

Inferences  

In their arguments, the parties have asked you to infer, on the basis of your reason, experience, and common sense, from one or more established facts, the existence of some other fact. The process of drawing inferences from facts in evidence is not a matter of guesswork or speculation. An inference is a reasonable deduction or logical conclusion which you, the jury, are permitted to draw—but not required to draw—from the facts which have been established by either direct or circumstantial evidence. In drawing inferences, you should exercise your common sense.

 As with most general instructions, these seem to be mainstream and unobjectionable.

Circumstantial evidence plays a large role in crimes where mens rea is required, because that requires the jury to determine what was in the defendant's mind when he or she committed the actus reus.  Unless the defendant admits the mens rea (unlikely if the defendant has not pled guilty), the jury must infer mens rea from the circumstantial evidence.  The quantum of mens rea for tax crimes is willfulness -- specific intent to violate a know legal duty (often referred to as the Cheek standard of willfulness).  (I set aside the possibility that conscious avoidance, however, nominated, may suffice, because that is a big issue I have discussed in various blogs before.)

I thought readers might find helpful several excerpts from my Federal Tax Crimes Book dealing with circumstantial evidence (footnotes omitted).