Sentencing Guidelines Amendment Eliminates Acquitted Conduct from Sentencing Calculations (6/6/24; 6/11/24)

Effective 11/1/24, the U.S. Sentencing Commission has eliminated acquitted conduct as relevant conduct under §1B1.3 to enhance sentencing calculations. See Sentencing Commission web page titled "2024 AMENDMENTS IN BRIEF: Acquitted Conduct," here. 

Of course, because the Guidelines were advisory, a sentencing judge did not have to consider acquitted conduct as relevant conduct in imposing sentence, although the judge might feel compelled to include acquitted conduct in calculating the advisory Guidelines sentence. Under the prior rules, the acquitted conduct could be considered only if the judge found the acquitted conduct by a preponderance of the evidence.

The announcement caveats that “This amendment does not comment on the use of uncharged, dismissed, or other relevant conduct as defined in §1B1.3.” What does that mean? Well, for example, it means that a plea bargain dismissing counts permits the sentencing judge to consider the dismissed counts as relevant conduct, provided that by sentencing the judge is convinced by a preponderance of the evidence that the defendant committed the relevant conduct crimes. Same for uncharged conduct. (PSRs often note, particularly for dismissed counts, that the sentencing calculations are the same as if the dismissed counts were counts of conviction.)

There are other amendments that are potentially applicable in tax crimes or FBAR crimes cases. Readers might want to review the Sentencing Commissioner web page titled “Amendments in Brief,” here.

Added 6/11/24 10:00 am:

I offer more on the amendment to prohibit conduct behind “not guilty” verdicts from the Guidelines sentencing calculations. I picked up this blog on the Sentencing Commissions decision: Ellen Podgor, Sentencing Commission Change - Acquitted Conduct - "Not Guilty Means Not Guilty" (White Collar Crime Blog 5/24/24), here. I just wanted to clarify why the Guidelines ever included acquitted conduct as relevant conduct and what the practical effect of the elimination of acquitted conduct in the formal Guidelines calculations may be.

On Unanimity - the Trump NY False Documents Conviction and Federal Conspiracy Law (6/5/24)

I will post at least this blog dealing with conceptual overlaps from the Trump trial and conviction in the New York Supreme Court (trial level).

Readers surely recall that Trump’s false records case, generally a misdemeanor, was elevated to a low-level New York felony if the records were falsified with an intent to commit or conceal another crime. The other crimes are called “predicate’ crimes. See Josh Gernstein, Judge: To convict Trump of felonies, jury does not need to unanimously agree on what 'predicate' crime he committed (Politico 5/21/24), here. At trial, the prosecutors asserted three possible other crimes: “a tax crime and violations of state or federal election law.” Id. Readers of this blog should be thoroughly familiar with use of falsified records as tax crimes. The backdrop of the underlying facts made “state or federal election law” crimes possibilities. The judge ruled and so instructed the jury that, in order to convict for the felony, the jury had to find for each count a predicate crime but need not be unanimous as to the predicate crime.

There is an analog to this holding in federal criminal law of conspiracy. Conspiracy requires, among other elements, an object to commit an offense (offense conspiracy) or defraud the Government (defraud/Klein conspiracy. 18 USC § 371, here. In the infamous Leona Helmsley criminal tax trial, the indictment charged a single count alleging both an offense conspiracy and a defraud conspiracy. United States v. Helmsley, 941 F.2d 71, 91 (2d Cir. 1991), cert. denied, 502 U.S. 1091 (1992), here.  The Court rejected the argument that, as charged, the jury did not have to be unanimous as to the type of conspiracy. The Court held that any confusion was cured by the jury instructions requiring unanimity  on “the specific object the defendant agreed to try to accomplish”). See Michael Saltzman and Leslie Book, IRS Practice and Procedure (Thomsen Reuters), current online edition at ¶ 12.03[1][c][vi][A].

There is another analog federal conspiracy law. Conspiracy requires, among other elements, an overt act. I quote the following from Michael Saltzman and Leslie Book, ¶ 12.03[1][c][vi][A] General conspiracy statute:

Federal Tax Crimes Blog Total Pageviews Hit 10 Million + and Thoughts on Comments to Blogs (5/25/24)

I just noticed in the innards of this Federal Tax Crimes Blog that the blog has had over 10 million pageviews. I went into the design features and found a “gadget” that I added to the right-hand column with the total pageviews which, as of this posting, was 10,092,710.

On Blog Comments:

The comments feature (by Disqus) for some reason unknown to me does not seem now to work for readers of this blog anymore. I don’t have the technical skills to make the nested comments feature work, so I will soon go back to the Google blogspot comments feature which will work without nesting offered by Disqus. Nesting, by the way, permits responses to particular comments rather than simply first in first out,. When I do make that change, I think that all of the prior comments will go away and be lost forever. But, on an ongoing basis, this should permit comments for those wishing to share comments with readers.

Swiss Bank Spins on Facilitating U.S. Tax Evasion (5/23/24)

 I link to a new posting summarizing one Swiss view of the Swiss-U.S. tax dispute. The power the US wields over the Swiss financial centre (Swissinfo.ch 5/22/24), here. The article emphasizes the U.S. political power that resulted in Swiss banks disclosing and paying the price for conspiring with U.S. taxpayers to evade their U.S. tax obligations. The latter activity was not forced on Swiss banks. They could have refused to participate (conspire with) the U.S. taxpayers. They did not so in order to earn more profits. They were called out and made to pay the piper. Not much sympathy there.

I guess the message is that, if the U.S. had not had such financial power, their assisting in U.S. tax cheating was OK.

Fourth Circuit Affirms Criminal Tax Sentences in Unpublished Opinion that Is Good for Teaching (5/162/24)

In United States v. Rice, 2024 U.S. App. LEXIS 11329, 2024 WL 2078454 (4^th Cir. 5/9/24), CA4 here and GS here, an unpublished opinion, the Court affirmed the Rices’ convictions and sentencing. Normally, I don’t write on unpublished opinions, but I thought this opinion had some interesting facets which are good teaching opportunities for students or relatively new tax crimes practitioners.

First, the opinion says at the opening (slip op. 3):

James and Susan Rice (collectively, Appellants) appeal their conviction and sentence on ten counts relating to their failure to file tax returns and failure to pay employment taxes to the Internal Revenue Service (IRS). Finding no error, we affirm.

Second, the Court provides a short summary of the facts, among which was the following (slip op. 4):

Appellants were jointly represented by trial counsel.

In my experience joint representation in a criminal case is very unusual. The concern is that the two defendants might have different interests which would compromise the joint representation. For example, one defendant may have an interest in obtaining the benefits of cooperation (such as no prosecution or a better plea deal) or presenting evidence of a defense which might not be in the other defendant’s interest. I entered such a joint representation with two family members once. After extensive discussion with the defendants, I satisfied myself that there was nothing other than a theoretical possibility of conflict; and they waived the possibility of conflict. Nevertheless, the judge expressed displeasure. Recognizing that it was not in the defendants’ interests to displease the judge, at my advice that it was not worth the hassle, one of the defendants quickly engaged new counsel (a former colleague) and, as often in tax prosecution, both defendants took the same plea deal (without any actual conflict between the defendants).

The joint representation was raised in the ineffective assistance of counsel (“IAC”) claim on appeal, to which I now turn.

Third, the opinion rejected an IAC claim on this direct appeal. The Court noted (slip op. p. 4-8):

Oral Argument in Supreme Court Case on Trump Immunity Discussing the Defraud / Klein Conspiracy (4/26/24)

I have written many blogs over the years on the defraud conspiracy (aka Klein conspiracy) in 18 USC § 371, here. I collect at the end of this email some of the more noteworthy (in my imagination) of those blogs on the subject I discuss today. That subject is the potential breadth of the defraud conspiracy, particularly when the Supreme Court interpreted the word “defraud” in § 371 to not be limited to fraud in the usual federal law criminal sense to require some taking or intent to take property. In Hammerschmidt v. United States, 265 U.S. 182, 188 (1924), the Court held that the defraud conspiracy certainly means to cheat or attempt to cheat the Government out of property or money, but it also means to interfere with or obstruct lawful governmental functions “by deceit, craft or trickery, or at least by means that are dishonest” even if no fraud in its normal meaning is the object. As interpreted, that means defraud includes simply an object of the conspiracy to impair the lawful functions of Government. The Hammerschmidt interpretation of defraud was an outlier from the normal interpretation and was not based upon any objective indication that Congress meant the broader interpretation. But, as noted, Hammerschmidt is a long-ago case that is now entrenched in jurisprudence (perhaps even settled law, as some Justices used the term to get past confirmation hearings). (Note, however, that in the current Supreme Court settled law may not be settled after all.)

In yesterday’s oral argument in Trump v. United States, No. 23-939 (4/25/24) (Transcript here; and docket here), the defraud conspiracy came up at least briefly. That is perhaps not surprising because the indictment, CL here, alleged the defraud conspiracy as Count One. The oral argument focused on Presidential immunity for conduct alleged in various counts (including the defraud conspiracy and the two counts under 18 USC § §  1512 (Counts Two and Three). The focus was on presidential immunity rather than the contours of the statutes. 

I don’t propose to discuss the issue of presidential immunity here. My purpose is to relate the discussions of the potential scope of the defraud conspiracy, § 371, aka Klein conspiracy.

Justices Alito, Gorsuch, and Kavanaugh engaged at least glancingly with Michael R. Dreeben, Counselor to the Special Counsel, Jack Smith. I offer the excerpts (with some surrounding potentially relevant content; page numbers are indicated in brackets with asterisk (e.g. [*97]]):

[*97]

JUSTICE ALITO:

* * * *

MR. DREEBEN:

* * * *

[*98]

And making a mistake is not what lands you in a criminal prosecution. There's been some talk about the statutes that are at issue in this case. I think they are fairly described as malum in se statutes, engaging in conspiracies to defraud the United States with respect to one of the most important functions, namely, the certification of the next president.

JUSTICE ALITO: Well, I don't want to dispute the particular application of --of that, of 371, conspiracy to defraud the United States, to the particular facts here, but would you not agree that that is a peculiarly open-ended statutory prohibition? In that -that fraud under that provision, unlike under most other fraud provisions, does not have to do --doesn't require any impairment of a property interest.

Good Article on Lesser Included Offense Strategy in Trump Criminal Trial in NY Court Next Week (4/11/24)

I have written on several occasions on the concept of lesser included offense, including the strategies involved for defense counsel in seeking a lesser included offense instruction. See e.g., Defense Request of Lesser Included Offense Instruction Precludes Questioning Sufficiency of Conviction (Federal Tax Crimes Blog 10/3/17), here; and Court Affirms Conviction, Rejecting Lesser Included Offense Instruction Request (Federal Tax Crimes Blog 7/17/19; 7/18/19), here; for the complete list sorted by relevance see here and sorted by date see here.

I thought readers might like the following Politico article:  Ankush Khardori, The Surprising Strategy Trump Could Use to Win His Manhattan Trial (Politico 4/11/24), here. The author, a former federal prosecutor, has a good discussion of Former President Trump’s potential use of the lesser included offense in his upcoming criminal trial in New York state court set to commence on April 15, 2024.

One key risk for the defendant is that a jury who thinks the crime(s) charged are too harsh for the conduct or might have some other reason to not convict where the binary choice is guilty or not guilty of the more serious offense charge might settle back (compromise) on a lesser included offense whereas, had the choice remained binary, the jury would acquit. 

Report on IRS CI Use of BSA Filings in Financial Crime Investigations (4/6/24)

The IRS has posted this report on the use of the BSA filings.  IRS CI, Primary subject in nearly 88% of investigations opened by CI in FY23 had a BSA filing, here(1/17/24; last reviewed or updated 1/18/24 and viewed 4/6/24). The posting mentions specifically third-party reports such as suspicious activity reports and currency transaction reports. The report is short but I copy and paste a couple of key paragraphs:

The primary subject in nearly 88% of investigations opened by CI during fiscal year 2023 (FY23) had a BSA filing. From FY21 to FY23, BSA data was instrumental in securing average prison sentences of 39 months and seizing $7.4 billion in assets tied to criminal investigations. BSA data during this same timeframe also resulted in restitution orders totaling $434 million and forfeited assets totaling $629 million, nearly double and triple the amounts, respectively, from FY20 to FY22.

* * * *

Under the BSA, financial institutions must notify the federal government when they encounter instances of potential money laundering or tax evasion. Of the CI investigations that originated from BSA data in FY23, 77% used information from suspicious activity reports, and 63.6% used information from currency transaction reports. Additionally, 16.5% involved fraudulent Small Business Association loans tied to COVID relief programs, 7.1% involved skimming where the primary subject steals funds from a business or charity and 4.7.% involved employment tax fraud where taxes due were not paid.

The key information relates to “financial crime investigations” which is defined at the end to include “tax fraud, narcotics trafficking, money-laundering, public corruption, healthcare fraud, identity theft and more.” (Bold-face supplied by JAT.) I wonder whether the data set from which the 88% figure derives includes garden-variety tax crimes. My question is whether garden-variety tax crimes would generate such a high number of third-party BSA reports. Or, maybe the 12% remainder accounts for most of the garden-variety tax crimes.

A similar report came out last year. BSA data serves key role in investigating financial crimes, here (1/18/23, last reviewed or updated 11/9/23, and viewed 4/6/24),. That report showed an 83% figure over the past 3 years. The FY23 report mentioned above was at 88% but only related to a single year.

Attorney General Jackson Famous 1940 Speech on the Role of the Federal Prosecutor (4/1/24; 4/3/24)

I have recently written an article featuring Justice Robert H. Jackson’s contributions to tax law and to administrative law, The Tax Contribution to Deference and APA § 706 (SSRN 4665227 January 17, 2024), here. I am a Justice Jackson fan, heavily influenced by his contributions to the discussion of deference in tax cases and other contributions to tax as IRS Chief Counsel, Assistant Attorney General for Tax, Solicitor General, Attorney General, and then as Supreme Court Justice authoring the famous unanimous opinion in Dobson v. Commissioner, 320 U.S. 489 (1943), here, reh. den. 321 U.S. 231 (1944), here. (Note: many citations to Dobson omit the opinion denying rehearing, but the opinion on denial of rehearing is important for understanding Dobson.; one interesting feature of the opinion on rehearing is that Justice Douglas dissented in the denial of rehearing without explaining his position (not uncommon for Douglas in tax cases) but Justice Douglas had not dissented from the original opinion. See * below)

Correction 4/3/24 4:40pm: I have corrected the bold-face to say Douglas rather than Jackson. I apologize for that error.

Justice Jackson did so much more than tax; indeed, his major contributions to the country were not tax contributions; those major contributions should not eclipse his tax contributions though.

Today, I received an email from a Jackson scholar, John Q. Barrett, professor of law at St. John’s University (bio here). The bio mentions that his emails for his “Jackson List” go to more than 100,000 readers.  In today’s email, Professor Barrett quotes in full Justice Jackson’s famous speech on April 1, 1940 as Attorney General titled “The Federal Prosecutor.” Readers of this blog may read the entire speech on the Jackson Center site, here (with a link to its original publication in  ); and on DOJ site here. Sprinkled through the speech are some real gems of wisdom about the prosecutor’s role. I will not “cherry-pick” the best or my favorite quotes because all are good and are really appreciated best in the full context of the speech. (I do alert that he does not mention the word “tax” in the speech; perhaps that alert may induce some to read the speech.)

Enjoy!

 

* On Justice Douglas’ propensity to offer no opinion for his dissents in tax cases, see Bernard Wolfman, Jonathan L.F. Silver, & Marjorie A. Silver, The Behavior of Justice Douglas in Federal Tax Cases 122 U. Pa. L. Rev. 235 (1973), later turned into a book titled Dissent Without Opinion: The Behavior of Justice Douglas in Federal Tax Cases (1975).

Based in Part on NYT Article, Senators Request Information from AG Garland about Possible Political Intervention in Caterpillar Tax Investigation(s) (3/20/24)

In the past, I offered two blog entries on a tax and other agency investigation of Caterpillar’s use of a Swiss company transfer pricing diversion of U.S. income from the U.S. tax base. In reverse chronological order, they are:

• Caterpillar Shareholder Suit For Fraudulent Disclosures from Tax Civil and Criminal Investigation Dismissed (Federal Tax Crimes Blog 9/28/18; 3/20/24), here;
• The Whistleblower Behind Caterpillar Tax Commotion (Federal Tax Crimes Blog 6/2/17), here.
• Search Warrant Executed Against Caterpillar HQ, Apparently Related to Tax (Federal Tax Crimes Blog 3/6/17; 3/20/24), here

There is current reporting that there may have been political influence that stopped the criminal investigation and ended in a quite favorable civil tax resolution. See Jesse Drucker, How Trump’s Justice Dept. Derailed an Investigation of a Major Company (NYT 3/9/24), here. Following that article, on March 13, Senators Wyden (D. Oregon) and Whitehouse (D. Rhode Island), who serve as Chairs of the Senate Finance Committee and the Senate Budget Committee, respectively, wrote a letter here to Attorney General Garland requesting information about the handling and conclusion of the investigation. The facts as alleged in Drucker’s article and in the Senators’ letter (as to which I cannot personally attest) raise issues that, at least facially, require investigation (or at least answers) regarding the handling of the Caterpillar investigation that seems to have been resolved very favorably to Caterpillar.

Note: The Senators' letter linked above as posted on the Senate website as of today asks for a return date for the requested answers of "no later than____." (Letter physical p. 6; the letter does not have pagination.) Perhaps, that means that the return date is to be negotiated.

Recent Tax Enforcement Volume of DOJ Journal of Federal Law and Practice (3/19/24)

I recently discovered the recent Tax Volume of DOJ Journal of Federal Law and Practice, Vol. 71, number 4 here dedicated to Tax Enforcement. The following articles are in the volume (with page numbers indicated).

Recent Tax Volume of DOJ Journal of Federal Law and Practice (3/19/24)

• Elissa Hart-Mahan, Restitution in Criminal Tax Cases: Common Pitfalls and Practical Strategies 5 
• Todd Ellinwood & Caryn Finley, Investigating Legal Source Income Tax Cases 23 
• Howard J. Zlotnick, Twelve Rules for Presenting Accomplices 71 43 
• Andrew H. Kahl, Follow That Lead! Obtaining and Using Tax Information in a Non-Tax Case, 47 
• David Zisserson, Tax Fraud Involving COIVD-Relief Provisions 63 
• Larry Wszalek & Stuart Wexler, Attorney-Client Privilege in the Context of Tax Preparation and Tax Planning 79 
• Gregory S. Knapp & Joseph B. Syverson, Prosecuting Tax Obstruction under 26 U.S.C. 7212(a) 97 (2023)
• Stanley J. Okula, Jr. & Matthew Hicks, Sentencing Advocacy in Criminal Tax Cases - Making the Government's Case for the Appropriate Sentence 109 
• Katie Bagley & Melissa Siskind, A Fool for a Client: Legal and Practical Considerations When Facing Pro Se Defendants 129 
• Sean Beaty & Wilson Stamm, A Taxing Dilemma: Navigating the Crime- Fraud Exception in Criminal Tax Cases 155 
• Sarah Kiewlicz & Thomas F. Koelbl, Prosecuting Fraudulent Tax Return Preparers 175 
• Kimberle E. Dodd & Nanette L. Davis, Gathering and Using Foreign Evidence in Tax Cases 199 
• Jason Bergmann & Richard J. Markel, Monetary Claims Against the Government: When Are They Tax Refund Cases? 223 
• Marie E. Wicks & Michael W. May, They Don't Make 'Em Like They Used to: Statutory Jurisdictional Requirements in the Age of the Clear-Statement Rule 241

Excellent Article by Former Tax Crimes Prosecutor About How the Tax Crimes Prosecution Decisions Are Made in Politically Charged Cases (3/14/24)

This blog entry will alert Tax Crimes fans to an article about, well, tax crimes. Andrey Spektor, Opinion: What Hunter Biden and Donald Trump have in common (CNN 3/13/24), here. Spektor is identified in the article as “Having worked with the Department of Justice Tax Division and prosecuted tax offenses.” His law firm bio, here, mentions only AUSA experience for EDNY and does not mention DOJ Tax Division experience; I infer that, as a prosecutor on tax cases in USAO EDNY, he would have “worked” with the Tax Division which is common. So he has credibility to speak to the how criminal prosecution decisions are made (or not made) in politically charged cases such as Hunter Biden’s and Donald Trump’s.

The article is fairly short, engaging, well-written, and, based on my experience in the tax crimes area, very credible. As to Hunter Biden, Spektor claims (rightly, I think) that Hunter Biden would not have been prosecuted on the facts had he not been related to Joe Biden, the President, and decisions influenced by the press and politics.  I offer the conclusion in the hope that offering the conclusion will not discourage anyone from reading the article:

          Hunter Biden has been treated differently from almost any other person save for, perhaps, Trump – at least in New York, where the former president has been indicted on a novel and shaky legal theory reserved for it seems, Trump. That doesn’t mean that Trump or Hunter Biden are [sic - is] innocent; indeed, the former has more serious cases to contend with. But unequal treatment of our citizens, no matter how unethical or despicable they may be, is just as immoral.

Taxpayers Should Be Prosecuted Along with Enablers of Abusive Tax Shelters (3/8/24)

This blog entry is an opinion piece. Individual taxpayers should be prosecuted along with their enablers who promote and implement the abusive shelters (particularly enablers from the tax professions).

The following is from a report of Attorney General Garland's comments (Kerry K. Walsh Deborah A. Curtis Amy Jeffress, “Swift” Justice: Attorney General Garland Vows To Uphold DOJ Priorities in Fireside Chat (Arnold & Porter 3/6/24), here):

Additionally, AG Garland explained how DOJ’s three co-equal priorities — upholding the rule of law, keeping America safe, and protecting civil liberties — implicated corporate accountability. AG Garland stressed that the greatest deterrent of white collar crime is holding individual corporate executives to account. AG Garland also reiterated the importance of applying the rule of law equally, regardless of rank or position of power.

I supplied the bold-face to emphasize the point. There has been a perception that, by delivering up the corporation (or other entity) for criminal consequences, the people in the corporations (collectively, the executives) could escape accountability.

A similar perception and resulting phenomenon exists in the tax area where the promoters of abusive tax shelters (think, for example, the Son-of-Boss shelters in the late 1990s and early 2000s) were prosecuted, but the taxpayers generally were not. Yet all of those taxpayers or at least most of them knew that they were violating the law and participated in the fraud. For example, the abusive shelters wrapped in complex structures and voluminous more-likely-than-not opinions, required at the minimum that the taxpayers represent to the promoters that they had a nontax profit motive when, in fact, they did not. That was a lie that was essential to abusive tax shelter. Moreover, most of those wealthy taxpayers had independent counsel (other than the ones supplied or recommended by the promoters) before buying into the deal. Assuming that most of those independent counsel were competent, those taxpayers knew that the deals were bogus, but nevertheless sought to buy fraud insurance through the legal opinions rendered by the promoter’s supplied or recommended counsel (as opposed to their own independent counsel). That worked as insurance.

My argument has been that the way to discourage abusive tax shelters is to prosecute the taxpayers along with the promoters. This would discourage the tax professional penalty insurance industry and abusive tax shelters generally.

This blog entry is cross-posted on the Federal Tax Procedure Blog here.

District Court Holds Indicatively While Case on Appeal That Remand of FBAR Willful Penalty to IRS Did Not Vacate the Timely Assessments (2/27/24)

 In United States v. Kerr (D. AZ Dkt O. 2:19-CV-05432 Order dtd 2/23/24), TN here and CL here, the district court ruled indicatively clarifying the intended effect of the district court termination of the case after remand to the IRS of willful FBAR penalties for certain years. The intended effect was not to vacate those penalties but to provide a procedure to reconsider and modify the amount of the penalties for future district court judgment. In other words, the remand did not require a new assessment of FBAR willful penalties (for which the assessment statute of limitations had run). Rather, any IRS action would adjust the previously timely assessed FBAR penalties. After this indicative ruling, the appeal of the case can proceed in the Ninth Circuit.

Links to items related to this blog are:

• FRCP 62,1, titled Indicative Ruling on a Motion for Relief That is Barred by a Pending Appeal, here,
• FRAP 12.1, Remand After an Indicative Ruling by the District Court on a Motion for Relief That Is Barred by a Pending Appeal, here,
• Kerr docket entries for this civil case (FBAR penalty enforcement case): CL, here.
• Ninth Circuit Order staying Ninth Circuit proceedings pending the district court’s indicative ruling, here.

Prior blogs involving Mr. Kerr are (reverse chronological order):

Tax Court Denies WB Claim Made Contemporaneously With Target Taxpayer’s Voluntary Disclosure (2/23/24)

In Whistleblower 14376-16W v. Commissioner, T.C. Memo. 2024-22, GS here, the Court held that the Whistleblower (“WB”) was entitled to no relief from the Whistleblower Office’s denial of an award. The opinion establishes no new precedent, which is why it is a Memo opinion. The opinion does offer some interesting aspects, which I will discuss here.

1. The WB claim targeting several taxpayers was made a couple of months before some of the taxpayers made a request to CI to participate in an IRS voluntary disclosure program.  (It is not clear whether the request was under one of the offshore variants or was under the general voluntary disclosure program (see p. 3 n. 6); it makes no difference, however, for the point I discuss here, so I will just call it a VDP request.) The VDP request was made before any submissions (amended returns, etc.) required to complete voluntary disclosure; those submissions were delayed a substantial period. After the voluntary disclosure request, the WBO processed and sent to the field the WB claim after CI received the VDP request. The IRS subsequently undertook the work required to determine and collect substantial tax based on the taxpayers' submissions. The IRS says that, although its examination function received the WB information, it took no action based on the information. The record before the Court (essentially the record related to the WB claim and related items) supported the IRS’s claim that the proceeds generated from its activity did not rely on the WB claim and information in the WB claim.

2. The Court denied the WB’s sweeping and broadly written discovery requests designed to ferret out all documents and information that could test even tangentially the IRS’s narrative that no collected proceeds resulted from the WB information (including whether the record the IRS submitted to the Court was complete). In part, the WB requested documents and information in the voluntary disclosure package that, it claims, was “indirectly considered” in collecting the proceeds. (See pp. 33-37.) In part, the Court reasoned:

          Petitioner contends, however, that the WBO “indirectly considered” the VDP materials. As one court has aptly observed, “it is not entirely clear what it means to indirectly consider documents or materials.” Amgen Inc. v. Hargan, 285 F. Supp. 3d 397, 404 (D.D.C. 2017) (treating the “indirect consideration” concept as “captur[ing] materials that are necessary to understand the documents that the agency directly relied upon” and denying motion to supplement the administrative record with documents intended to test a decision by the Food and Drug Administration for consistency with previous decisions). The caselaw provides no general test.24 But it does suggest some guiding principles. One court has observed that if an agency's final decision was based “on the work and recommendations of subordinates, those materials should be included as well.” Amfac Resorts, L.L.C. v. U.S. Dep't. of Interior, 143 F. Supp. 2d 7, 12 (D.D.C. 2001) (collecting cases), aff'd in part, rev'd in part 282 F.3d 818 (D.C. Cir. 2002), vacated in part sub nom. Nat'l Park Hosp. Ass'n v. Dep't of Interior, 538 U.S. 803 (2003). On the other hand, it is not always necessary to include in the administrative record source information upon which agency staff relied in making their recommendations to the agency decisionmakers if other information in the record obviates the need to consider the source information independently. See, e.g., James Madison Ltd. by Hecht v. Ludwig, 82 F.3d 1085, 1095 (D.C. Cir. 1996) (affirming denial of discovery and record supplementation with respect to source documents that bank examiners had relied upon in making their bank-insolvency reports to the Comptroller of the Currency, where “detailed contemporaneous reports from the examiner-in-charge and members of her examination team explain[ed] how and why they reached their conclusions regarding the banks' reserves”); Cape Hatteras Access Pres. All., 667 F. Supp. 2d at 114 (denying motion to supplement the record with a biological report that the National Park Service had relied upon [*35] in developing an interim strategy that was before the Fish and Wildlife Service when it designated certain critical habitats, even though the biological report was referenced by several other documents in the administrative file).

Sixth Circuit Affirms Summary Judgment on FBAR Willful Penalty on Conduct Objectively Reckless (2/14/24)

I report this morning on United States v. Kelly, ___ F.4th ___ (6th Cir. 8/8/24), CA6 here and GS here. Kelly affirms the district court's approval of the FBAR willful penalty on motion for summary judgment.

I first offer the MS CoPilot (MS’s version of AI) explanation of the case:

Case Title: United States v. James J. Kelly, Jr.

Background:

• James J. Kelly, Jr., a U.S. citizen, opened an interest-bearing account at Finter Bank in Zurich, Switzerland in 2008.

• He designated the account as “numbered” to keep his name off the statements and requested that Finter retain account-related correspondence instead of mailing it to him.

Legal Context:

• Under the Bank Secrecy Act, individuals with foreign bank accounts containing $10,000 or more must annually file a Report of Foreign Bank and Financial Accounts (FBAR) with the U.S. Department of the Treasury.

• Failure to file an FBAR by the deadline can result in civil penalties. The penalty amount depends on whether the failure was accidental or willful.

Case Details:

• The government sued James Kelly, alleging that he willfully failed to timely file FBARs for the years 2013, 2014, and 2015.

• The district court granted summary judgment in favor of the government.

• Kelly’s failure to file was deemed a willful violation of the Bank Secrecy Act.

Outcome:

• The court affirmed the judgment, emphasizing that Kelly’s actions constituted a willful violation of the law.

• In summary, James Kelly’s failure to file FBARs for his foreign bank account led to civil penalties due to willful non-compliance with the Bank Secrecy Act.

Law Firm Tax Partner Sentenced in Germany to 3 1/2 Years for Fraudulent Tax Shelters (2/7/24)

An earlier news item finally reached my consciousness this morning and gave me a déjà vu experience. A Freshfields (prominent law firm) former tax partner who gave legal advice for clients to exploit an abusive tax shelter (aka bullshit tax shelter) was sentenced to 3 ½ years incarceration for his role. The shelter has attracted the name “Cum-Ex.” See e.g., Tom Sims & Kirstin Ridley, Former Freshfields partner sentenced to jail for German tax fraud (Reuters 1/30/24), here; and Olaf Storbeck, Freshfields’ former tax partner sentenced to 3½ years in jail (Financial Times 1/30/24), here.

I don’t know exactly how the scheme worked but the generic description is summarily described in the Reuters article:

Using such dividend stripping schemes, banks and investors would swiftly trade shares of companies around their dividend payout day, blurring stock ownership and allowing multiple parties to falsely reclaim tax rebates on dividends.

The following is from the Financial Times article:

The fraud centred on share deals executed before and after a stock’s dividend payments that duped governments to reimburse taxes that were never paid in the first place.

Maple Bank’s cum-ex transactions were equivalent to “organised [financial] crime”, Gröschel [the judge' said, adding that they were highly organised, took part over several years and led to “ludicrous” financial damage.

The aim of the transactions, said Gröschel, was not just to cut the amount of tax paid but to steal from the government. Johannemann’s legal advice was “a central contribution” to that crime, he added.

“Paying [a tax] once but reclaiming [it] twice just does not work,” he said, and that “a halfway talented elementary school pupil” was able to understand that concept.

* * * *

During the trial, Johannemann acknowledged he had “glossed over the fact that my legal advice was used for illegal means”, and said he had “totally failed” as a lawyer. The judge took issue with that assessment, saying he was certain Johannemann had been aware of all relevant details of the fraudulent transactions when giving his advice.

In his ruling Gröschel also took aim at Freshfields, accusing the tax practice of one of the world’s most prestigious law firms of having developed “its own business model” that specialised in giving affirmative advice on cum-ex transactions. The fees the law firm generated from such business were “almost ridiculously low”, he said.

The latter on fees caught my eye. My experience from the abusive tax shelter era was that the fees were very large compared to the hours expended delivering the opinions when they were "cookie-cutter" opinions marketed to many taxpayers. The excess fees were a form of “get out of jail free’ insurance premium to the taxpayers paying the fees. Viewed alone from a single transaction, the excess fee would be ridiculously low, but when marketed widely among wealthy and high-income earners, the fees really could add up to ridiculous amounts. See e.g., More on the Daugerdas Case - The Role of Nonpromoter Enablers (Federal Tax Crimes Blog 6/5/11), here.

Tax Lawyer of Some Notoriety Is Again in the News (2/3/24)

 I previously blogged on a tax lawyer, John Anthony Castro, a tax lawyer of some notoriety in the tax community. Repeat Tax Player and Republican Presidential Candidate Loses Unauthorized Return Information Disclosure Suit on Appeal (Federal Tax Procedure Blog 12/24/25), here. I noted in the blog that Castro was a Republican candidate for President; I reported on a Fifth Circuit disposition of a claim he made against the IRS and his candidacy for President.

I have two developments to report:

1. Newsweek recently reported that Castro is suing Clarence Thomas under the Virginia Fraud Against Taxpayers Act, Code of Virginia, Article 19.1 (“VFATA”), here.  I am not familiar with the VFATA, but it appears to be a state parallel to a federal qui tam action, a suit to recover for the government. Excerpts from the article are:

           The complaint, which was shared with Newsweek, alleges that in violation of VFATA, "Clarence Thomas knowingly presented or caused to be presented a false and fraudulent claim (i.e., his 2005 Virginia State Income Tax Return) to the Virginia Department of Taxation on or about April 15, 2016, that failed to report income from discharge of indebtedness."

           Thomas has faced immense scrutiny and calls for his resignation after it was reported that he failed to disclose several transactions, including a $267,230 loan that he received from wealthy friend Anthony Welters. Last year, an investigation from the Senate Finance Committee revealed that Thomas never repaid a "substantial portion" of that loan, raising concerns about whether the justice properly reported it in his tax filings.

          "Under Section 108 of the Internal Revenue Code, he would have had a legal obligation to report [the loan] as taxable income and the tax alone would have been, probably $40,000 or $50,000. That's a third of his annual salary," Castro said on Friday. "And that's when I was like, 'There's no way he reported that because that'd be financially disastrous for him.'"

          Castro is suing Thomas under VFATA, which allows private citizens anywhere in the country to bring a claim against a Virginia resident for making a knowingly false or fraudulent claim to the commonwealth for money or property, essentially empowering regular Americans to take on the role of a de factor agent of the Virginia attorney general.

          "It basically allows you to bring a tax enforcement action against a taxpayer," Castro said of the law.

          Castro said he had planned to file the suit last year but claims that Trump coordinated with the Internal Revenue Service in retaliation against his activities "undermining the political objectives of the Trump Administration."

          "Right when I'm going to level these accusations against Clarence Thomas for filing false and fraudulent returns, what happens to me? I get accused of false and fraudulent returns," Castro said.

          "They intentionally devised this plan of, 'Let's accuse him of what he's about to accuse Clarence Thomas of, it's going to completely discredit him. And if he brings this claim, nobody's going to believe him," he continued. "But, of course, I still want to go forward with it."

          Asked about whether he thinks his lawsuits against Thomas and Trump will fuel speculations about whether or not he was a conservative, Castro insisted he was still a Republican.

          "I'm a very, very stubbornly principled person and if I feel that somebody broke the law, I'm going to hold them accountable," he said. "Just like Trump for January 6 and Clarence Thomas for this sham loan." 

Note that Castro claims that Trump and the IRS coordinated this alleged retaliatory indictment. That is an interesting pairing.