District Court Holds that Santander's Arguments to Avoid Penalty for Bullshit Tax Shelter (No Substance) Lack Substance (7/24/18)

In Santander Holdings USA, Inc. v. United States (D. Mass. Dkt. 09-11043-GAO Dkt Entry 344 7/17/18), here, Santander previously lost the merits of its bullshit tax shelter on appeal, with the Court of Appeals holding that the shelter lacked economic substance.  Santander Holdings USA, Inc. v. United States, 844 F.3d 15 (1st Cir. 2016), here, cert. denied sub nom. Santander Holdings USA, Inc., & Subsidiaries v. United States, 137 S. Ct. 2295 (2017).  See my discussion of the Court of Appeals decision, First Circuit, Reversing the District Court, Rejects Santander's Bullshit Tax Shelter (Federal Tax Crimes Blog 12/17/16), here.

Santander argued that, although its tax shelter lacked economic substance -- i.e., was bullshit -- it should be able to avoid the accuracy related penalty.  Well, basically, the district court held that that argument too lacked substance -- was bullshit.  The opinion is short and, I think, predictable, so I forego addressing it further.

However, the district court did include a quote from the Court of Appeals' decision that I had included in my prior write up but was in a larger quote so that I had not focused on it.  The district court did focus on it as follows.  This is the quote (cleaned up):

When a transaction is one designed to produce tax gains not real gains—such as when the challenged transaction has no prospect for pre-tax profit—then it is an act of tax evasion that, even if technically compliant, lies outside of the intent of the Tax Code and so lacks economic substance.

The district corut did not quote the whole paragraph from the Court of Appeals which includes "tax evasion" twice, so I offer the whole paragraph (cleaned up):

The economic substance doctrine is centered on discerning whether the challenged transaction objectively lies outside the plain intent of the relevant statutory regime. A transaction fails the economic substance test if, though it actually occurred and technically complied with the tax code, it was merely a device to avoid tax liability. Courts may disregard the form of transactions that have no business purpose or economic substance beyond tax evasion. In other words, when a transaction is one designed to produce tax gains not real gains -- such as when the challenged transaction has no prospect for pre-tax profit -- then it is an act of tax evasion that, even if technically compliant, lies outside of the intent of the Tax Code and so lacks economic substance.

Readers of this blog will recognize the term "tax evasion."  At least in this blog and in other authorities on criminal tax matters, tax evasion is a term of art.  Narrowly, it means the specific tax evasion crime in § 7201, but is often used to cover the panoply of tax crimes where tax was evaded (e.g., the Sentencing Guidelines require that for a tax loss as the first step in the sentencing calculation).  But, the term usually does connote conduct that is criminal.  See e.g., the Wikipedia entry for Tax Evasion, here.

Attorneys and Summonses -- Some Lessons (7/23/18)

In Presley v. United States, ___ F.3d. ___, 2018 U.S. App. LEXIS 19832 (11th Cir. 2018), here, the court rejected an attempt to duck an IRS summons to a bank.  The parties wishing to avoid the summons were "a lawyer, his law firm and associated parties."  Those parties, let's call them appellants, faced "formidable" odds because of United States v. Miller, 425 U.S. 435 (1976), and United States v. Powell, 379 U.S. 48 (1964).  (Not to mention that the lawyer apparently appeared for himself and the appellants on the appeal; and the court illustrated the long odds with a sports illustration from 1980 that seems more of a detour to tell us that the author is a sports fan than really needed for the opinion.)

Challenging IRS summonses always face daunting odds because of Powell.  The Court said on the merits (cleaned up):

For IRS summonses of bank records, the "gist" of the Fourth Amendment protection is that the disclosure sought "shall not be unreasonable." This baseline requirement emanates from the interest of all citizens "to be free from officious intermeddling." But an IRS summons is not unreasonable, provided the IRS has complied with the Powell requirements. In other words, when it comes to the IRS's issuance of a summons, compliance with the Powell factors satisfies the Fourth Amendment's reasonableness requirement. 

The summonses here satisfy that standard. In fact, as we have mentioned, Plaintiffs do not contest that the summonses satisfy each Powell factor. For example, Plaintiffs do not suggest that the files containing their clients' records are not relevant to the IRS's investigation and that the summonses are not narrowly tailored. By definition, the IRS is not engaged in a "fishing expedition" when it seeks information relevant to a legitimate investigation of a particular taxpayer. In such cases, the incidental effect on the privacy rights of unnamed taxpayers is justified by the IRS's interest in enforcing the tax laws. 

Nor do Plaintiffs contend that the summonses were really just a subterfuge so the IRS could investigate their clients or invade the attorney-client privilege.  If the district court finds in the enforcement proceeding that the IRS does not in fact intend to investigate the summoned party, or that some of the records requested are not relevant to a legitimate investigation of the summoned party, the IRS could not obtain all the information it sought unless it complied with § 7609(f) [John Doe Summons procedure]. We are likewise unable to discern any other reason why the summonses should not be enforced. Because the Powell factors define the reasonableness of the summonses under the Fourth Amendment and Plaintiffs do not contest that the summonses satisfy them, our inquiry should be complete.

The Court also rejected an attempt to invoke the United States v. Gertner, 65 F.3d 963 (1st Cir. 1995), although not mentioned in the opinion by name.  Basically, the claim, such as it was, that the Government was attempting to use the regular IRS administrative summons rather than the more appropriate John Doe Summons.  The problem with that argument, if it had been properly raised, was that the investigate parties were named in the summons and there were not unknown parties the IRS was investigating.

District Court Grants Government Summary Judgment for FBAR Willfulness Civil Penalty (7/23/18)

In United States v. Markus, 2018 U.S. Dist. LEXIS 118871 (D. N.J. 7/17/18) (unpublished), here, the district court granted summary judgment for the Government on willful FBAR penalties.  The docket entries are here.

In summary, Markus was a combat engineer for the U.S. Army in Iraq and then, after leaving the Army, worked for the U.S. Corps of Engineers deployed in Iraq.  He accepted bribes and kickbacks for confidential information for an oil pipeline.  He deposited the proceeds in bank accounts in Egypt and Jordan.  He filed no FBAR at all for 2007 and 2009 and filed an incomplete FBAR for 2008.  He was convicted for the bribery and kickback claims and for failure to file an FBAR for 2009.

The IRS assessed the following FBAR willful civil penalties:

		Account	Account	Penalty
Year	Bank Account	Number	Balance	Assessed	%
2007	Banque Misr	-2393	$299,250	$100,000	33.4%
2007	Housing Bank I	-70220	$744,854	$372,427	50.0%
2007	Housing Bank II	-201	$90,000	$45,000	50.0%
2008	Banque Misr	-2393	$364,950	$100,000	27.4%
2009	Banque Misr	-2393	$400,000	$218,225	54.6%
2009	Housing Bank III	-80220	$680,000	$6,362	0.9%
				$842,014

The Government filed suit within 2 years of assessment.  Markus represents himself in the case.

The Court held that the assessments and the civil suit were made and instituted, respectively, within the applicable the statutes of limitations and that Markus' prior criminal conviction not involving FBARs (years 2007 and 2008) did not give rise to collateral estoppel.  The court then turned to the merits of the willful penalty assessment.

First, the Court cites the FBAR willful penalty as being the greater of $100,000 or 50% of the balance in the account at the time of the violation.  The Court does not say anything about the issue in Colliot and Wadhan that capped the FBAR willful penalty to $100,000.  See District Court Caps IRS Authority to Assess Willful FBAR Penalty at $100,000 (Federal Tax Crimes Blog 5/19/18) (on Colliot), here; and Another District Court Limits IRS Authority for FBAR Willful Penalty to $100,000 (7/18/18) (on Wadhan), here.

Temporary Suspension of Listing of Popular Blog Entries Over Last 7 Days (7/21/18)

I have taken down the last 7 days popular posts listing to the right of the blog.  It will be down just over 7 days. 

The reason I have temporarily suspending that listing is that an old blog entry somehow got to the top of that list some time ago and since then stays on the list, usually at the top, because people coming to the blog click on it.  I presume that they think there is something new and currently useful there because it is at the top of the 7 days popular posts listing.  But in fact, it is at the top simply because people see it at the top and click on it.  So, I am taking down that listing for over 7 days and, hopefully, since it is a 7 day listing, when I put the list back up, that particular blog entry from long ago will never appear again as a currently popular blog entry and the listing will be more accurate as to what is currently trending.

If that doesn't work to get that old blog entry off the list, I will consider just deleting it.  But, for now, I hope the temporary suspension of the list will work.

NPB Neue Privat Bank Enters Nonprosecution Agreement (7/19/18)

As previously rumored, NPB Neue Privat Bank (NPB) entered a nonprosecution agreement (NPA) with DOJ Tax.  See DOJ Tax Press Release here.  (I previously reported that this NPA was expected.  NBP Neue Privat Bank (Category 1 Swiss Bank) Reported Ready to Settle with U.S. Prosecutors (Federal Tax Crimes Blog 7/14/18), here.

The press release summarizes the agreement and statement of facts and has links at the bottom to the following documents:

• NPB Signed Statement of Facts
• NPB Executed NPA
• NPB Signed Resolution of Board of Directors

Comments:

1.  NPB agrees to pay a $5,000,000 penalty.  The NPA does not describe the penalty.

2.  NPB sought to insulate itself generally by dealing with external asset managers rather than the U.S. taxpayers directly.

3.  NPB interpreted the QI Agreement with the IRS as permitting it to "continue to accept and service U.S. account holders, even if it knew or had reason to believe they were engaged in tax evasion, so long as it complied with the QI Agreement, which in NPB’s view did not apply to account holders who were not trading in U.S.-based securities or to accounts that were nominally structured in the name of a non-U.S.-based entity.  NPB formed this view without consulting legal counsel."

4.  NPB saw a business opportunity as U.S. taxpayers exited other Swiss banks feeling the heat from the IRS and DOJ.  As a result:

Prior to 2009, NPB had few U.S. clients. At the close of 2008, U.S. Related Accounts held approximately 8 million Swiss francs in assets.  By the end of 2009, NPB had approximately 450 million Swiss francs under management in accounts owned or beneficially owned by U.S. taxpayers, an influx of approximately 442 million Swiss Francs.  * * * 

NPB’s executives hoped that their U.S. customers would eventually fully declare their accounts and keep their money at the Bank after becoming compliant. However, NPB created no written or formal policies to encourage or mandate tax compliance and, in fact, continued to acquire and service non-compliant U.S. taxpayers. 

According to NPB executives, beginning in August 2010, NPB decided not to open any new accounts for U.S. customers who were not tax-compliant. NPB did not memorialize this decision in any written policy nor in any executive board or management board meeting minutes. NPB knew in August 2010 that some of its existing U.S. customers were not tax-compliant, but continued to service those accounts. 

5.  NPB taxpayers now have increased costs under the OVDP -- being a miscellaneous offshore penalty of 50%.

IRS Counsel Advice on FBAR Willful Penalty Standard and Burden of Proof (11/19/18)

In PMTA 2018-013 (5/23/18), here, an IRS Technical Advisor in Chief Counsel's office provides advice regarding the FBAR willful penalty standard and burden of proof.  This is the party line, so to speak, a distillation of the Government victories in a series of cases that I have discussed in this blog previously.  My comments are as follows:

1.  The standard

The PMTA and some of the loose language in the cases shift the standard, improperly, I believe.

The standard in the statute is willfully.  31 USC § 5321(a)(5)(C) in exactly the same wording as the criminal penalty in 31 USC  § 5322(a).  The only difference is that one penalty is criminal and the other is civil.  The Supreme Court held in Ratzlaf v. United States, 510 U.S. 135, 136-37 (1994) that willfulness in § 5322(a), the criminal statute is voluntary intentional violation of a known legal duty, the same as the Cheek definition of willfulness in the Title 26 criminal penalties. Cheek v. United States, 498 U.S. 192 (1991).

Consistent with Ratzlaf and Cheek, IRM 4.26.16.6.5.1 (11-06-2015), Willful FBAR Violations - Defining Willfulness, here, says:

The test for willfulness is whether there was a voluntary, intentional violation of a known legal duty.

The PMTA, however, suggests that this is not the standard, citing Bedrosian as rejecting the argument "that in order for the government to sustain a civil willful FBAR penalty, it must meet the standard used in the criminal context and show “that the actions amounted to a voluntary, intentional violation of a known legal duty. See Cheek v. United States, 498 U.S. 192, 201 (1991).”

Perhaps my complaint is semantics, but I think the standard is (or should be) the Cheek standard stated in the IRM.  The issue is not whether the standard is articulated differently in criminal and civil FBAR contexts, but whether more relaxed proof is permitted in the civil context to meet the standard.

Example, the criminal tax standard (willfully) and civil fraud standard (fraud).  Although, unlike the FBAR context, the statutory standard is different, as interpreted they are the same.  The difference is in the burden of proof with respect to the conduct -- beyond a reasonable doubt in the criminal tax case and clear and convincing in the civil tax fraud case.

Another District Court Limits IRS Authority for FBAR Willful Penalty to $100,000 (7/18/18)

In United States v. Wadhan (D. Colo. Dkt 17-CV-1287 Dkt Entry 55), here, the Court held that the IRS's discretion to impose FBAR maximum willful penalties is limited to the $100,000 amount in there regulations. The bottom line holding is the same as the Court in United States v. Colliot (W.D. Texas No. AU-16-CA-01281-SS), here.  I discussed Colliot in District Court Caps IRS Authority to Assess Willful FBAR Penalty at $100,000 (Federal Tax Crimes Blog 5/19/18), here.

According to the opinion, "[F]or three violations, the IRS assessed penalties of $1,108,645.41 for 2008, $599,234.54 for 2009, and $599,234.54 for 2010."  Under the opinion, the FBAR willful penalty is limited to a maximum of $100,000 for each of the three years.

The docket entries in Wadhan as of today are here.

Update on Colliot Limitation on Discretion for FBAR Willful Penalty (7/16/18; 7/18/18)

I have written on the Colliot summary judgment limiting the IRS FBAR willful penalty to $100,000.  United States v. Colliot (W.D. Texas No. AU-16-CA-01281-SS), here;  see District Court Caps IRS Authority to Assess Willful FBAR Penalty at $100,000 (Federal Tax Crimes Blog 5/19/18), here.  I have two follow through items.

1.  The Government is asserting in other cases that Colliot was incorrectly decided.  Kimble v. United States (Court Fed. Cl. Dkt. 170521 T, Dkt entry 29), here.

2.  In Colliot, the Government filed an Additional Memorandum dated 6/14/18, here, seeking to mitigate the damage caused by the opinion.  The Government argues that, based on the number and balances in the accounts, even applying the limitation imposed by the court in the opinion, the Government is entitled to most of the penalties assessed.  The key to the claim is that the FBAR willful penalty with the limitation imposed by the court is based per account per year.  Each account could, under the court's opinion, be assessed FBAR willful penalties as follows: (i) $100,000 penalty per account with an amount of $100,000 or more; (ii) the amount in the account when the amount is between $100,000 and $25,000, and (iii) $25,000 when the amount in the account is $25,000 of less.  In Colliot, the defendants had a number of accounts with varying amounts, so the disaggregation of the accounts makes a substantial difference.

The Government argues that the maximum allowed under the Colliot opinion for 14 of the 16 accounts involved would have been $871,300, but that, for those accounts, the Government only assessed $445,314.  (See Table on p. 6.)  The Government thus argues that for those 14 penalties, the assessments “are within the maximum limits set forth in the regulation, and remain unaffected by the Court’s Order” and thus the IRS did not act arbitrarily or capriciously in assessing those penalties.  Further, the Government argues (pp. 7-10), the Court’s order affects only two of the accounts to cap the penalty at $100,000 or $25,000, so that the total penalties assessed for those two accounts is $378,784 and the amount allowed under the court’s order is $125,000.  In net, under the Government’s calculations, the reduction in FBAR willful penalty for those two accounts would be $253,784.

Government Pushes the Envelope on the Meaning of Willfulness in FBAR Willful Civil Penalty (7/15/18)

A colleague called my attention to the Government's motion and brief for summary judgment in Kimble v. United States (CFC Dkt. no. 17-421 T), here.  The case is an FBAR willful civil penalty refund suit.  In the brief, the Government makes bold claims about the standard for what it must prove to establish a persons liability for the FBAR willful civil penalty.  The docket entries are here.  Mrs. Kimble has not yet filed a response.  I offer the following based on the Government's brief.

I start with the statute.  Section 5321(a)(5)(C) authorizes the civil FBAR willful penalty as follows against "any person willfully violating, or willfully causing any violation of, any provision of section 5314."  The latter section is the section imposing the requirement to file an FBAR.

Often where there is a significant civil penalty, there is a corresponding criminal penalty.  (See e.g., the income tax civil fraud penalty in § 6663 and the criminal tax evasion penalty in § 7201, imposing parallel penalties with the only material difference being the level of proof required (clear and convincing in the civil fraud instance and beyond a reasonable doubt in the criminal instance).)  Similarly, there is also a criminal penalty in 31 USC § 5322(a) imposed on "A person willfully violating this subchapter or a regulation prescribed or order issued under this subchapter."

Two things to observe about the criminal FBAR penalty.  First, the penalty is stated in the same words and cut from the same cloth.  By contrast the civil fraud income tax penalty is worded differently and interpreted the same as the criminal penalty for tax evasion. Second, the criminal penalty for tax evasion requires proof beyond a reasonable doubt, but the civil penalty requires proof by clear and convincing evidence.

The consensus of the decided cases for the civil FBAR willfulness penalty hold that the FBAR willful civil penalty requires that the government prove willfulness only by a preponderance of the evidence.  I think that holding is wrong, as I have previously asserted on this blog, but do not address that issue here.

What I want to address is the meaning of willfulness.  In Ratzlaf v. United States, 510 U.S. 135 (1994), the Supreme Court held that the same standard of willfulness applies to the FBAR criminal penalty as applies in federal tax crimes requiring willfulness -- "`voluntary, intentional violation of a known legal duty'" Cheek v. United States, 498 U.S. 192, 201 (1991) (a tax case).  Since the Supreme Court calibrated the definition of willfulness for FBAR criminal purposes to the definition of willfulness for criminal tax purposes, I have found the following explanation from Bryan v. United States, 524 U.S. 184 (1998) to be helpful:

The word “willfully” is sometimes said to be “a word of many meanings” whose construction is often dependent on the context in which it appears.  See, e.g., Spies v. United States, 317 U.S. 492, 497 (1943).  Most obviously it differentiates between deliberate and unwitting conduct, but in the criminal law it also typically refers to a culpable state of mind.  As we explained in United States v. Murdock, 290 U.S. 389 (1933), a variety of phrases have been used to describe that concept.  As a general matter, when used in the criminal context, a “willful” act is one undertaken with a “bad purpose.”  In other words, in order to establish a “willful” violation of a statute, “the Government must prove that the defendant acted with knowledge that his conduct was unlawful.” Ratzlaf v. United States, 510 U.S. 135, 137 (1994). 

* * * * 

In certain cases involving willful violations of the tax laws, we have concluded that the jury must find that the defendant was aware of the specific provision of the tax code that he was charged with violating.  See, e.g., Cheek v. United States, 498 U.S. 192 (1991).  Similarly, in order to satisfy a willful violation in Ratzlaf, we concluded that the jury had to find that the defendant knew that his structuring of cash transactions to avoid a reporting requirement was unlawful.  See 510 U.S. at 138, 149.  Those cases, however, are readily distinguishable.  Both the tax cases and Ratzlaf involved highly technical statutes that presented the danger of ensnaring individuals engaged in apparently innocent conduct.  As a result, we held that these statutes “carve out an exception to the traditional rule” that ignorance of the law is no excuse and require that the defendant have knowledge of the law.  The danger of convicting individuals engaged in apparently innocent activity that motivated our decisions in the tax cases and Ratzlaf is not present here because the jury found that this petitioner knew that his conduct was unlawful.

With that background of what the term willfully means in the parallel criminal FBAR penalty statute, let's turn to willfully in the civil FBAR willful penalty statute.

Tax Obstruction -- Is Marinello's Nexus Requirement Broader than Obstructing or Intending to Obstruct? (7/14/18)

United States v. Lawson, 2018 U.S. Dist. LEXIS 115310 (D. Alaska 2018), here, a U.S. magistrate judge rejected the defendant's claim that, as interpreted in Marinello v. United States, ___ U.S. ___, 138 S. Ct. 1101 (2018), § 7212(a), tax obstruction, requires the defendant's actions must intend to obstruct a pending IRS administrative proceeding.  The Court said that all Marinello requires is that the Government prove a nexus between the obstructive conduct and a pending proceeding.  I am struggling to understand how a person's conduct can have a nexus to a pending proceeding but the actor does not obstruct or intend to obstruct the proceeding.

By order dated 7/10/18, the district court adopted and accepted the magistrate judge's opinion in its entirety.  The docket entries are here.

I quote in full magistrate judge's order on the point (please note that I use the cleaned up procedure to strip out unnecessary portions):

C. The Mens Rea of § 7212(a) Requires Proof that the Defendant Acted with an Intent to Secure an Unlawful Benefit for Himself or Another 

Finally, Lawson argues that count five should be dismissed because the indictment fails to allege that he committed the obstructive acts with the intent to obstruct a specific IRS proceeding. (Doc. 208 at 1, 3). This claim is without merit. 

Prior to Marinello, the Ninth Circuit held that the elements of corruptly endeavoring to obstruct the due administration of the internal revenue code are: "(1) corruption ... and (2) an attempt to obstruct the administration of the IRS." The Ninth Circuit in turn defined "corruptly" under § 7212(a) as performed with the intention to secure an unlawful benefit for oneself or for another. Thus, it is clear that, at least prior to Marinello, that the mens rea of § 7212(a) only required proof that the defendant acted with an intent to secure an unlawful benefit, as opposed to an intent to obstruct an IRS investigation or proceeding. 

Nothing in Marinello suggests that the mens rea of § 7212(a) has changed. Summarizing its prior decision in Aguilar, the Marinello court stated: 

In interpreting that statute, we pointed to earlier cases in which courts had held that the Government must prove an intent to influence judicial or grand jury proceedings.  We noted that some courts had imposed a "'nexus' requirement": that the defendant's act must have a relationship in time, causation, or logic with the judicial proceedings. And we adopted the same requirement. 

Marinello v. United States, 138 S. Ct. 1101, 1106 (2018) (emphasis added). 

That is, the Aguilar court considered the possibility of requiring the government to prove that the defendant intended to obstruct a grand jury proceeding, but instead elected to join those courts holding that obstruction of justice requires proof of a "nexus" between the defendant's obstructive acts and a judicial proceeding. 

As the Supreme Court clearly stated in the conclusion of Marinello, 26 U.S.C. § 7212(a) requires the government to prove a nexus between the defendant's acts and an IRS proceeding that was either pending or reasonably foreseeable at the time of the obstructive acts. As construed in Marinello, § 7212(a) does not require explicit proof that the defendant intended to obstruct an IRS proceeding.

The Government's opposition, here, filed after the magistrate judge's decision (apparently for consideration by the district judge who, by the date of filing, had already adopted the magistrate judge decision.

NBP Neue Privat Bank (Category 1 Swiss Bank) Reported Ready to Settle with U.S. Prosecutors (7/14/18)

Finews reports that U.S. federal prosecutors have offered NBP Neue Privat Bank, Zurich, a nonprosecution agreement for payment of $5 million.  Peter Hody, Swiss Bank to Settle U.S. Tax Probe (Finews.com 7/13/18), here.

The paper reports that a "[a]  dozen Swiss banks are still waiting to settle a U.S. criminal probe into help tax dodgers and cheats."  These banks were in DOJ's category 1.  The paper reports that NBP was not originally in the first category, but moved into the category when U.S. prosecutors opened a criminal probe in 2013.

Also, the other category 1 banks settling -- Credit Suisse and Julius Baer -- have been required to enter deferred prosecution agreements, whereas NBP will get a nonprosecution agreement.

It has been a while since I focused on Category 1 banks.  My list of Category 1 banks (including now NBP) shows 17 in that category.  I include my list below.  My list includes UBS which was resolved before the categories were established, but still I suspect that there may be some error there.  I would appreciate hearing from anyone with the complete definitive list of Category 1 banks.

Financial Institution or Facilitator

Bank Frey & Co. AG

Bank Hapoalim (Switzerland)

Bank Julius Baer

Basler Kantonalbank

Clariden Leu

Credit Suisse AG

HSBC Private Bank (Suisse)

Liechtensteinische Landesbank (Switzerland) Ltd.

Mizrahi-Tefahot (Switzerland)

NBP Neue Privat Bank, Zurich

Neue Privat Bank

Neue Zürcher Bank

Pictet & Cie

Rahn & Bodmer

UBS AG

Wegelin & Co.

Zürcher Kantonalbank

Addendum 10/4/18:  This list includes non-Swiss Banks.  Technically, as I understand it, only Swiss banks are in formal category 1 because it was part of the DOJ Swiss Bank Program.  However, as I became aware of other foreign banks under criminal investigation I just arbitrarily put them in category 1 so that I would have a complete list of banks under criminal investigation.  (I infer that foreign banks under criminal investigation would not be permitted to voluntarily disclose and achieve some type of favorable settlement that the Swiss banks achieved under the other categories.)

Court Affirms Holding Dismissing Damages Claim for IRS Failure to Obtain Court Approval for JDS (7/7/18)

I have previously blogged on the trial proceedings in Hohman v. United States, 2017 U.S. Dist. LEXIS 106439 (ED MI 2017) where the taxpayer sought damages for the IRS's improper use of a John Doe Summons ("JDS") under § 7609(f) without the necessary court approval.  See Court Dismisses Claims Where IRS Issued JDS Without Required Court Approval for JDS (Federal Tax Crimes Blog 7/20/17), here.  The Sixth Circuit has affirmed in Hohman v. Eadie, ___ F.3d ___, 2018 U.S. App. LEXIS 18269 (6th Cir. 2018), here.  Taxpayers have no remedy.

The interesting issue on the appeal is whether the Financial Privacy Act gave a remedy under 12 USC § 3417.  Under 12 USC § 3413, there is an exception for disclosure of records "in accordance with procedures authorized by Title 26." So, if the JDS had been valid, there would be no question that the taxpayers would have no remedy.  Does the IRS's failure to meet the requirements for JDS change the result?  Here is the court's identification of the issue and its decision to duck the issue:

The parties dispute the meaning of the "in accordance with" language. When confronted with this question, the district court stated that from a plain reading, the exception only applies to IRS summonses issued "in accordance with" procedures under the Code. The court reasoned that because the IRS failed to follow the requisite Code procedures by issuing summonses without first obtaining approval in federal district court, it was subject to the provisions of the Act, including damages claims. 

On appeal, Plaintiffs contend that the district court correctly determined that the plain meaning of this language is that the IRS has to act "in accordance with" the Code, or it is subject to the Act. In support, Plaintiffs cite Neece v. IRS, 922 F.2d 573, 577 (10th Cir. 1990). In Neece, the IRS made a similar argument when it asserted that it was allowed to informally review bank records under I.R.C. § 7602. The IRS referenced the same provision of the Act authorizing "disclosure of financial records in accordance with procedures authorized by [the Internal Revenue Code]." 12 U.S.C. § 3413(c). The Tenth Circuit disagreed and determined that while I.R.C. § 7602 permitted the IRS to issue a third-party summons, I.R.C. § 7609 set forth the procedure the IRS was required to follow. Neece, 922 F.2d at 577-78. The IRS had not followed the proper procedure under its own Code, and so the IRS was bound by the Act. Id. at 577. 

In response, the government argues that the Act has no application to any activities carried out under the Code, including the issuance and enforcement of IRS summonses. In support, it cites the legislative history to argue that Congress indicated that this exception was intended to exempt IRS summonses generally because they are governed by their own privacy regime. It also contends that Neece is distinguishable because it involved an instance where the IRS obtained records informally, instead of through the issuance of a summons. 

There are two possible ways to read the phrase "in accordance with." Congress either intended for this language to mean: (1) that the Code and not the Act governs the IRS, or (2) that the IRS must follow the procedures under the Code, or it is subject to the Act. A review of the relevant provision and legislative history indicates that Congress did not give any thought to or explain what it intended to have happen in a case like this. The House Committee Report states that under the exception, because IRS administrative summonses are already subject to the privacy safeguards of I.R.C. § 7609, they are exempted from the procedures of the Act. H.R. Rep. 95-1383, at 226 (1978). 

Because we uphold the district court's ruling on sovereign immunity grounds, however, there is no need for us to resolve this issue.

Dealing with Other Counts of Conviction After Vacating Tax Obstruction Based on Marinello (6/26/18)

I previously reported on United States v. Westbrooks, 858 F.3d 317 (5th Cir. 2017), where the Fifth Circuit joined the majority of circuits holding that tax obstruction, § 7212(a), did not require the Government show that the defendant knew of an IRS investigation that it was foreseeable for the defendant to obstruct.  See Fifth Circuit Joins Majority Decisions that § 7212(a) Requires No Pending Investigation (Federal Tax Crimes Blog 5/28/17), here.  That position was rejected in the subsequent Supreme Court case of Marinello v. United States, ___ U.S. ___, 138 S. Ct. 1101 (2018); see my blog post Supreme Court Holds that Omnibus Clause of the Tax Obstruction Crime (§ 7212(a)) Requires Awareness of Pending Tax-Related Proceeding (Federal Tax Crimes Blog 3/21/18; 3/22/18), here.  In subsequent proceedings in Westbrooks on remand from certiorari, the Government conceded that the tax obstruction must be vacated but that the defendant's other convictions for tax perjury should stand.  The Fifth Circuit agreed, rejecting Westbrooks' argument that the tax obstruction conviction contaminated the tax perjury convictions, thus permitting those convictions to stand.  United States v. Westbrooks, 2018 U.S. App. LEXIS 16943 (5th Cir. 2018) (unpublished), here.  The Court reasoned:

The disagreement between the parties is about what the vacatur of the obstruction conviction means for the three "false return" convictions. Westbrook contends that the improper obstruction count contaminated the false return counts. This same argument about "spillover prejudice" was raised in Governor Edwin Edwards's appeal of his convictions because an intervening Supreme Court decision had invalidated the legal basis for some of the mail fraud counts. United States v. Edwards, 303 F.3d 606, 638-40 (5th Cir. 2002) (citing Cleveland v. United States, 531 U.S. 12, 121 S. Ct. 365, 148 L. Ed. 2d 221 (2000)). We noted that the concept came from cases challenging a failure to grant a pretrial severance, and we had never decided whether "spillover from invalid claims can be a basis for granting a new trial." Id. at 639. We did not resolve that question in Edwards because even assuming the theory applied in this "retroactive misjoinder" situation, the improper taint exists only if the counts the jury should not have heard allowed the introduction of evidence that would not have otherwise been admissible. Id. at 640. That was not the case in Edwards, id., and it is not the case here. Evidence concerning cash payments, shoddy or nonexistent bookkeeping, and prior false returns was admissible even without the obstruction count as either intrinsic to the false return counts or permissible Rule 404(b) evidence that showed Westbrooks' plan, fraudulent intent, and absence of mistake. United States v. Morgan, 117 F.3d 849, 861 (5th Cir. 1997); Fed. R. Evid. 404(b). The testimony about Westbrook's false testimony at the show cause hearing was, as we have already explained, a permissible basis for the obstruction count and, even if not, would have been admissible as probative of Westbrook's intent. Because the now-invalid obstruction count did not allow the jury to consider evidence that would not have been allowed at a trial focused on just the false return counts, the latter will not be vacated. Edwards, 303 F.3d at 640.

The Court then turned to the sentencing and held:

The final question relates to the sentences for those false return convictions we are upholding. The government agrees that we should vacate those sentences and remand for resentencing in light of the vacatur of the obstruction count. That new sentencing will include but not be limited to reconsideration of the restitution amount which the government concedes should be reduced as it included amounts based on returns filed only during the time period covered by the obstruction count.

Quinnipiac University Law School Tax Crimes Conference Materials Available On Line (6/25/18)

Quinnipiac University School of Law held its 2nd Annual Criminal Tax Day on May 17th and has posted materials that readers may download.  The main site (with links) is here.

I could not get the video to work, but that my be my browser issue.  There are links to download the materials from the event.  For an introduction to the events, see the agenda here.  According to the agenda, the topics covered were:

• What’s New in Criminal Tax?
• Income Reconstruction: Methods, Approaches, and Defenses
• Dealing with the Undocumented Worker
• Taxpayer vs. Preparer: Who to Pursue? 
• Bringing Your Client in from the Cold
• The Criminal Prosecution: Strategies, Plea and Sentencing

Updates on Forfeiture and Civil Penalty in Bullshit Tax Shelter Cases (6/18/18)

I write on two unrelated topics today.  Neither are directly related to federal tax crimes, so I write in summary only.

1.  In United States v. Daugerdas, ___ F.3d ___, 2018 U.S. App. LEXIS 15823 (2d Cir. 2018), here, the Second Circuit held that the petitioner-appellant, the wife of Paul Daugerdas who was convicted for bullshit tax shelter activity, could have the opportunity to amend her pleadings in the criminal forfeiture in Paul's case against funds in which she claimed an interest.  I have previously posted a number of blog entries on Paul.  A general search, here, on Daugerdas will show those entries.  Here is the Second Circuit's summary of the case:

Petitioner-appellant Eleanor Daugerdas appeals from an order of the United States District Court for the Southern District of New York (William H. Pauley III, J.), dismissing her petition asserting a third-party interest in certain accounts (the "Accounts") preliminarily forfeited in the underlying criminal proceedings against her husband, Paul M. Daugerdas. The parties agree that Paul initially funded the Accounts, at least in part, with money he was paid by the law firm through which he conducted his fraudulent activities, and that he gratuitously transferred ownership of the Accounts to his wife over a period of years. Eleanor contends that the law firm irreversibly commingled the income it received from Paul's fraudulent-tax-shelter clients with untainted money before it paid Paul, and accordingly the funds in the Accounts cannot easily be traced to her husband's fraud. Eleanor therefore asserts that the Accounts cannot now be taken from her to satisfy her husband's forfeiture obligations; instead, she argues, equivalent amounts must be collected from her husband's own assets in the same manner that a judgment creditor would enforce any personal money judgment. 

We conclude that Eleanor's petition does not currently contain sufficient plausible allegations to sustain her position; however, at oral argument, she claimed to be able to plead additional facts, and such repleading would not necessarily be futile. Because denying Eleanor the ability to assert the argument she raises here could potentially permit the government to deprive her of her own property without due process of law, we VACATE the district court's order and REMAND the case for proceedings consistent with this opinion.

The opinion contains a good discussion of the differences between criminal forfeiture (in personam) and civil forfeiture (in rem).

2.  In Greenberg v. Commissioner, Tax Ct. Memo LEXIS 79, here, the Court rejected Greenberg's bullshit tax shelter claims but held that, although it would otherwise have sustained the 40% accuracy related penalty, it would not do so because the IRS had not met the requirement that it meet a production burden with respect to the written supervisor approval required by § 6751(b).  The Tax Court's opening two paragraphs project the result:

These cases are about a lawyer and a tax accountant who used a series of complex option spreads to generate millions in tax savings for themselves and their clients. The Commissioner says these transactions look too much like Son-of-BOSS deals--a type of deal this Court has consistently said doesn't work. n2 He argues that the taxpayers made a fortune selling tax shelters and tried to shelter their shelter income with the same kind of shelter. He also takes issue with a large tax loss that the taxpayers say was generated when they abandoned their interest in a mysterious partnership--even though there is no paperwork to prove any such abandonment.
   n2 Son-of-BOSS is a variation of a slightly older alleged tax shelter known as BOSS, an acronym for "bond and options sales strategy." There are a number of different types of Son-of-BOSS transactions, but what they all have in common is the transfer of assets encumbered by significant liabilities to a partnership with the goal of increasing basis in that partnership or the assets themselves. The liabilities are usually obligations to buy securities, and are typically not completely fixed at the time of transfer. This may let the partnership treat the liabilities as uncertain, which may let the partnership ignore them in computing basis. If so, the result is that the partners will have a basis in the partnership or the assets themselves so great as to provide for large--but not out-of-pocket--losses on their individual tax returns. We have never found a Son-of-BOSS deal that works. See, e.g., CNT Inv'rs, LLC v. Commissioner, 144 T.C. 161, 169 n.7 (2015); BCP Trading & Invs., LLC v. Commissioner, T.C. Memo. 2017-151, at *2 n.2. 

The Commissioner issued two rounds of notices of deficiency. The first disallowed losses from option spreads claimed through the taxpayers' partnership, GG Capital, as well as the abandonment loss. The second disallowed losses the Commissioner says the taxpayers claimed from another partnership--AD Global-- through the same type of transaction. The taxpayers say they never claimed these losses. They also say the Commissioner got the procedure wrong--he should have issued notices of final partnership administrative adjustment (FPAAs), not notices of deficiency--and that he missed the statute of limitations. If those arguments fail, they say these transactions were legitimate investments, not Son-of-BOSS deals. The Commissioner thinks this sounds too good to be true.

Evidentiary Rulings in FBAR Collection Suit (6/6/18)

In United States v. Garrity, 2018 U.S. Dist. LEXIS 92561 (D. Conn. 2018), here, the Court rules on objections to evidence in this FBAR collection action about which I have previously written (blog entries collected at the end of this blog entry).  Because of the number of the exhibits and objections, the Court opens with a general discussion titled "I. General Principles and Observations About the Parties' Objections to Exhibits."  Then in part II, titled "II. The Court's Rulings on Specific Proposed Exhibits," the Court addresses the specific exhibits and objections in chart form.  I address here only the general discussion.  Readers may, however, find the specific discussion useful.

The particular part of the general discussion I found interesting is:

1. Authenticity 

Finally, courts have held that the fact that the records were produced by a party in response to a discovery request, "while not dispositive of the issue of authentication, is surely probative." McQueeney, 779 F.2d at 929. See also Burgess v. Premier Corp., 727 F.2d 826, 835-36 (9th Cir. 1984) (holding that "the district court could properly have found that all of the exhibits were adequately authenticated by the fact of being found in [defendant's] warehouse"). 

In this case, as noted below in the specific rulings, the documents whose authenticity defendants challenge include records bearing the signature and/or initials of Mr. Garrity, Sr., and/or his sons—and those signatures, which appear to be by the same person(s), are also contained in other records to which Defendants do not object. See, e.g., Exs. 25 (signed by Kevin Garrity, and to which Defendants do not object), 61 (will signed by Mr. Garrity and submitted to the Court at ECF No. 115-13), and 99 (promissory notes signed by Mr. Garrity and submitted to the Court at ECF No. 115-11). Other documents include the same bank account number and appear to be records of the same bank as to which Defendants have made judicial admissions in their answer; appear to be records of the same foundation, and bear the same dates, about which Defendants have made judicial admissions in their answer; and provide evidence of the same "shared signature authority" about which defendants have made judicial admissions in their answer. See ECF No. 9 ¶¶ 7, 8, and 21. Further, Plaintiff has represented that all of these documents were produced by Defendants after the documents were obtained from the foundation or "after Defendants' counsel travelled to Liechtenstein and obtained it directly from" the bank that served as the foundation's agent. See ECF No. 155 at 1-2. Defendants have not contested this representation.

In addition, for some related context of the above, I picked up two recently filed documents related to specific requests for jury instructions on specific subjects requested by the Court.  The item  of particular interest is both sides' proposed instructions on "Judicial Admissions from Answer" (Gov't description) and "Uncontested Facts" (Defendant's description).

• Government Instructions, here.
• Defendant's Instructions, here.

Tax Attorney's Conviction and Sentencing Affirmed on Appeal (6/6/18)

In United States v. Lynch, 2018 U.S. App. LEXIS 14085 (3rd Cir. 2018) (nonprecedential), here, the Third Circuit affirmed the conviction and sentencing of Steven J. Lynch, a tax attorney, whose criminal conviction and sentencing I have written before.  See Tax Attorney Convicted of Employment Tax Fraud (Federal Tax Crimes Blog 9/8/16; 9/10/16), here, and Tax Attorney Sentenced to 48 Months of § 7202 Convictions (Federal Tax Crimes Blog 1/14/17), here.  The decision is nonprecedential and covers no new ground.  It  does cover a lot of points, albeit in some cases not in great detail.  I will just point out some of the points as reminders to readers.

1.  As a defense to the criminal charge and as a  means to lower his tax loss for sentencing, Lynch argued that the subsequent delinquent payment of the Trust Fund tax should be considered.  The Court's rejections of those arguments were as follows:

Lynch argues that § 7202 does not contain within it any language specifying a due date and so argues that his late payments do not alone suffice to establish that he failed to pay over the taxes. This argument fails on its face. Section 7202 applies to taxes "imposed by this title," and § 6151 makes clear that "when a return of tax is required under this title or regulations, the person required to make such return . . . shall pay such tax at the time and place fixed for filing the return." See, e.g., United States v. Quinn, No. 09-cv20075 (JWL), 2011 U.S. Dist. LEXIS 10506, 2011 WL 382369, at *1 (D. Kan. Feb. 3, 2011) ("[A] 'failure to pay over' necessarily incorporates the concept of a deadline, as the failure must be measured as of some particular time."), aff'd, 566 F. App'x 659 (10th Cir. 2014). Thus, where a payment is late, the responsible person has by definition failed to pay it over and if that failure was willful, that person has violated § 7202. 

* * * * 

Lynch next argues that the tax loss should actually have been zero, given that he always intended to pay the taxes, or alternatively should have been reduced by the amount of his late payments. As we already explained, § 7202 is violated when the taxes are willfully not paid as of the time that the filing is due. The Guidelines, for their part, are clear that for willful failure-to-pay offenses, "the tax loss is the amount of tax that the taxpayer owed and did not pay" and furthermore that "[t]he tax loss is not reduced by any payment of the tax subsequent to the commission of the offense." § 2T1.1(c)(3) & (c)(5). Accordingly, the tax loss is properly calculated based on whatever Lynch owed and willfully did not pay when the applicable filings were due, at which point the offense had been committed. Subsequent payments cannot retroactively reduce that tax loss.

2.  Lynch argued that the prosecutor had improperly asserted to the jury that the taxes were his taxes when, in fact, they were employer taxes.  The Court rejected the argument as follows:

Court Rejects Defense Expert Testimony as to State of Law and Duty in Government FBAR Willful Penalty Case (6/3/2018)

In United States v. Garrity, 2018 U.S. Dist. LEXIS 91665 (D. Conn. 2018), here, a Government suit to obtain judgment on an FBAR willful penalty, the Court granted the Government's motion in limine to preclude the testimony of the defense's expert witness.  The Court described the testimony thus excluded:

According to Defendants' expert disclosure, Mr. Epstein is a certified public accountant with over 25 years of experience. (Report of Howard B. Epstein, CPA, ECF No. 114-2 at 2.) His practice focuses on international tax planning and compliance for individual taxpayers and multi-national companies. (Id.) Defendants propose that Mr.  Epstein will testify at trial on the following general subjects: 

• "general reporting requirements as they related to Foreign Financial Accounts and Foreign Trusts"; and
• "general guidance published by the Internal Revenue Service, the Department of Treasury, and FinCen explaining the rules and reporting requirements to taxpayers and practitioners relating to such vehicles for the year the subject penalty is assessed (2005), as compared to years before and after." (ECF No. 114-2 at 2.) 

More specifically, Mr. Epstein's proposed testimony includes opinions on: 

• "the state of published guidance and public awareness of [foreign account] reporting requirements so as to provide an objective backdrop or perspective . . . .";
• "how such guidance evolved in the years before and after the subject year [i.e., 2005], and how, in that climate, international tax compliance has been viewed and understood by practitioners and taxpayers . . . ."; and
• "whether an individual taxpayer could have been unaware of his filing foreign income and asset reporting requirements." (ECF No. 114-2 at 3.) 

Mr. Epstein's proposed testimony purports to answer the question, "Should Paul Garrity Sr. have known of his requirements to report the Stiftung [a Liechtenstein entity]?" (ECF No. 114-2 at 9.) He opines that "the IRS should not and does not determine—without specific supporting evidence—that a taxpayer should have known of his foreign bank account reporting requirements." (Id. at 10.)

The Court excluded the testimony for three reasons:  First, it found that "it will not assist the jury to understand the evidence or to determine a fact in issue."  Second, it found the proffered testimony to be "is irrelevant to the question of willfulness."  Third, even if relevant, the Court invoked Rule 403 "because allowing Mr. Epstein to testify on the proposed subjects would risk jury confusion and invade the province of the Court.

The opinion is very short, so I encourage readers interest in this subject to read the opinion.  Basically, I think the reasoning is as follows:

1.  The issue in the case is whether the taxpayer (the deceased parent) was willful in not reporting the foreign accounts.  Willfully, the court says, means "knowingly or recklessly" failing to file.  Significantly, the court said:

Actual knowledge encompasses "willful blindness" to the obvious or known consequences of one's actions. McBride, 908 F. Supp. 2d at 1205 (citing Global-Tech Appliances, Inc. v. SEB S.A., 563 U.S. 754, 767 (2011)). The government may prove willful blindness with evidence that Mr. Garrity, Sr. made a "conscious effort to avoid learning about reporting requirements." Williams, 489 Fed. Appx. at 659. Evidence of a taxpayer's negligence, however, is insufficient to prove willfulness. See, e.g., Bedrosian, 2017 WL 4946433, at *6 (finding that the defendant was not liable for willful failure to file an FBAR because his actions amounted to, at most, negligence).

2.  On the issue the jury will resolve, the expert's report:

does not, and does not purport to, address the subjective standard at issue here. Instead, Mr. Epstein speaks only to an objective standard—whether Mr. Garrity, Sr. "should have known" of the reporting obligation in light of the IRS's public education on the issue at the relevant time. What Mr. Garrity, Sr. should have known—i.e., whether Mr. Garrity, Sr. was negligent in his failure to file an FBAR—is not the issue in this case. 

What Mr. Garrity, Sr. actually knew (or consciously chose to avoid learning) is the key issue, and there is no evidence linking that issue with Mr. Epstein's proposed testimony.

JAT Comments: