DOJ Reaches DPA with HSBC Switzerland (12/11/19)

DOJ Tax has announced a deferred prosecution agreement (“DPA”) with HSBC Switzerland in which “HSBC Switzerland admitted to conspiring with U.S. taxpayers to evade taxes and, as part of the agreement, HSBC Switzerland will pay $192.35 million in penalties.”  See Press Release titled “Justice Department Announces Deferred Prosecution Agreement with HSBC Private Bank (Suisse) SA,” here.

The key excerpts of the press release are:

According to court documents, HSBC Switzerland admits that between 2000 and 2010 it conspired with its employees, third-party and wholly owned fiduciaries, and U.S. clients to: 1) defraud the United States with respect to taxes; 2) commit tax evasion; and 3) file false federal tax returns. In 2002, the bank had approximately 720 undeclared U.S. client relationships, with an aggregate value of more than $800 million. When the bank’s undeclared assets under management reached their peak in 2007, HSBC Switzerland held approximately $1.26 billion in undeclared assets for U.S. clients.  

According to the terms of the DPA, HSBC Switzerland will cooperate fully with the Tax Division and the IRS. The DPA also requires HSBC Switzerland to affirmatively disclose information it may later uncover regarding U.S.-related accounts, as well as to disclose information consistent with the department’s Swiss Bank Program relating to accounts closed between Jan. 1, 2009 and Dec. 31, 2017. Under the DPA, prosecution against the bank for conspiracy will be deferred for an initial period of three years to allow HSBC Switzerland to demonstrate good conduct. The agreement provides no protection for any individuals. 

The $192.35 million penalty against HSBC Switzerland has three parts. First, HSBC Switzerland has agreed to pay $60,600,000 in restitution to the IRS, which represents the unpaid taxes resulting from HSBC Switzerland’s participation in the conspiracy. Second, HSBC Switzerland agreed to forfeit $71,850,000 to the United States, which represents gross fees (not profits) that the bank earned on its undeclared accounts between 2000 and 2010. Finally, HSBC Switzerland agreed to pay a penalty of $59,900,000. This penalty amount takes into consideration that HSBC Switzerland self-reported its conduct, conducted a thorough internal investigation, provided client identifying information to the Tax Division, and extensively cooperated in a series of investigations and prosecutions, as well as implemented remedial measures to protect against the use of its services for tax evasion in the future.

Interesting Retrial After Cheek Defense Based on Religious Objection to Use of Tax Collections (12/11/19)

I picked up this article: After mistrial, judge says he made mistake in allowing man to argue religious objection to filing tax returns (The Oregonian 12/10/19), here.  Basically, it reports that the defendant in a failure to file tax case, Michael Bowman, was permitted in the first trial to assert this defense: “he believed the government had to accommodate his religious objection to funding Planned Parenthood and abortions before he filed the returns.”  The jury hung, so the judge declared a mistrial.  Facing retrial, the judge determined that the defense could not be asserted.  So, it looks like the defendant may not have a viable defense, but he is still entitled to have the government prove his guilt beyond a reasonable doubt.

But, in that retrial, the parties apparently agreed to unusual procedures described in the article:

The extremely rare trial will have no witnesses and no jury and will take place before Chief U.S. District Judge Michael W. Mosman, the same judge who presided over the first trial. Mosman will make a decision based on a set of facts agreed upon ahead of time by the prosecutor and the defense lawyer. 

Bowman, 55, of Columbia City, doesn’t even plan to show up but instead will listen to the proceeding by phone, calling the latest legal twist an “abortion of justice’’ in an email to the judge. Stripped of his defense, he expects Mosman to convict him on all four counts of willful failure to file tax returns. 

Then he plans to appeal.

The trajectory in the first trial has become something of a cause celebre among tax protesters with some misleading claims about what happened.  Here is a good factcheck on those claims (Saranac Hale Spencer, Old Decision in Tax Lawsuit Gets New Spin (FactCheck.org 4/9/19), here) where the quick take is:

A website known for spreading misinformation writes that a man who cited religious reasons for not paying his income taxes “has won an historic lawsuit against the IRS.” That’s misleading. One charge was dropped, but four others have yet to be determined.

JAT Comment:

Reuters Reports EU Considers Further Tax Haven Listing (12/9/19)

Reuters has this report:  EU to consider tougher tax haven listing (12/6/19), here.  Key excerpts:

A group of European Union countries is calling for the bloc to cast a wider net when listing tax havens and to consider imposing stricter sanctions for countries facilitating tax avoidance, according to an EU document and an EU official. 

The document, prepared by the Danish government and seen by Reuters, urges a discussion on whether “current criteria provide sufficient protection against tax avoidance and evasion” and pushes for “strengthened” standards and sanctions. Germany and France were among its backers. 

It also calls for a discussion on how member states deal with the issue, asking “Do we internally have sufficient safeguards against tax avoidance and evasion?” 

This potentially sets up a dispute with EU members Luxembourg, the Netherlands and Ireland, which widely use low tax and other sweeteners to host EU headquarters of foreign firms, depriving other EU governments of tax revenues from profits that corporations make on their territory. 

At a meeting of EU finance ministers on Thursday, several EU states backed the Danish proposal, one EU official said, naming Germany, France, Spain and Austria among the explicit supporters. 

* * * * 

Luxembourg, the Netherlands and Ireland were listed in a report by International Monetary Fund researchers in September as world-leading tax havens, together with Hong Kong, the British Virgin Islands, Bermuda, Singapore, the Cayman Islands, Switzerland and Mauritius. None of them are on the [current ] EU list.

JAT Comment:  Good.

Swiss High Court Approves UBS Disclosure of French Account Holders and Outlines Requirements (12/4/19)

According to a Reuters report, Switzerland's highest court has outlined the requirements for foreign countries seeking Swiss assistance for tax related information:  Swiss court outlines rules for helping countries chase tax cheats (Reuters 12/4/2019), here.  Key excerpts:

Switzerland’s highest court spelled out the steps foreign authorities must take if they want legal assistance in chasing tax cheats as it released the written verdict on why it made UBS Group (UBSG.S) in July share client data with France. 

The Federal Court ruled that Switzerland’s biggest bank must hand over historical data on more than 40,000 client accounts to French tax authorities in a landmark case keenly watched by other countries seeking similar information. 

The ruling was also closely watched for the impact it might have on the Swiss bank’s separate 4.5 billion euro ($5 billion) legal battle with France in a criminal case over alleged tax avoidance by UBS clients. 

Revenue-hungry governments, for years thwarted by Switzerland’s strict secrecy rules, are monitoring developments to see if they can use historical evidence of their citizens’ trying to hide money from tax authorities. 

In its written ruling released on Wednesday, the court said it would not help “fishing expeditions” by foreign tax authorities seeking potential evidence of wrongdoing by groups of citizens. 

Tax authorities must give a detailed description of the group involved and specific circumstances that led to the request; explain the applicable law and reasons to assume that taxpayers did not fulfill their obligations; and demonstrate that the information requested could help make them do so. 

The court reinforced its stance that the client data UBS is providing French tax authorities cannot be used by French prosecutors in the criminal investigation of UBS, the world’s biggest wealth manager. 

The data is solely to help go after French tax dodgers.

The Missing Witness Negative Inference and the Impeachment Proceedings (12/1/19)

A couple of days ago, I wrote on the D.C. Circuit Court’s rejection of another Bullshit Tax Shelter.  D.C. Circuit Swats Down Bullshit Tax Shelter (Federal Tax Crimes Blog 11/29/19), here.  One of the issues discussed in the case (but only lightly discussed in the blog) is the negative inference that a trier of fact may draw from a missing witness.  I noted: “In its most common iteration, the missing witness negative inference is deployed when the witness is controlled by one of the party’s to the litigation.”  I use this separate blog entry to discuss the missing witness negative inference in this context because of its potential for its application where, in the impeachment proceedings or the resulting trial, President Trump has control or suasion over witnesses whom he directs or encourages not to testify.

A good statement of the missing witness rule--usually invoked in a jury instruction context to explain to the jury how to use the rule--is (United States v. St. Michael's Credit Union, 880 F.3d 579, 597 (1st Cir. 1989), here (cleaned up):

The rationale behind the missing witness instruction has been stated as follows: "the failure of a party to produce available evidence that would help decide an issue may justify an inference that the evidence would be unfavorable to the party to whom it is available or whom it would ordinarily be expected to favor." 2 C. Wright, Federal Practice and Procedure § 489 (1982). First Circuit precedent has established three circumstances that may warrant a missing witness instruction.  

The jury may draw an inference adverse to a party toward whom the missing witness is favorably disposed, because the party would normally be expected to produce such a witness. In addition, the jury may draw an adverse inference when a party fails to produce a material witness who is peculiarly available to that party. Finally, when a party having exclusive control over a witness who could provide relevant, noncumulative testimony fails to produce the witness, it is permissible to draw an adverse inference from that party's failure to do so, even in the absence of any showing of the witness's predisposition toward the party.

Readers will note that the negative inference from a missing witness is an evidentiary context for inferences that we use everyday in all sorts of contexts beyond a trial setting.  If it is important to establish the truth of a proposition and any party withholds potentially important evidence as to the truth or falsity of the proposition, then an inference can be and often is drawn that the evidence would be negative to that party.  The inference is deployed in a trial setting where it is critically important to establish the truth of facts which the trier of fact (judge or jury) is requested to find.  The party who suffers if the fact is or is not true and declines to produce evidence within that party's control can be subject to a negative inference as to the content of the withheld evidence.  Just that simple.

In the current context, President Trump has directed and clearly signaled to all persons within his control or suasion that they should not testify.  That is the classic case in which the missing witness negative inference can be made.  As I indicated, that rule is important in fact finding in every day life and in trials.

D.C. Circuit Swats Down Bullshit Tax Shelter (11/29/19)

In Endeavor Partners, LLC v. Commissioner, ___ F.3d ___ (D.C. Cir. 2019), here, the Court affirmed the Tax Court’s strike-down of yet another bullshit tax shelter, Endeavor Partners, LLC v. Commissioner, T.C. Memo. 2018-96, here.  In broad overview without getting into the weeds, these shelters do very large highly leveraged offsetting trades with relatively little cash outlay and no real economic risk.  The resulting transactions produce very large nominal gains with offsetting nominal losses, with in net no material risk and no material gain.  The nominal gains are allocated to tax indifferent parties, and the nominal losses are allocated to wealthy taxpayers with high taxable income to offset their income and thus avoid (or, in many cases, evade) tax on their income.

I start with the marvelous Tax Court opinion by Judge Lauber because he does get into the weeds.  Here is the overview from p. 3 of the Slip Op.:

Finding that the transactions lacked any economic substance whatsoever, we will sustain respondent’s disallowance of the loss deductions in question. But we are unable to sustain the accuracy-related penalties determined under section 6662(a). Although the partnerships’ conduct is plainly deserving of penalty, respondent has conceded that the IRS did not secure, prior to the issuance of the FPAAs, written supervisory approval of the penalties as required by section 6751(b)(1). 

Basically, the principal behind one of the promoters was Andrew D. Beer, but he had many enablers, including prominent accounting firms (Arthur Andersen and Ernst & Young), at least one prominent law firm (Arnold & Porter, whose more likely than not opinion was highly marketable), and Deutsche Bank ("DB", which implemented the illusory financial transactions and made the purported loans backing them).  Arnold & Porter alone was paid about $10 million for something.  I started to call them legal fees, but that gives them a dignity they do not deserve.  A better description is that they were insurance premiums sold to wealthy participants in the shelter to protect them (they hoped) from criminal and civil penalties for claiming tax shelter benefits that any reasonable and half-way intelligent person would have known were too good to be true.

So, the Tax Court in 66 pages lays bare the perfidy of these actors, albeit dressed in tax lingo that somehow detracts from the fact that these bullshit shelters, and this one specifically, were simply fraudulent raids on the U.S. Treasury.

So, how does one defend such nonsense?  I have not looked through the Tax Court briefs, but the Tax Court did find Mr. Beer and the expert witnesses not credible on any issue in the case.  So, further obfuscation was the defense.  It did not work at the trial level.

To their credit, the attorneys for the bullshit shelter in their appellate brief opened as follows:

Delta and its affiliates (collectively the “Delta Group”) were involved with certain so-called “tax shelters” that we recognize this Court has viewed with disfavor. At issue here, however, is not whether any transaction was a “tax shelter” or whether any “tax shelter” was valid. Rather, the issues on this appeal are principled ones of evidence and fundamental procedural fairness. We respectfully urge the Court to focus on how the Tax Court applied the rules of evidence rather than on the subject matter to which it applied them.

Just as the shelter dodged the bullet on the accuracy related penalty because of the IRS’s footfault on the § 6751(b) written manager approval requirement, it tried to avoid the consequence of its bullshit because, it alleged, the Tax Court treated it unfairly from a procedural perspective.

New LB&I Campaign for Post OVDP Compliance (11/25/19)

I previously reported that IRS LB&I included among its “campaigns” OVDP Declines-Withdrawals Campaign.  IRS LB&I "Campaigns" to Focus on OVDP Declines-Withdrawals, Among Other Issues (Federal Tax Crimes Blog 2/1/17), here.

LB&I’s campaigns are an audit strategy added in 2017 to improve return selection, identify issues representing a risk of noncompliance, and make the greatest use of its limited resources.

In another OVDP related development, in November 2019), the IRS added the following:

Post Offshore Voluntary Disclosure Program (OVDP) Compliance

Practice Area: Withholding & International Individual Compliance 

Lead Executive: John Cardone, director of Withholding & International Individual Compliance 

U.S. persons are subject to tax on worldwide income. This campaign addresses tax noncompliance related to former Offshore Voluntary Disclosure Program (OVDP) taxpayers’ failure to remain compliant with their foreign income and asset reporting requirements. The IRS will address tax noncompliance through soft letters and examinations.

See IRS website for its active campaigns, here.

JAT Comment:  One of the traditional goals of the IRS's voluntary disclosure programs is not only to resolve past issues but, put the taxpayers involved on a track of ongoing compliance, not only with respect to offshore accounts but their tax obligations generally.  It is not clear whether these initiatives will focus narrowly on the compliance issue identify but might sweep more broadly to identify general noncompliance.

RICO Claim Dismissed Against Bullshit Tax Shelter Promoters (11/19/19; 11/22/19)

In Menzies v. Seyfarth Shaw LLP, __ F.3d ___ (7th Cir. 2019), here, the Court dismissed a RICO claim arising out of an alleged fraudulent tax shelter peddled to the taxpayer (Menzies) by a lawyer, law firm and two financial services firms.  The Court held that fraudulent tax shelters can be subject of RICO claims, but Menzies had failed to properly assert the claims in the pleadings.

The particular shelter involved was of the bullshit shelters, often a topic discussed on this blog.  Here is my definition from my Tax Procedure books (Practitioner Edition p. 905 (footnotes omitted); Student Edition p. 616):

Abusive tax shelters are many and varied.  Some are outright fraudulent, usually wrapped in a shroud of paper work and cascade of words designed to mask the shelter as a real deal.  The more sophisticated are often without substance but do have some at least attenuated, if superficial, claim to legality.  Some of the characteristics that I have observed for tax shelters that the Government might perceive as abusive are that (i) the transaction is outside the mainstream activity of the taxpayer, (ii) the transaction is incredibly complex in its structure and steps so that not many (including IRS auditors, if they stumble across the transaction(s)) will have the ability, tenacity, time and resources to trace it out to its illogical conclusion (this feature is often included to increase the taxpayer’s odds of winning the audit lottery); (iii) the transaction costs of the arrangement and risks involved, even where large relative to the deal, offer a favorable cost benefit/ratio only because of the tax benefits to be offered by the audit lottery, (iv) the promoters (and other enablers) of the adventure make a lot more than even an hourly rate even at the high end for professionals (the so-called value added fee, which is often insurance type compensation to mediate potential penalty risks by shifting them to the tax professional or the netherworld between the taxpayer and the tax professional) and (v) the objective indications as to the taxpayer's purpose for entering the transaction are a tax savings motive rather than any type of purposive business or investment motive.   

More succinctly, Michael Graetz, a Yale Law Professor, has described an abusive tax shelter as “[a] deal done by very smart people that, absent tax considerations, would be very stupid.”  Other thoughtful observers vary the theme, e.g. a tax shelter “is a deal done by very smart people who are pretending to be rather stupid themselves for financial gain.”  Others have described the abusive tax shelters as “too good to be true.” 

I could not ascertain precisely what the steps in the fraudulent tax shelter scheme were other than, like Son-of-Boss transactions, the scheme created artificial losses that, presumably, offset the gain on sale of AUI stock, although it is not clear whether that gain was ever reported in order to use artificial losses. (I perhaps just missed something there.)  Here is the best explanation from Judge Hamilton’s dissenting opinion (Slip Op. 33-35):

Report of IRS Criminal Interest in Captive Insurance Shelters (11/17/19)

It is reported that the IRS is looking to make criminal referrals to CI in § 831(b) captive insurance cases.  Jay Adkisson, IRS Suggests Criminal Referrals To Be Made In Abusive 831(b) Captive Tax Shelter Cases (Forbes 11/17/19), here.  The article cites as its source an article written by Aysha Baghi in Bloomberg's Tax Management Weekly Report™ which in turn cites SB/SE Commissionier Eric Hylton at a conference.

Adkisson notes the potential targets:

1. Promoter (captive manager) who could have been subject to promoter examination and continued to market the product even after Notice 2016-66.

2. Actuaries who provided studies making “unsupportable predictions about claims and losses, i.e., so-called ‘whore actuaries’.”

3. The captive owners who continued to take deductions after the Notice.

Adkisson speculates that, while referral to CI is one thing, as to referral from CI to DOJ Tax, the target environment is “ not so rich since DOJ-TAX would have to prove tax fraud beyond a reasonable doubt, which is a much higher standard than that something is a mere tax shelter.”  Adkisson notes:

Here, it would likely be a captive manager and their client who was caught fabricating claims after-the-fact so as to try to justify the premiums paid to the captive, or the IRS had audio tapes or other evidence of the captive manager selling the captive as a tax shelter but then later falsely testifying that there were no tax motivations for the arrangements.

Adkisson notes that the IRS may seek promoter injunctions, but that “the forecast for a criminal injunction before 2020 is probably pretty low.”  I think he means criminal prosecution rather than criminal injunction.

Sixth Circuit Holds that Courts Cannot Enjoin IRS From Receiving or Using Alleged Confidential Info from Former Attorney (11/13/19)

In Gaetano v. United States, 2019 U.S. App. LEXIS 33164 (6th Cir. 2019), here, the Gaetanos (husband and wife) sued the United States to enjoin the IRS from receiving and using attorney-client confidential information that their former attorney, Goodman, did or might share with the IRS.  The Court opens with this good succinct introduction of the factual background and holding.

Richard and Kimberly Gaetano trusted Gregory Goodman as their legal advisor and business partner in running a cannabis operation. That trust was spurned.  The Gaetanos ended the relationship after ethics violations undid Goodman's license to practice law. He retaliated by assisting the Internal Revenue Service in a tax audit against them. Concerned about what Goodman might reveal, the Gaetanos sued the government to prevent it from discussing attorney-client confidences with him. The Anti-Injunction Act bars the lawsuit, and the Williams Packing exception does not apply. See 26 U.S.C. § 7421(a); Enochs v. Williams Packing & Navig. Co., 370 U.S. 1, 82 S. Ct. 1125, 8 L. Ed. 2d 292 (1962).

The district court dismissed the complaint.  On appeal, the Sixth Circuit held that dismissal was proper on jurisdictional grounds because of the Anti-Injunction Act, § 7421(a).  In summary, the Court held:

1.  The claim of violation of the Sixth Amendment right to counsel was improper because that is a right that attaches when prosecution is commenced.  There was no prosecution (at least not yet).

2.  The claim of violation of due process was improper.  The Court reasoned (cleaned up):

The Gaetanos next seek refuge in the Due Process Clause of the Fifth Amendment. As a creation of the common law, not the Constitution, the attorney-client privilege cannot by itself provide the basis for a due process claim. Support for the Gaetanos' position thus must come from somewhere else, in this instance from cases holding that deliberate preindictment intrusions into the attorney-client relationship may prove so pervasive and prejudicial as to imperil the fairness of subsequent proceedings.  

Vanishingly few decisions have found a due process violation for government intrusion into the attorney client relationship. The few cases generally involved nefarious government conduct,  such as infiltrating a defense lawyer's office. And in the lion's share of cases, courts treat these due process claims with suspicion. For our part, we have never found a Fifth Amendment violation on this ground. And we recently expressed our skepticism about the continued vitality of the "outrageous government conduct" defense, of which these claims are thought to be a subspecies. 

Even if this deliberate-intrusion concept could form the basis of a due process claim, the Gaetanos still would not prevail. Such claims require an ongoing, personal attorney-client relationship. That's not something the Gaetanos and Goodman have. Such claims also require a deliberate intrusion. But that's not what happened. The government never requested privileged information from Goodman. Such claims also require actual and substantial prejudice. But the Gaetanos seek relief outside the context of any enforcement proceeding, and they offer no explanation why the ordinary remedy—suppressing privileged evidence—would fail to protect them. No Fifth Amendment danger lurks.

3.  The Court rejected a claim under § 7525, noting that the privilege could be raised only to prevent compelled production of privileged information, but cannot be used to stop extrajudicial communications unrelated to  proceedings before a court.

Negotiating Misdemeanor Plea in Lieu of Felony in Tax Crimes Cases? (11/13/19)

In United States v. Christensen, 2019 U.S. Dist. LEXIS 193864 (D. AZ. 2019) (Magistrate Report and Recommendation), here, Gary Steven Christensen had been convicted of multiple tax crimes and brought a "Motion Under 28 U.S.C. § 2255 to Vacate, Set Aside, or Correct Sentence by a Person in Federal Custody."  This motion states a standard claim for convicted defendants that they had not received a fair trial and appeal because of ineffective counsel.  The Magistrate R&R linked here recommends that the motion be denied and that a certificate of appealability be denied.

The general claims of ineffective counsel made are interesting.  Those who might be interested in such claims will, I think, find these claims interesting and so I do recommend it for those particularly interested in this type of claims.

But, what caught my eye was the claim Christensen makes about his attorney's plea negotiations.  Christensen was charged with 13 felony counts (7 evasion and 5 tax perjury) and 2 misdemeanor counts (failure to file).  The opinion states that, prior to the trial, Christensen's "Counsel wrote that he was "close to securing a plea offer ... which would dismiss all felonies and allow plead[ing] to three misdemeanor offenses to entirely resolve this criminal prosecution."  (See Slip Op. 5-6.)

Bottom-line, I have not experienced any willingness on tax prosecutors to take pleas to misdemeanor charges in lieu of felony charges.

I point to the DOJ Tax Criminal Tax Manual (CTM) Chapter 5 on plea agreements, here.  I could not find any discussion of offering to exchange multiple felony counts for one or more misdemeanor counts.

I ask readers to offer their comments on this issue, either by comment to this blog or by email to me at jack@tjtaxlaw.com.

Net Worth, Corroboration of Defendant's Statements and Corpus Delecti (11/11/19)

One of my weekly automated searches picked up this recent case quote from United States v. Tanco-Baez, Nos. 16-1322, 16-1323, 16-1563, 2019 U.S. App. LEXIS 32910, at *15-16 (1st Cir. Nov. 4, 2019), here (cleaned up; emphasis supplied):

The Court recognized that the corpus delicti for some offenses -- unlike the corpus delicti for, say, homicide -- is not "tangible." Smith, 348 U.S. at 154. For example, according to the Court, tax evasion is an offense that lacks a "tangible" corpus delicti, id., because the offense results in no "physical damage to person or property," The Court then explained that, for offenses of that sort, evidence that would tend to establish the corpus delicti "must implicate the accused," even though evidence that would tend to establish the corpus delicti of offenses that result in physical damage or injury -- such as evidence of the murdered body in a homicide case -- need not.

Since I don't recall dealing with the concept of corpus delecti before in my tax crimes adventures or the cited Smith case, I thought I would chase down Smith, which may be viewed in it glory here.

In Smith, the Court opens with this statement:  "This is the third of the net worth cases and the first dealing with the Government's use of extrajudicial statements made by the accused."  Tax Crimes fans know (or should know) all about the net worth method for proving taxable income and thus tax due and owing, a key element of tax evasion.  (The net worth method is also used in civil cases to establish tax due.)  I had encountered the other two cases of this net worth trilogy, Holland v. United States, 348 U.S. 121 (1954), here, and Friedberg v. United States, 348 U.S. 142 (1954), here.  I am sure many tax crimes fans had encountered Holland and Friedberg.  So, having not yet consciously encountered Smith, I thought I would educate myself.

I found out that the real reason Smith does not arise prominently in a tax crimes practice is that the key issue it resolved was not a tax issue, but a general criminal issue having to do with the so-called corroboration rule for a defendant's out of court admissions of a crime.  Thus, Smith is prominently linked with the corroboration rule cases; indeed, it is linked with a "trio" of corroboration cases decided the same day.  As the First Circuit in Tanco-Baez said:

But, while the corroboration rule initially served this important but "extremely limited function," Smith, 348 U.S. at 153, the Supreme Court expanded on it in a trio of cases decided on the same day in 1954. See Smith, 348 U.S. 147; Opper v. United States, 348 U.S. 84 (1954); United States v. Calderon, 348 U.S. 160 (1954).

The background for Smith is that, in the application of the net worth method, the agent received statements from Smith as to opening net worth but then, through further investigation, increased the opening net worth.  In the net worth method, it is better for the defendant (or taxpayer in a civil case) to have a higher opening net worth, so the agent's further investigation helped Smith, although it still indicated enough income in the convicted years to convict for tax evasion.  In effect, the agent’s further work “corroborated” the statements as to components of the opening net worth made by Smith.

This still does not have the context of the other two contemporaneous corroboration cases of the development of the law since Smith and the two other cases.  The Court in Tanco-Baez covers that quite nicely, so I won’t plow that ground here for those wanting to get further into the issue.  I do offer this excerpt, rather extensive to tee up the topic in its current context:

Court of Appeals for Federal Circuit Affirms CFC Norman Holding that Taxpayer is Subject to FBAR Willful Penalty (11/10/19; 11/13/19)

In Norman v. United States, (Fed. Cir. 11/8/19), here, the Federal Circuit sustained an FBAR willful penalty, holding:

1. FBAR willfulness includes recklessness, as held by two other Circuits:  Bedrosian v. United States, 912 F.3d 144, 152–53 (3d Cir. 2018); United States v. Williams, 489 F. App’x 655, 658–59 (4th Cir. 2012).

2.  The Court of Federal Claims ("CFC") did not err in holding that Norman was willful for the following reasons (Slip Op. 7-8):

The Court of Federal Claims did not clearly err in finding that Ms. Norman’s failure to file an FBAR was willful. Ms. Norman signed her 2007 tax return under penalty of perjury, and this return falsely indicated that she had no interest in any foreign bank account. She did so after her accountant sent her a questionnaire that specifically asked whether she had a foreign bank account. In addition, the evidence shows that Ms. Norman took the following steps, each of which had the effect of inhibiting disclosure of the account to the IRS: (1) Ms. Norman opened her foreign account as a “numbered account”; (2) she signed a document preventing UBS from investing in U.S. securities on her behalf; and (3) the one time she withdrew money from the account, her Swiss bank account manager delivered the money to her in cash. 

Moreover, once the IRS opened an audit of Ms. Norman, she made many false statements to the IRS about her knowledge of, and the circumstances surrounding, the account. Ms. Norman told the IRS, both during an interview and in a letter, that she first learned of the account in 2009. In her letter, she stated that she “was shocked to first hear about the existence of foreign accounts” in her name. In 2014, after retaining counsel, Ms. Norman sent the IRS another letter “to correct several misstatements.” Although Ms. Norman admitted in this 2014 letter that she knew [*8] “more than a decade ago” that she had an “interest” in a foreign bank account, she maintained in the 2014 letter that “none of the money in the Swiss account(s) was mine[,] and I did not consider myself to have any kind of control over the account.” J.A. 146. In fact, Ms. Norman knew long before 2009 that she owned a foreign bank account and controlled its assets. She opened the account in 1999, actively managed the account for many years, and even withdrew money from the account in 2002.

3.  In making the holding, the Court rejected that argument that her mother advised her do it.  (Slip Op. 8.)

4.  Also, the Court rejected the claim that she did not know because she did not read the return she signed.  Even if she did not, she had constructive knowledge and acted recklessly.  (Slip Op. 8-9.)

6.  The Court rejected her argument that the unamended regulations after the 2004 amendment increasing the penalty to $100,000 or 50% of the acccount prevented a penalty exceeding $100,000 (the maximum under the pre-amendment statute).  Basically, the court held that the amendment trumped the regulations that preceded the amendment.

7.  The Court declined to reach Norman's argument, launched too late, that the FBAR willful penalty was an excess fine under the Eighth Amendment.

8.  For an excellent discussion of the Norman case, see Robert S. Horwitz, Federal Circuit Upholds Liability for FBAR Willful Penalty, Determines the Regulation Limiting Penalty to $100,000 Is Invalid (Tax Litigator Blog 11/11/19), here.

JAT Comments:

Government Alleges Misconduct By Attorney in FBAR Related Summons Enforcement Case (10/26/19)

I ran across an article on Law360:  NY Man's Atty Made False Statements In FBAR Row, US Says (Law360 10/21/19), here (subscription required).  Since allegations against attorneys are rare, I poked around the docket entries in United States v. Chabot (D. N.J. - No. 3:14-cv-03055).  I offer here links to key documents filed as of today, but offer no comment on them.  Those interested should read the documents.  The attorney against whom the allegations are made has not filed a response.  I will look for the response and provide a link as an update when it is filed.

The docket entries on CourtListener are here.  They are available on Pacer, of course, but readers who are cost-sensitive might want to review on CourtListener which is a free service.

This is a summons enforcement action originally started in 2014.  Somehow, the case has been pending for a long time now, with some intrigue along the way.  One of the reasons for the delays is Chabot's continued intransigence, with resulting appeals.  See United States v. Chabot, 793 F.3d 338 (3d Cir. 2015) here, cert. denied, 136 S. Ct. 559 (2015) (rejecting Fifth Amendment as to foreign bank records); and United States v. Chabot, 2017 U.S. App. LEXIS 4355 (3d Cir. 2017), here, cert. den. (nonprecedential) (affirming Chabot's contempt).  Chabot's position in both appeals, asserted by Richard Levine appear tenuous at best, at least in hindsight. although the Third Circuit did feel the need to write a precedential opinion in the first appeal which would likely not be needed if the argument were frivolous.

The key document on the subject of the article:  U.S. brief titled "United States of America's Brief Regarding Past Statements by Eli Chabot and Richard Levine," Dkt Entry 150 here.  A prior related motion, titled "United States of America's Renewed Motion for an Increased Sanction to Compel Compliance," Dkt Entry 141 here.

In that brief (Dkt Entry 150), the Government makes strong allegations against Mr. Chabot and against his prior attorney in the litigation, Richard Levine.  The allegations are captioned, respectively:

ELI CHABOT – FALSE STATEMENTS (Brief Dkt 150 pp. 4-8) 

RICHARD LEVINE – ETHICAL VIOLATIONS (Brief Dkt 150 pp. 8-17), with the following subtitles:
The Changing Bases of Chabot’s Defense (starting on p. 9)
Misrepresentation of the FBAR Requirements (starting on p. 12)
False or Misleading Evidence (starting on p. 13)
Frivolous Motions to Compel Production (starting on p, 16)

The Government concludes by requesting that "that the Court take whatever action it deems necessary to vindicate its authority and to enforce all applicable laws and regulations governing the legal and ethical obligations of attorneys practicing in New Jersey."

Mr. Levine has engaged counsel.  See letter of 10/24/19, here, requesting until 12/4/19 to respond.

I will post an update with a link to the response when filed.

California Attorney, a Prior Tax Offender and Embezzler, Pleads Guilty to tax Evasion (10/21/19)

I received an email from IRS CI announcing the following plea

James Roy McDaniel, 66, who pleaded guilty before United States District Judge S. James Otero to one count of tax evasion, is scheduled to be sentenced on February 3, 2020.  At sentencing, McDaniel could receive a statutory maximum sentence of five years imprisonment. 

McDaniel was a licensed California attorney for more than two decades, until he pleaded guilty in late 2004 to one felony count of subscribing to a false income tax return. In 2005, McDaniel was sentenced to three years in federal prison for that crime, and he surrendered his license to practice law in California. In that case, McDaniel’s failure to report income resulted in a tax loss of $677,368 to the federal government, according to court documents. McDaniel’s additional income was the result of his embezzlement of over $1.6 million from two prominent families he represented as an attorney.  McDaniel served time in state prison for the embezzlement. 

The IRS subsequently assessed McDaniel more than $1.4 million in taxes, interest and penalties for the tax years 1997 through 2001, court papers state. 

According to the signed plea agreement, McDaniel willfully attempted to evade paying his debt to the IRS by creating two shell companies – Davis Bell Consulting LLC and James Roy Consulting LLC – where he directed payments for tax and estate planning consulting work he performed after being released from prison. During a scheme that allegedly ran from May 2008 until December 2012, McDaniel attempted to mislead federal tax authorities and conceal his income by directing other people to sign documents identifying themselves as the sole managing members of the shell companies. As part of the scheme, McDaniel directed them to open bank accounts where he deposited checks for his tax and estate planning work. 

McDaniel continued to earn income for tax and estate planning consulting work during each of calendar years 2008 to 2018, but willfully failed to report his income, and willfully failed to file tax returns with the IRS for tax years 2011 to 2018. 

McDaniel admits that from 2012 through 2017, he received taxable income of at least $527,944, and subsequently owes unpaid taxes of $184,126, in addition to the $1.4 million previously assessed. 

I'll post a link to the DOJ Tax or USAO web page on the plea when I have it.

JAT Comment:  

1.  This is not your typical tax crimes case.  The typical tax crimes offender is a one-time offender and is not charged again after serving his time.  There is more than one possible reason for that.  The first is that the offender learned his lesson and will not commit tax crimes again.  The second is that perhaps the IRS and DOJ do not want to fire their limited prosecutorial bullets at repeat offenders who may seem incapable of learning lessons.  Still, I suppose that some of these repeat offenders have to be tried simply to discourage others who might be tempted after being convicted for tax crimes.

Make Tax Crimes Great Again Caps for Sale (10/14/19; 6/2/22)

I am offering for sale the "official" cap -- Make Tax Crimes Great Again (see image at right).

I offer them for a per unit cost that covers my costs of purchase, tax and mailing.  Here is the breakdown, with the costs depending upon the number purchased by me which I will then pass on.

Number Ordered	My Per Cap Cost	Tax	Total	Your Price
12	$25.73	$1.54	$27.27	$30.00
20	$20.23	$1.21	$21.44	$25.00

As you can see, I am not really looking to make money on the sale of caps.  I suspect that the difference between my purchase price and sales price is just a bit more than the cost to mail the caps, but not much.

Let me know if you are interested by emailing me at jack@tjtaxlaw.com. After I determine the number interested, I will set the final Purchase Price and then advise where to send the check and provide the delivery address for the caps.  Keep in mind that the caps are not yet made.  I am told that the time to make and deliver the caps to me is about 2 weeks.

Added as of 6/2/22: I have taken down the image of the Make Tax Crimes Great Again cap from the column on the right.  Since the image is no longer a regular part of the blog, I include it here for future reference.

A Reminder on the Cheek Good Faith Defense -- It Usually Does Not Work (10/12/19)

The United States Attorney for Nevada announced here the sentencing of William Waller Jr., a Las Vegas real estate broker and the owner of Burbank Holdings or Platinum Properties for convictions of tax evasion and willful failure to file.  His sentence was 78 months and restitution imposed is $1,459,535.70.  Key excerpts are:

According to court pleadings and evidence presented at trial, Waller sought to evade taxes by incorporating a shell entity, opening bank accounts in its name, and directing his income into those accounts rather than accounts in his own name.  He also dealt extensively in cash and reduced his equity in his home, the only asset he held in his own name, thereby making it an unattractive asset for the IRS to seize.  

Waller testified at trial that he believed that he was not required to file tax returns or pay taxes, but acknowledged that he was influenced by the teachings of several prominent tax defiers. These included one, who had been convicted three times of tax fraud, and another, who had been stripped of his CPA license. Waller also admitted to purchasing and watching tax defier courses, including one on how to beat criminal tax charges.  Following the defendant’s testimony and the conclusion of the trial, the jury returned guilty verdicts on March 18, 2019.

The first two sentences of the second paragraph describe, somewhat cryptically, his Cheek good faith defense.  That defense is that, in effect, he, in good faith, did not intend to violate a known legal duty.  See Cheek v. United States, 498 U.S. 192 (1991), here, defining willfulness (an element of most Internal Revenue Code (Title 26) tax crimes) as voluntary, intentional violation of a known legal duty.  United States v. Pomponio, 429 U.S. 10, 13 (1976), here.  As I have conceptualized that element of the crime, (i) the duty must be knowable (the law must be clear and not ambiguous, per the line of cases going back to James v. United States, 366 U.S. 213 (1961), here) and (ii) the defendant must have known the knowable duty.  A defendant's good faith belief that he is not violating the law is a defense.  In other words, real, good faith ignorance of the law (but not feigned ignorance) is a defense.

In Cheek, the defendant was successful in establishing that he was entitled to an instruction properly advising the jury of the defense, thus entitling him to retrial where the Government must prove that he intended to violate a known legal duty.  The defendant lost on retrial.  United States v. Cheek, 3 F.3d 1057 (7th Cir. 1993), cert. denied, 510 U.S. 1112 (1994), here.

I don't have statistics on how many cases in which this defense has been raised on trial it has been successful, but my sense from watching these cases over a number of years is that it is rarely successful.  It certainly did not work for Mr. Waller in the case prompting this blog.

I thought I would include some discussion of the Cheek good faith defense from Michael Saltzman and Leslie Book, IRS Practice and Procedure (Thomsen Reuters 2015), here, ¶12.05. Selected Criminal Tax Topics (of which I am the principal author):

Eleventh Circuit Remands for Better Restitution Calculation (10/5/19)

In United States v. Sheffield, ___ F.3d ___ (11th Cir. 2019), here, the Court remanded to the district court for a more precise calculation of restitution imposed on a tax preparer falsely claiming tax credits of $1,000 per return.  Basically, the Court held that the calculation was easy -- $1,000 times the number of returns.  Hence, there was no excuse for any estimation or duplication (which there apparently was, as even admitted by the Government).

In this regard, the Court of Appeals observed:

The Supreme Court, citing a 2018 publication by the Government Accounting Office, recently noted that approximately 90% of restitution orders in criminal cases are uncollectible. See Lagos v. United States, 138 S. Ct. 1684, 1689 (2018). As the district court surmised, it is highly unlikely that Ms. Sheffield and her co-defendants will be able to satisfy a restitution obligation of over $3 million. 

At oral argument, Ms. Sheffield asserted that the duplicate entries totaled $136,000. The government, for its part, stated that the duplicate entries amounted to only $31,000. If Ms. Sheffield is correct about the extent of the duplication error in the spreadsheet, that error amounts to a mere .04% of the government’s proposed total of $3,461,638. So one may wonder why it is that we are reversing a multimillion dollar restitution order when the result on remand is likely to be approximately the same and payment (at least full payment) is unlikely. The reason is a simple one. Ms. Sheffield has the “right not to be sentenced on the basis of inaccurate or unreliable information,” United States v. Giltner, 889 F.2d 1004, 1008 (11th Cir. 1989), and is not required to pay restitution she is not responsible for.