Monday, August 22, 2016

Third Circuit Affirms Sentence for Tax Obstruction (§ 7212(a)) Under the Obstruction Guidelines (8/22/16)

The Third Circuit's recently unpublished opinion in United States v. Celluci, 2016 U.S. App. LEXIS 14958 (3d Cir. 2016), here, serves as a reminder of some hiccups in the normal application of the Guidelines for tax sentencing.  There, the taxpayer pled to wire fraud (§ 1343) and tax obstruction (§ 1343).  For sentencing, the counts were grouped under SG § 3D1.3.and sentenced under the tax obstruction Guideline.  Now, normally that would mean that the taxpayer's calculations would be made under the evasion Guideline in SG § 2T1.1.  But, as an "obstruction" crime, Guidelines Appendix A (Statutory Index) provides that the Guideline calculation for the omnibus clause tax obstruction may be made under either SG 2J1.2, Obstruction of Justice, or SG 2T1.1.  Based on the taxpayer's conduct in the two grouped crimes, the sentencing court determined that the Obstruction of Justice Guideline was more appropriate.

Taxpayer complained on appeal.  The Court of Appeals affirmed.  The reasoning for the affirmance is short, so I quote (footnote omitted):
The Statutory Index provides that for a conviction under the omnibus clause of § 7212(a), either U.S.S.G. § 2J1.2 (Obstruction of Justice) or § 2T1.1 (Tax Evasion) may be appropriate.3 U.S.S.G. App. A. Where, as here, the Statutory Index "specifies more than one offense guideline for a particular statute, the court must 'determine which of the referenced guideline sections is most appropriate for the offense conduct charged in the count of which the defendant was convicted.'" Aquino, 555 F.3d at 127 (quoting U.S.S.G. § 1B1.2 cmt. n. 1). 
In determining which of two or more guidelines is "most appropriate," U.S.S.G. § 1B1.2 cmt. n. 1, we consider only the conduct charged in the relevant count of the indictment. See U.S.S.G. § 1B1.2(a); Boney, 769 F.3d at 160; Aquino, 555 F.3d at 129. The indictment here charges that, as part of its efforts to collect back taxes from OLR, the IRS sent CPA a Notice of Levy that directed CPA to submit payments due to OLR to the IRS instead. Cellucci then "endeavor[ed] to obstruct and impede the due administration of the internal revenue laws" by creating a false Release of Levy and transmitting it to CPA, so that CPA would believe it was no longer obligated to submit payment to the IRS and would instead send the payment to OLR. App. 18. 
Section 2J1.2, the obstruction of justice guideline, addresses various offenses, including "obstructing a civil or administrative proceeding." U.S.S.G. § 2J1.2 cmt. n. 2. In the context of a prosecution under § 7212(a), an IRS "action" or "proceeding" has been defined as "some step [by the IRS] to investigate a particular taxpayer beyond routine administrative procedures such as those required to accept and process tax filings in the ordinary course." United States v. Miner, 774 F.3d 336, 346 (6th Cir. 2014). The IRS's efforts to collect back taxes from OLR, which included sending the Notice of Levy to CPA, involved more than routine administrative procedures, and thus are appropriately viewed as a "proceeding." Because Cellucci's criminal scheme—an effort to re-direct the payment from CPA to her business, rather than the IRS—directly interfered with that proceeding, the District Court appropriately relied on § 2J1.2 in calculating her sentence. 

Sunday, August 21, 2016

Sentencing for Defendant Implicated in Early UBS Disclosures (8/21/16)

On Friday, Judge Pauley of SDNY sentenced Rowen Seibel to one month in prison after his plea to one count of tax obstruction, § 7212(a).  Jesse Drucker has a good report on the sentencing:  Restaurateur Seibel Sent to Jail, Then Kitchen, in Tax Scam (Bloomberg 8/19/16), here.

I offer the following documents related to the sentencing:
  • The information (the charging document in lieu of an indictment usually after a plea agreement arrangement has been reached), here.
  • The defendant's sentencing memo, here.
  • The Government's Sentencing Letter , here (like a Sentencing Memo, but SDNY does a lot of filings by letter rather than a more formal pleading document).
  • The defendant's supplement submission in response to the Government's Sentencing Letter,  here.
My own summary of the operative facts is:

In 2004, when Mr. Seibel was just 23 years old, he and his mother traveled to Switzerland to set up a numbered account (having a moniker of CQUE, followed by an account number).  I refer to Mr. Seibel as Seibel and to his mother as "Mother."  That action had some relationship to Brad Birkenfeld of UBS and whistleblower fame.  The account was set up in Seibel's name and he was designated beneficial owner.  It appears, however, that he was not -- at least allegedly not -- the beneficial owner of the account and that Mother was instead the beneficial owner.  Mother was given full power of attorney over the account.  It appears, however, that Seibel had the significant contacts with UBS about the account.  Seibel directed UBS not to send account statements or other correspondence to the U.S.  The account was initially seeded with $25,000, but quickly grew via other deposits to slightly above $1,000,000, all supposedly the Mother's money.  (There is perhaps some intrigue about the source of the deposits, but I don't think the documents I have read really definitively clarifies the matter.)

In 2008, after reading press reports about the IRS initiatives against UBS, Seibel traveled to UBS in Switzerland to withdraw the money, specifically mentioning to the bankers that his concerns related to the press reports.  By that time, the value of the account had increased to over $1,300,000, apparently due to interest and investments.  He then proceeded to deposit the bulk of the amount withdrawn into another bank, Bank Safra (which, by the way, joined the DOJ Swiss Bank Program as a category 2 bank).  The deposit was made in the name of Mirza International, a Panamanian company set up by Seibel owned and controlled by Seibel.  The documents gave Seibel signatory authority over Mirza's Bank Safra account.

The information recites that Seibel had filed 2008 and 2009 returns omitting interest and dividends from the UBS account and failing to report that he had an interest in or signatory authority over the account.  (There is some fuzziness here; if it were the Mother's account as the beneficial owner, Seibel would not have had to report the income from the account.)

After that shuffle to further hide the money, apparently sometime in 2009, an IRS special agent attempted to contact Mother about the account, leaving his card at her residence.  Mother quickly contacted an NYC attorney.  Mother at first misrepresented to her attorney key facts about the account (including her alleged beneficial ownership).  (In his affidavit, the attorney says that she "ultimately" did tell him about having the account which she closed in 2008; the affidavit is Exhibit A, Part One, to the Government's sentencing submission).  The attorney then presumably advised she had a serious problem.  In October 2009, the attorney advised her about the IRS voluntary disclosure program, OVDP as announced in May 2009.  He advised her, however, that she did not qualify because of the agent's attempt to contact her.  He advised, however, that Seibel might qualify, provided that he applied to the program by its then schedule end date of October 15, 2009.  So, allegedly based solely on conversations with the mother, the lawyer set about drafting a submission including some facts and omitting others (that the attorney may or may not have know about).

The handling of the drafts for Seibel's submission is interesting and relevant to this discussion.  The Mother and Seibel were in Florida at the time.  The attorney was in New York.  The attorney says that he only discussed the facts with Mother and not with Seibel.  The attorney emailed drafts of Seibel's submission to Seibel who printed and delivered them to Mother for her to discuss with the attorney.  The implication (although not a direct statement anywhere I could find) is that Seibel was just a messenger for the drafts but did not read the drafts.  (I discuss that implication below in comments.) After Mother and attorney had agreed upon the final draft, the attorney prepared the final document for submission and a Form 2848 which is a power of attorney for the attorney (and a representation that the attorney was the attorney for Seibel at least by that time) and emailed them to Seibel with the instructions to sign and mail them by October 15, 2009.  Seibel claims that he did not read the submission document he signed and submitted to the IRS.  The implication from Seibel's submissions for sentencing is that he did not know the contents of the document he signed, either by reading the drafts or from discussions with Mother (although they were together throughout the process).  The submission (i) made false statements as to Seibel's knowledge about the UBS account and (ii) claimed that the funds may have disappeared rather than disclosing the Bank Safra gambit noted above upon closing the UBS account.

Thursday, August 11, 2016

Taxpayer Loses Cheek Defense at Trial and, on Appeal, Fails in Argument of Prosecutor Misconduct (8/11/16)

United States v. McBride, 2016 U.S. App. LEXIS 13479 (10th Cir. 2016), unpublished, here, involves a relatively common scenario -- a U.S. taxpayer who adopts a claimed sincerely held belief that he does not owe tax in mask his tax evasion.  Cheek v. United States, 498 U.S. 192 (1991) holds that a sincerely held belief -- one actually held -- defeats the willfulness element of evasion and most tax crimes.  Generally, given the rigor with which the IRS and DOJ investigate tax crimes before charging, most cases where there appears to be a real sincerely held belief are not prosecuted.  DOJ Tax tries to authorize prosecution of only those cases where the claimed sincerely held belief is a ruse for tax evasion.  Generally, when prosecutions are authorized, the prosecutions result in conviction.  So it was in McBride.  The jury convicted after McBride took the stand to further his claim.  (The jury did acquit for one count of evasion, but as the Court notes in fn. 4 that may have been because they did not find the tax due and owing element for the crime.)  The opinion is not remarkable in that respect.

I think the opinion may be interesting to readers with regard to the prosecutor's rebuttal closing argument which was a subject that the taxpayer complained of on appeal.  Here is the relevant portion of the prosecutor's rebuttal closing argument:
Ladies and gentlemen, having earned millions of dollars, Mr. McBride decided to pick up the bogus philosophy to try to save what he had left. To him paying taxes, it seems, is for schmucks, working stiffs like you and me, who go to work everyday, earn our keep, and pay our taxes. He placed himself above that. It's the ultimate irony, ladies and gentlemen, that Mr. McBride, who speaks so passionately about his love for the Constitution, has taken a course that would present a great danger to the Constitution of the United States. The Constitution is based on a few bedrock principles that we hold dear. One of them is that we are a nation ruled by laws, not by men. There are very few countries that can say that. 
There are two things that remind me of this great principle. One is when the Office of the Presidency of the United States changes hands from one political party to another. That's inspiring. The other experience that reminds me of the rule of law is when I walk into this building, because it is here that the rule of law is acted out each and everyday. 
Mr. McBride stands in opposition to the rule of law. He stands for the proposition that each person may be a law unto himself. If we don't like the law, we just interpret it our way. If I don't like to pay taxes, I just adopt the belief that earnings are not income and hope to fool people into thinking I'm acting in good faith. Where would that lead, ladies and gentlemen? It would lead to anarchy and chaos. 
Perhaps none of us loves paying taxes, but we do it, don't we? We may grumble a bit, but we do it because we're in this together. This great country thrives because the vast majority of its people have accepted a priceless social contract, a common commitment to do our part to maintain this country's greatness. We pay our taxes because we want to contribute to the well-being of our communities and our nation, we pay them because we don't want to be a burden, our -- we don't want the burden of our taxes to fall on others. And if there are those who, through no fault of their own, can't pay, we gladly carry their load. If we didn't, who would pay for the freeways that Mr. McBride drives on everyday, who would pay for the airport security that protects him on his flights to China, if we didn't, who would pay his medical expenses when he gets old, and for that matter, who would pay ours? Those things cost money. Mr. McBride has been enjoying them for free for the past nine years or more. And whether he pays another dollar of taxes, we'll keep paying ours. But if he's getting a free pass, ladies and gentlemen, by committing the crimes charged in this Indictment, then it is time to hold him accountable in the interest of what we hold dear. Thank you.
The Court of Appeals said that this argument may have been improper but was not sufficiently prejudicial in the overall facts of the case to warrant reversal.  Here is the Court's reasoning:

Wednesday, August 10, 2016

Articles of Interest to Tax Crimes Fans (8/10/16)

I offer these two articles of interest to Tax Crimes fans.  The authors are all prominent players in the tax and white collar crime practice, so I link their bios as well.  They are sorted by first author's last name:
  • Peter D. Hardy, here, Scott D. Michel, here, and Fred Murray, here, Is the United States Still a Tax Haven? The Government Acts on Tax Compliance and Money Laundering Risks, J. Tax Prac. & Proc. 33  (June-July 2016), here.  The summary is:
As the world now knows well, the Panamanian law firm Mossack Fonseca was the subject of a stunning breach of approximately 11.5 million financial and legal documents in April 2016. These leaked documents, the so-called "Panama Papers," have been publicized through an international consortium of journalists and allegedly reveal a global system of undisclosed offshore accounts, money laundering and other illegal activity. The effect of the Panama Papers has been explosive; the documents allegedly implicate world leaders, financiers, celebrities and other prominent individuals from across the world in the use of shell companies to conceal assets from their respective home country governments. The Office of the U.S. Attorney for the Southern District of New York has announced that it is launching an investigation into these matters, as have enforcement agencies in many other countries.
  • Jeremy Temkin, here, Collecting Taxes From Convicted Defendants, 256 NYLJ No. 27 (8/9/16), here.  The summary is:
At the conclusion of a criminal tax case, a convicted defendant is rightfully most concerned with the prospect of incarceration. There are, however, other consequences of a conviction and, in federal criminal tax cases, the financial ramifications are complicated by the potential for a subsequent civil proceeding brought by the Internal Revenue Service seeking taxes, interest and penalties far beyond what was addressed in the criminal case. This article discusses cases that highlight these issues, and concludes that practitioners need to be cognizant of the financial consequences of tax convictions.

Tuesday, August 9, 2016

Priest Pleads Guilty to Tax Evasion After Losing on Suppression Motion re Miranda (8/9/16)

DOJ Tax has this press release, here, on a Catholic Priest who has pled to tax evasion on income he stole from parishoners.  The indictment is here.  This is cut and paste from the press release:
Father Hien Minh Nguyen, 56, admitted that over a period of four years, he stole money his parishioners donated to the Diocese and willfully evaded paying income taxes on the money he misappropriated each year from 2008 through 2011.  He admitted that he deposited this money into his personal bank account, did not disclose this income to his return preparer, did not keep records of the donations he stole, and filed false income tax returns which did not report this money.  
Father Nguyen also pleaded not guilty to bank fraud charges.  Those charges are still pending.  
“Father Nguyen stole money from his parishioners and filed false returns with the IRS to evade his income tax obligations,” said Principal Deputy Assistant Attorney General Ciraolo.  “The department remains committed to holding all criminal tax offenders accountable for their illegal conduct, regardless of their profession.  No one is above the law.” 
Sentencing on the tax evasion convictions has not been scheduled.  Father Nguyen faces a statutory maximum sentence of five years in prison and monetary penalties for each tax evasion conviction. Father Nguyen’s next scheduled appearance is a status conference on the bank fraud charges currently scheduled for Aug. 23.  An indictment is merely an allegation and a defendant is presumed innocent until and unless proven guilty in court.  Father Nguyen pleaded guilty to the tax evasion charges.  He has not pleaded guilty to bank fraud charges and remains presumed innocent of those charges. 
This just seems a different iteration of garden variety fraud coupled with tax evasion.

In an earlier decision, the district court denied a motion to suppress statements he made to "IRS agents on the basis that they were: (1) involuntary; and (2) the product of an un-Mirandized custodial interrogation."  United States v. Nguyen, Case No. 15-cr-00203-BLF-1 (N.D. Cal. May 05, 2016), here.  Such claims by taxpayers who make admissions or false statements to IRS agents are often made and rarely successful.  Although the court ultimately rejected the claim, the pattern is unusual.  The agents surprised the taxpayer with a request to interview him which he allowed.  At the start, the IRS noncustodial Miranda warning was given.  The taxpayer then started giving inconsistent answers.  The agents called the inconsistencies to his attention.  He ask what was the worst that could happen to him.  They declined to answer the question.  He then asked for a break, and the agents left the room.  A short while later, he invited the agents back into the room.  The agents then read him the noncustodial Miranda warning.  The agents then continued the questioning and he continued to participate.  He lied in some of his answers.  Then he said he had stolen the money.  The district court held that he participated voluntarily in the noncustodial interview and had not been tricked, deceived or coerced.

In my experience, in cases where the agents suspect a possible crime within the scope of CI's investigative authority, they will always start with the noncustodial Miranda warning.  Indeed, IRM 9.4.5.11.3.1.1  (02-01-2005), Subject of Investigation, here, requires that, at the start of the initial interview, the agents first identify themselves as IRS CI agents whose job includes investigation of tax crimes.  In the next paragraph, with no specific time statement, the agents are required to give the noncustodial warnings.  As stated, there is no express temporal requirement, but the implication and, in my experience, the practice, has been to give the warning.  The Court addresses the taxpayer's argument on this as follows:
iv. The IRS Form 5661 Non-Custody Statement Of Rights 

Monday, August 8, 2016

The Vanishing Federal Criminal Jury Trial (8/7/16)

This NYT article offers a good introduction, with quotes from noted federal judges in SDNY (Kaplan Rakoff, et al., about the vanishing criminal jury trial.  The myth is that juries delivery better community justice and service on juries makes better citizens.  See Benjamin Weiser, Jury Trials Vanish, and Justice Is Served Behind Closed Doors (NYT 8/7/16), here.  But, the system from overcriminalization and the resulting smorgasbord of choices given to prosecutors virtually compels a plea agreement in the overwhelming number of cases that are charged.  The NYT article is by no means a complete analysis of the issue, but it does introduce the issue in a straight-forward and understandable way.

This phenomenon is present generally in the federal criminal system and in the particular subset of federal criminal tax cases.  The prosecutor can lard up the charging document with any number of charges arising from a pattern of conduct which may be fairly characterized generally as tax evasion. Or he may charge down tax evasion to a lesser crime, such as tax perjury or a tax misdemeanor (although the misdemeanor is rarely charged). The Sentencing Guidelines will usually mitigate the effect of overcharging because the sentence will be primarily driven by the tax loss related to the overall pattern of conduct (including relevant conduct).  So, that is good.  But the perverse side is that the Sentencing Guidelines offer a better deal for acceptance of responsibility, most often achieved by plea agreement which means, in theory, that the Government's charge of criminal conduct may never get tested by trail (oh, sure the Government and the defendant must agree on the elements of the crime to which a plea is made, but that may not be critically tested).  And, of course, the prosecutor has virtually unfettered discretion as to what crimes to charge in the first instance..

I was reading through the recent cases this past Friday and found the following from a federal habeas corpus type proceeding under 28 USC § 2255.  United States v. Crowe, 2016 U.S. Dist. LEXIS 103706 (WD VA 2016).  In these proceedings, a common complaint by the person incarcerated after conviction is that his or her lawyer in the criminal proceeding rendered ineffective assistance of counsel.  One of Crowe's claims was that counsel failed to pursue the issue of selective criminal enforcement of the tax laws.  Here is the full, cryptic presentation and discussion of the issue in the opinion:
D. Selective Prosecution 
Next, Crowe argues that counsel failed to object to the fact that he was being prosecuted for tax fraud when only a fraction of those who commit such crimes are criminally charged. The Due Process Clause does not allow the government to prosecute a criminal case based on an "unjustifiable" factor, such as race, religion, or the exercise of a constitutional right. United States v. Armstrong, 571 U.S. 456, 464 (1996). However, absent a clear and substantial showing of such impermissible conduct, the government's decision to prosecute is presumed to be motivated by proper considerations. Id.; see also United States v. Hastings, 126 F.3d 310, 313 (4th Cir. 1997) (noting that "[a] criminal defendant bears a heavy burden in proving that he has been selected for prosecution in contravention of his constitutional rights"). "The Attorney General and the United States Attorneys retain broad discretion to enforce the Nation's criminal laws." Armstrong, 571 U.S. at 464 (internal quotation marks omitted). 
Crowe does not even make a bare allegation that he was prosecuted based on a discriminatory purpose. The government made clear that it was prosecuting him because he had been convicted of very similar conduct previously, and began the process of purchasing Southside less than 30 days after he was released from incarceration. (Ex. 13 § 2255 Mot. at 17-18, ECF No. 31-1.) Therefore, Crowe's selective prosecution argument lacks merit, and counsel was not deficient for failing to raise it. Strickland, 466 U.S. at 687.
It is just the nature of our system that many more taxpayers cheat than can be prosecuted and the Government knows of many more that cheat than can be prosecuted.  The prosecution bullet is usually retained for use against the worst offenders.  I say usually, because sometimes the Government goes after less egregious tax cheats in order to make a point to the public -- e.g., the prosecution of tax protestors or defiers.  It can't prosecute them all, but perhaps some prosecution -- perhaps it could be called selective prosecution -- will send a message to the larger group and will, at the same time, give the general public some idea that the Government is "on the beat."

Thursday, August 4, 2016

Tax Court Includes Title 18 Fines and Forfeitures from Tax Crimes in Whistleblower Collected Proceeds (8/4/16)

In Whistleblower 21276-13W v. Commissioner, 147 T.C. ___, No. 4 (2016), here, the Tax Court interpreted the term "collected proceeds" which is the base to which the Whistleblower award percentage is based under § 7623(b) to include the following:

tax restitution $20,000,001
criminal fine $22,050,000;
civil forfeiture $32,081,693

Total $74,131,694

There was no question that collected proceeds included the tax restitution.  Tax restitution is a payment with respect to Title 26 taxes and thus is a relatively easy fit in the term "collected proceeds" under § 7623(b).  The dispute was over the criminal fines and civil forfeiture which are not collected under Title 26; rather, criminal fines and civil forfeitures are collected under Title 18, the general criminal code.  (See Slip Op. 5 fns. 4 & 5, discussing 18 USC § 3571 (fines) and § 981(a)(1)(A) (civil forfeiture).)  Bottom line, the Tax Court interpreted the term "collected proceeds" expansively and included the criminal fines and forfeitures.

An interesting point for readers of this blog is the payor of the amounts at issue.  The opinion refers to the payor as the "targeted taxpayer."  Actually, the payor was Wegelin & Co. ("Wegelin,", a Swiss Bank, which was not the U.S. taxpayer but was the conspirator required to pay the tax of the client-taxpayers via tax restitution in Wegelin's criminal case.  The opinion does not specifically identify Wegelin, but gives enough details to identify Wegelin from the other public information.  See the USAO SDNY press release dated 3/4/13, here.  Technically, Wegelin was not a taxpayer per se, but I suppose the term "targeted taxpayer" was used for convenience because that concept is the usual application of § 7623(b).

One of the interesting steps in its holding was the following (Slip Op. 17-18) (bold-face supplied by JAT):
The Code itself refers to laws outside title 26 as internal revenue laws. As an example, section 6531 provides periods of limitation on criminal prosecutions:  
SEC. 6531. PERIODS OF LIMITATION ON CRIMINAL PROSECUTIONS. 
No person shall be prosecuted, tried, or punished for any of the various offenses arising under the internal revenue laws unless the indictment is found or the information instituted within 3 years next after the commission of the offense, except that the period of limitation shall be 6 years--
* * * * * * *
     (8) for offenses arising under section 371 of Title 18 of the United States Code, where the object of the conspiracy is to attempt in any manner to evade or defeat any tax or the payment thereof. 
We find the reference in section 6531(8) to 18 U.S.C. sec. 371 to be especially illuminating inasmuch as the targeted taxpayer pleaded guilty to conspiracy to defraud the IRS, file false Federal income tax returns, and evade Federal income tax, in violation of 18 U.S.C. sec. 371. n15 Finally, the phrase “internal revenue laws” dates from the earliest version of the whistleblower statute enacted in 1867. At that time, the modern title 26 did not exist; internal revenue laws meant all revenue laws. We think it erroneous to impose a post facto restriction on the meaning of the phrase not intended by Congress when it enacted the legislation. In sum, the phrase “internal revenue laws” is not limited to those laws codified in title 26.
   n15 Ours is not the only court to note that tax laws and related laws may be found beyond those codified in title 26. The District Court for the Northern District of California in Hom v. United States, 2013 WL 5442960 (N.D. Cal. Sept. 30, 2013) aff’d, ___ F. App’x ___, 2016 WL 1161577 (9th Cir. Mar. 24, 2016), stated: “[T]he issue here is whether [31 U.S.C.] Section 5314 is either an internal revenue law or related statute (either designation would make the disclosure [of taxpayer information under sec. 6103] permissible). The United States argues that [31 U.S.C.] Section 5314 is a ‘related statute’ under Section 6103 (Dkt. No. 13 at 6). This is correct. Congress intended for [31 U.S.C.] Section 5314 to fall under ‘tax administration.

Wednesday, August 3, 2016

Eighth Circuit Opinion on Cheek Good Faith Defense and Conditions of Supervised Relied (8/3/16)

Leslie Book has a great Procedurally Taxinging Blog entry on a recent 8th Circuit case, United States v. West, ___ F3d ___ (8th Cir. 2016), here.  The Blog entry is 8th Circuit Strikes Down Restrictions on Internet and Computer Use Special Conditions for Convicted Tax Evader (Procedurally Taxing Blog 8/3/16), here.

The case involved an appeal by West who had been convicted of tax evasion.  West was what is commonly referred to as a tax protestor or tax defier, arguing that he believed that the law did not apply to him.  This is often called the Cheek defense, after Cheek v. United States, 498 U.S. 192, 201 (1991), a defense that is frequently discussed in this blog.  (Actually, as I note below, the Cheek defense is not a defense at all, so see below.)  As background, as noted by the panel "West proselytized his beliefs in an e-book self-published and sold through Amazon.com, entitled Are You a Taxpayer? Really? Prove It!."  (Readers may purchase the Kindle edition of the e-book here for just $7.77; the picture with the Kindle offering shows a man, presumably West, dressed ruggedly (perhaps as some type of patriot which is a cloak that many tax protestors/defiers adopt) with a gun, a look that might resonate with the anti-tax population.)  West made similar claims on his websites.  West represented himself at trial.  He lost (i.e., was convicted), despite his Cheek defense.

On appeal, the panel considered his arguments that (i) in the case in chief, the trial court had excluded certain evidence and argument generally addressed to a good faith defense and (ii) imposed certain conditions of supervised relief (banning creation of websites and use of computers).

Les -- with a contribution from Peter Hardy of Ballard Spahr, here -- does a great job discussing the holding on the conditions of supervised release holding, so I won't repeat that here.

Rather, I will focus on the common issue of the Cheek defense.  West's claim on appeal is that he was not allowed to present the Cheek defense properly -- or at least the way he wanted to.  Normally, the defendant will have to take the stand to present the most credible Cheek defense.  The defense after all is about what the defendant subjectively believed; the defendant is almost always the best witness on that issue and is in the courtroom and available to enlighten the jury.  But, it is often -- indeed usually -- dangerous for a defendant in a white collar crime case (of which a tax crimes case is a subset).  Apparently, although representing himself (which often blindsides the pro se litigant as to dangers of trial strategies), West made the right call on this and did not take the stand.  So, according to the panel opinion:
West presented his defense almost entirely through cross-examination of the government's witnesses. One of these was IRS agent Richard Troester, a so-called "summary" witness, who discussed application of the tax code generally to the particular facts of West's case. See United States v. Ellefsen, 655 F.3d 769, 780 (8th Cir. 2011) (describing role of summary witness in tax evasion case). West cross-examined Troester and attempted to impeach his knowledge ofthe IRC and contradict his testimony by referencing the IRC's definition of "United States" and "employee." The district court sustained the government's objection to each of these lines of questioning and did not permit West to recite the IRC's definitions of "United States." During his case-in-chief, West called his son Brandt, who had assisted West in writing his e-book. When West attempted to enter the e-book into evidence, the district court sustained the government's objection on relevance.

Monday, August 1, 2016

Another Plea to Offshore Account Tax Crimes (8/1/16)

DOJ Tax announced here another plea to offshore tax crimes.  The criminal information is here; the plea agreement with Exhibit A Statement of Facts is here.  The plea is to one count each of conspiracy (18 USC § 371) and tax obstruction (26 USC § 7212(a)), which have 5 year and 3 year, respectively, maximum incarceration period, so 8 years or 72 months maximum.  As usual , the Sentencing Guidelines will provide a lesser likely sentence.  Here are the key quotes:
Masud Sarshar, who owned and operated Apparel Limited Inc., a business that designed, manufactured and sold clothing and other apparel, signed a plea agreement admitting that he maintained several undeclared bank accounts at Bank Leumi and two other Israeli banks, both in his name and in the names of entities that he created.  For decades, with the assistance of at least two relationship managers from Bank Leumi and a second Israeli bank (Israeli Bank A), Sarshar hid tens of millions of dollars in assets in these accounts in an effort to conceal income and obstruct the Internal Revenue Service (IRS).  As alleged in the information, between 2006 and 2009, Sarshar diverted more than $21 million in untaxed gross business income to these undeclared bank accounts.  Between 2007 and 2012, Sarshar also earned more than $2.5 million in interest income from these accounts.  Sarshar omitted all of this income from his 2006 through 2011 individual and corporate tax returns and he failed to report his authority over and ownership of these bank accounts in false Reports of Foreign Bank and Financial Accounts (FBARs) that he submitted to the U.S. Department of Treasury. 
Sarshar signed a plea agreement to the charges in the information, agreeing to plead guilty and pay more than $8.3 million in restitution to the IRS.  If the court accepts the parties’ agreement, Sarshar will be sentenced to 24 months in prison.  In addition, Sarshar stipulated to a civil penalty in the amount of 50 percent of the high balance of his undeclared accounts to resolve his civil liability for not disclosing the existence of his Israeli bank accounts. 
“Mr. Sarshar stashed millions in secret foreign financial accounts in Israel and then sought to use these accounts to evade his U.S. tax obligations, seeking to cover his tracks along the way,” said Principal Deputy Assistant Attorney General Ciraolo.  “The message of this case is clear: There are no safe havens.  If you are concealing assets and income in undeclared offshore accounts – or are a banker, an asset manager or otherwise are assisting accountholders in such criminal conduct, your only viable option is to come forward and accept responsibility for your actions.  Those who continue to violate U.S. tax laws will be held accountable and pay a heavy price.” 
According to the information and statement of facts, Sarshar’s relationship managers at Israeli Bank A (RM1) and at Bank Leumi (RM2) visited him frequently in Los Angeles.  At his request, neither bank sent him account statements by mail, but rather, RM1 and RM2 provided Sarshar with his account information in person.  For example, RM2 loaded electronic copies of Sarshar’s Bank Leumi account statements on a USB drive, which she concealed in a necklace worn during her trips to the United States.  To further maintain the secrecy of his accounts, Sarshar’s meetings with RM1 sometimes occurred in Sarshar’s car.  RM1 and RM2 also used these visits to Los Angeles to offer Sarshar other bank products, including “back-to-back” loans.  Through back-to-back loans, which Bank Leumi made to Sarshar through its branch in the United States and which Sarshar collateralized with funds from his account at Israeli Bank A, Sarshar was able to bring back to the United States approximately $19 million of his offshore assets without creating a paper trail or otherwise disclosing the existence of the offshore accounts to U.S. authorities.  At the direction of RM1 and RM2, Sarshar also obtained Israeli and Iranian passports in an effort to avoid being flagged as a U.S. citizen by the compliance departments at both banks.  After receiving both new passports and still being flagged as a U.S. citizen by their compliance departments, RM1 and RM2 advised Sarshar to transfer his remaining funds to yet another Israeli bank, which he did in late 2011.
The news release says that Sarshar will be sentenced to 24 months pursuant to the parties' agreement.  The plea agreement states that it is a FRCrP 11(c)(1)(C) which is an agreement that "a specific sentence or sentencing range is the appropriate disposition of the case."  However, and not to be too picky, I wonder whether the actual wording would lock the judge into the sentence.  The agreement provides (emphasis supplied by JAT):
24.  Defendant and the USAO agree that, taking into account the factors listed in 18 U.S.C. § 3553(a)((1) - (7), the relevant sentencing guideline factors set forth above [in pars 22 (with calcs)] and defendant's cooperation pursuant to §5K1.1 of the Sentencing Guidelines, an appropriate disposition of this case is that the Court impose a sentence of 24 months imprisonment (the low end of level 17) * * * *.  
The use of "an" rather than "the" would seem to take it out of FRCrP 11(c)(1)(C), herehttps://www.law.cornell.edu/rules/frcrmp/rule_11, as to "the" appropriate disposition.  I wonder if that may be just a scrivener's error or whether a judge would impose the sentence accordingly anyway, whether or not bound.

Important CA2 Opinion on Foregone Conclusion Required To Overcome Fifth Amendment Act of Production Assertion to Summons Production of Foreign Documents, Including Bank Records (8/1/16)

In United States v. Greenfield, ___ F.3d ___, 2016 U.S. App. LEXIS _____ (2d Cir. 8/1/16), here, the Court rejected the IRS's summons enforcement.  I offer first the Court's opening summary and will then offer more (including some quotes and discussion).
Defendant-Appellant Steven Greenfield was implicated in tax evasion after a leak of documents from a Liechtenstein financial institution revealed connections to previously undisclosed, offshore bank accounts. Years after the leak, the Internal Revenue Service issued a summons for an expansive set of Greenfield’s financial and non-financial records, including those pertaining to the offshore accounts referenced in the leak. Greenfield refused to comply with the summons, and the Government sought enforcement in the Southern District of New York (Hellerstein, J.). Greenfield opposed enforcement and moved to quash the summons, inter alia, on the basis that the compelled production of the documents would violate his Fifth Amendment right against self-incrimination. The District Court granted enforcement for a subset of the requested documents under the foregone-conclusion doctrine set out in Fisher v. United States, 425 U.S. 391 (1976). We conclude that the Government has failed to establish that it is a foregone conclusion that the requisite exercise, control, and authenticity of the documents existed as of time of the issuance of the summons. Accordingly, we VACATE the District Court’s order enforcing the summons and denying Greenfield’s motion to quash and REMAND for further proceedings consistent with this opinion.
The panel in an opinion by Judge Calabresi opens with a sweeping introduction to the problem of offshore wealth and offshore evasion:
A remarkable amount of American wealth is held offshore, often in an effort to evade taxation. One recent study estimated that $1.2 trillion—some four percent of this nation’s wealth—is held offshore and that this results in an annual loss in tax revenue of $35 billion. Gabriel Zucman, The Hidden Wealth of Nations: The Scourge of Tax Havens 53 (Teresa Lavender Fagan trans., 2015). Such lost income diminishes the Treasury and exacerbates problems of inequality since, generally, only the wealthiest of individuals can take advantage of foreign tax havens. Id. Recognizing this, recent measures, such as the Foreign Account Tax Compliance Act, 26 U.S.C. §§ 1471-1474, have sought to strengthen the IRS’s efforts to combat tax evasion through the use of foreign shelters. But enforcement presents significant challenges given the sophistication of tax planning and the information asymmetry between taxpayers and tax authorities.
So there is strong need for tax enforcement and collection in the offshore area.  But,
The need to curtail tax evasion, however pressing, nevertheless cannot warrant the erosion of protections that the Constitution gives to all individuals, including those suspected of hiding assets offshore. In the present case, Steven Greenfield was implicated in tax evasion as a result of a document leak from a Liechtenstein financial institution. Years later, the Government issued a summons for a broad swath of Greenfield’s records, including documents relating to all of Greenfield’s financial accounts and documents pertaining to the ownership and management of offshore entities controlled by Greenfield. 
Greenfield opposed production and moved to quash the summons based on his Fifth Amendment right against self-incrimination. But the District Court for the Southern District of New York (Hellerstein, J.) granted enforcement as to subset of the records demanded by the summons. It concluded that the existence, control and authenticity of that subset of documents were a foregone conclusion and, as a result, under Fisher v. United States, 425 U.S. 391 (1976), any Fifth Amendment challenge must fail. 
We disagree with the District Court for two reasons. First, we find that, for all but a small subset of the documents covered by the District Court’s order, the Government has not demonstrated that it is a foregone conclusion that the documents existed, were in Greenfield’s control, and were authentic even in 2001. Second, we find that the Government has failed to present any evidence that it was a foregone conclusion that any of the documents subject to the summons remained in Greenfield’s control through 2013, when the summons was issued.  Accordingly, because the Government has not made the showing that is necessary to render Greenfield’s production of the documents non-testimonial and, hence, exempt from Fifth Amendment challenge, we vacate the District Court’s order and remand.
I urge readers with particular interest in the issue to study the opinion carefully.  I offer the following which steps through the key analysis as I understand it.

Saturday, July 30, 2016

Another Offshore Account Indictment (7/30/16)

The USAO SDNY announced yesterday here that a prominent New York Art Consultant, Lacy Doyle, has been indicted for one count each tax obstruction, 7212(a), and tax perjury (7206(2)), both being 3 year maximum felonies with a resulting aggregate maximum sentence of 6 years.  The indictment was handed down earlier but unsealed with the announcement of the arrest yesterday.  The indictment is here  Key excerpts from the press release:
As alleged in the Indictment unsealed today in Manhattan federal court: 
DOYLE, assisted by others – including Beda Singenberger, a Swiss citizen who ran a financial advisory firm – established and maintained undeclared bank accounts in Switzerland to hide those accounts from the IRS.  DOYLE used a sham entity to conceal from the IRS her ownership of some of the undeclared accounts and deliberately failed to report the accounts and the income generated in the accounts to the IRS. 
In 2003, DOYLE’s father died and secretly left an inheritance of over $4 million to DOYLE.  DOYLE, who was appointed the executor of her father’s estate, made court filings falsely stating under penalty of perjury that the total value of her father’s estate was under $1 million when, in truth and fact, it was more than four times that amount.
Thereafter, in 2006, DOYLE, with Singenberger’s assistance, opened an undeclared Swiss bank account for the purpose of depositing the secret inheritance from her father.  The account was opened in the name of a sham foundation formed under the laws of Lichtenstein to conceal DOYLE’s ownership.  As of December 31, 2008, the account held assets valued at approximately $3,548,380. 
In 2010, the sham foundation controlled by DOYLE was re-domiciled from Lichtenstein to Panama.  As of May 31, 2010, the sham foundation maintained assets of at least approximately $3,151,961.37. 
For each of the calendar years from 2004 through 2009, DOYLE willfully failed to report on her tax returns her interest in the undeclared accounts and the income generated in those accounts.  For each of these years, Doyle also failed to file a Report of Foreign Bank and Financial Accounts (FBAR) with the IRS, as the law required her to do. 
Singenberger was charged on July 21, 2011, with conspiring with U.S. taxpayers and others to defraud the United States, evade U.S. income taxes, and file false U.S. tax returns.  He remains at large.
JAT Comments:

1.  Beda Singenberger who has appeared several times in blog entries, here.  He was a Swiss enabler through a financial advisory firm.  The indictment alleges (par. 29):  "Between in or about 2007 and in or about 2010, Singenberger provided to one of his U.S. taxpayer clients a document (the "Singenberger Client List") containing significant details regarding clients and prospective clients who were U.S. taxpayers (including LACY DOYLE, the defendant) [List of details omitted].  (Par. 29.)  For a previous blog discussing the list , see:  U.S. Using a Client List of Indicted Swiss Banker/Enabler (3/14/13), here.  Presumably since Singenberger is still at large, the DOJ's access to the list came from the U.S. taxpayer.

2.  As with virtually all of the prosecutions, entities were involved and great lengths taken to hide the assets.

3.  Note that the allegations are that Doyle failed to report the account interest on income tax return and failed to file FBARs for the years 2004 through 2009. (See also indictment pars. 43 ff.)  It is not clear what happened in the later years.  The indictment says (par. 15) that Doyle continued obstructive activities "through in or about 2012."

4.  The banks involved are Credit Suisse and 4 other foreign banks pseudonymed serially (Indictment pars. 10-14):  Foreign Bank A (UK bank with headquarters in London), Foreign Bank B (Swiss Bank with headquarters in Basel), Foreign Bank C (Luxembourg bank, with headquarters in Strassen), and Foreign Bank D (Swiss Bank with headquarters in Zurich).

Wednesday, July 27, 2016

Ninth Circuit Affirms Conviction for Tax Misconduct Related to Failure to Honor Levy and Potential Bankruptcy Discharge (7/27/16)

In United States v. Wanland, ___ F.3d ___, 2016 U.S. App. LEXIS 13661 (9th Cir. 2016), here, the Ninth Circuit panel rejected two of the taxpayer's argument's to reverse his convictions for "tax related charges, including tax evasion."  In a companion unpublished opinion, here, the panel rejected other of his arguments for reversal.  I deal here with only the published precedential decision.

The Ninth Circuit staff provides a summary that is not part of the opinion but is usually a useful guide the opinion.  Here is that summary:
The panel affirmed the district court in all respects in a case in which the defendant was convicted of tax related charges, including tax evasion. 
The panel held that neither the district court nor the jury erred in concluding that the defendant's monthly income from his law practice qualified as "salary or wages" under 26 U.S.C. § 6331(e), and therefore rejected the defendant's contention that the government could not prove concealment of property subject to a levy, as required for conviction under 26 U.S.C. § 7206(4). 
Rejecting the defendant's contention that the district court erred in dismissing the levy counts because they exceeded the three-year statute of limitations, the panel held that the six-year statute of limitations of 26 U.S.C. § 6531(1), covering tax offenses "involving the defrauding or attempting to defraud" the government, applies to prosecutions under § 7206(4). 
The panel held that the district court properly rejected the defendant's argument that res judicata precludes the government from pursuing a criminal action concerning his debts that were already discharged in bankruptcy. The panel held res judicata cannot apply because the IRS in a bankruptcy action and the United States government in a criminal action are not in privity.
1. The partner draws.

JAT introduction to partnership taxation.  Technically, partner draws from a partnership are not income or even salaries or wages unless they are guaranteed payments.  Rather, for income tax purposes, the draws are treated as advances against the partner's capital account which, if the partnership makes money is increased by partnership income allocated and taxable to the partner.  So, from a tax accounting perspective, the draws are not income. But, given the relationship between draws and capital accounts, the partner's income must ultimately produce income consistent with partner draws in excess of capital contribution.

Wanland's charges did not relate to the taxable income of the partnership or his allocable share but to whether an IRS levy on the partnership that required the partnership to turn over "wages and salary" covered the partnership draws.  If the levy did cover the draws, then Wanland's failure to advise the partnership of the levy was an act that violated § 7206(4), here, for failure to honor a levy.  The partnership made regularly payments allocated to draw, aggregating $1,8 million.

Consistent with other cases, the panel affirmed the district court in adopting a practical approach indicating that the levy did cover the draws which were in every practical sense like salary or wages to be subject as such to levy.

Swiss FTA to Pass HSBC U.S. Depositor Information to IRS Under Treaty (7/27/16; 7/28/16)

Reuters reports that the Swiss Federal Tax Administration announced that it will respond to an IRS treaty request for information on U.S. depositors meeting certain characteristics.  John Miller, Swiss to pass information on HSBC accounts to U.S. tax agency (Reuters 7/26/16), here.  The request appears to be a group request (or what I call a John Doe Treaty request) whereby the U.S. depositors are not named (indeed, the IRS in most cases would not know their names) but certain characteristics of material potential U.S. tax noncompliance are suggested.  As reported:
The Swiss government said it made the announcement about its plans on Tuesday to alert HSBC account holders whom it has been unable to locate, and to give them the chance to lodge a legal appeal if they object to having their information sent to the U.S. Internal Revenue Service (IRS). 
The move comes after the IRS asked Swiss tax authorities in April for assistance on HSBC Private Bank (Suisse) SA accounts held by Swiss-registered "domiciliary companies" with U.S. beneficial owners between 2002 and 2014. 
The Swiss Federal Tax Administration said the IRS targeted HSBC accounts "where there is evidence that the U.S. beneficial owner exercised control, directly or indirectly, over the account in violation of corporate governance ... by withdrawing funds from the account for personal use." 
HSBC said it was cooperating. 
"Following an information request in April 2016 from U.S. authorities to the Swiss Federal Tax Administration (SFTA), the bank has provided certain files, mostly related to former clients, to the SFTA," said Lonnie Frisby, a spokesman for HSBC's Swiss private bank. "The Swiss authorities may forward part or all of this information to U.S. authorities in accordance with applicable laws and treaties. Anyone subject to this request has been notified." 
* * * * 
A spokesman for Switzerland's tax agency in Berne declined on Tuesday to say how many HSBC accounts were involved in the IRS request, citing Swiss privacy laws.
The article does note the SFTA appeals process for U.S. depositors to try to divert or derail the turnover of information.  Good luck on that.

Addendum 7/28/16 8:00am:

As noted by a commenter below (David), the actual announcement can be reviewed here.  The announcement, in pdf format, is in German for the first three pages and in English for the following pages.

Then, another commenter named Bert has the parameters for the request.  I will cut and paste them from the pdf document linked above (bold-face supplied by JAT):

Tuesday, July 26, 2016

Russian interest in U.S. Federal Tax Crimes or At Least Federal Tax Crimes Blog (6/26/16)

There has been a significant increase in interest from Russia (at least according to the Blogspot's Pageviews by Countries).  Here are the "alltime" statistics by country (stopping at Russia which is in the all time 7th position,  with the U.S. in first as one would expect:

All Time
1. United States 3,392,345
2. France 485,097
3. Canada 316,032
4. United Kingdom 307,456
5. Germany 218,954
6. Ukraine 112,237
7. Russia 92,393

So, turning to more recent time frames, here are the results (providing just Russia and U.S. in the first and second spots):

Last 24 hours:
1. Russia 3,462
2. United States 2,102

Last week:
1. Russia 16,280
2. United States 14,214

Last month
1. United States 61,568
2. Russia 20,081

So, it would appear that the last week was the biggie on an absolute and relative scale -- drawing 16,280 Russian pageviews out of 20,081 for the entire month and moving Russia to the first spot for the last week.

I wonder if this is related in any way to the reports that Russia -- perhaps orchestrated by Putin -- hacked the Democratic National Committee emails.

And beyond the political interest, I suppose it could involve politics in Russia.  It has been reported as a result of the Panama Papers that friends of Putin have done well in the Russia economy and have hidden much of their wealth offshore (offshore by reference to Russia).  I thought neither of those revelations particularly noteworthy and thus did not spend much time on it.  Perhaps that is the issue.

Now, as the title to this blog suggests, I don't know whether viewers in Russia are interested in U.S. Federal tax crimes generally or in my rather boring presentation of anecdotes related to federal tax crimes in this Federal Tax Crimes Blog.

Now, as to which FTCB pages they may have been looking at, I am not aware of whether there is a way to tell.  I did note that, for the past week,  the leading page visited was Comments by IRS Personnel on New Streamlined and OVDP Procedures (Federal Tax Crimes Blog 6/21/14), here, but that page only got 877 pageviews.  I don't see any correlation there, but I really have not tried to dig into that issue.

Now, from the statistics and other facts or fact substitutes above, I will now put on my Republican hat and draw some speculations (which I will try to identify).  I speculate that the uptick in hits (an apt word) from Russia is at Putin's direction.  I suspect that Putin's directions are based on his desire to help Trump.  And, I speculate that if questioned specifically about that giving those directions, he will deny it.  And, from that denial, I infer that he is a liar.

Ninth Circuit Rejects Argument that Offshore Gambling Accounts Are Banks for FBAR Purposes (6/26/16)

I previously blogged a district court holding that accounts related to online poker playing were FBAR reportable.  See United States v. Hom, 2014 U.S. Dist. LEXIS 77489 (N.D. CA 2014), here; and Court Holds Online Poker Accounts are FBAR Reportable (Federal Tax Crimes Blog 6/9/14), here.  Today, the Ninth Circuit affirmed the lower holding that one account -- the FirePay account -- was reportable, but reversed the lower court holding that the other two -- PokerStars and PartyPoker -- were not.  United States v. Hom, 2016 U.S. App. LEXIS 13269 (9th Cir. 2016), here.

In the Ninth Circuit, the issue turned  on whether the accounts were foreign financial accounts, which turned upon whether the organizations were financial institutions.  FirePay was a financial institution, the Ninth Circuit held, because it met the definition of money transmitter.  The other two were not money transmitters or otherwise financial institutions as defined.  The Ninth Circuit rejected the Government's argument that they should be treated as banks (a type of financial institution requiring an FBAR) because they functioned as banks, applying the plain meaning of the term bank to exclude these services.

Two caveats about the opinion.  First, the panel described it as nonprecedential under Ninth Circuit rules.  Second, the Government made an argument -- which the Court declined to consider because too late (see p. 4 fn. 1) -- that PokerStars and PartyPoker were casinos, another category of financial institution which, if foreign, requires FBARs for accounts.

With those caveats, this is a nice victory for the taxpayer and, while not precedential in the Ninth Circuit, does offer hope that others may avoid expansive definitions of foreign financial institutions requiring FBAR reporting.

District Court Rejects Complaint Denying Full Streamlined Relief for OVDP Participants (7/26/16)

The District Court for the District of Columbia has rejected taxpayers' attempt to force the IRS to admit them into the full Streamlined Procedures rather than the Streamlined Transition Treatment in OVDP 2012.  Maze v. IRS, 2016 U.S. Dist. LEXIS 96471 (D. D.C. 2016), here.  The fight, as it usually is, is about money, but seasoned by the risk of criminal prosecution theoretically looming in the background (relief from which is the common inducement to join any IRS voluntary disclosure program).  In order to follow the money, I first have to review key features of the programs in question:

The common features of the various iterations of the IRS offshore voluntary disclosure programs (referred to here collectively as OVDP) have been:  (i) filing delinquent or amended income tax returns for 8 years, (ii) payment of income tax penalties (20% accuracy related penalty for amended returns or the delinquency penalties (up to 45+%) for delinquent returns), (iii) filing 8 years of delinquent or amended FBARs, and (iv) a Title 26 Miscellaneous Offshore Penalty ("MOP") based upon a percentage -- currently 27 1/2% (increasing to 50% if a bad bank is involved) -- of the highest balance in the offshore accounts for the 8 year period.  The inducement was that, with completion of the OVDP process via a closing agreement, the IRS will not refer the taxpayer to DOJ Tax for criminal prosecution.  A taxpayer joining OVDP who thought the OVDP civil penalty structure was too high under the circumstances could opt out and be subject to a regular IRS audit that covered both income tax and FBAR noncompliance.  Usually, taxpayers who were relatively innocent -- i.e., nonwillful -- with respect to income tax and FBAR noncompliance might want to either forego joining OVDP altogether or joining OVDP and opting out.  If they were relatively innocent -- nonwillful -- the results of the audit would often be much better than the OVDP civil penalty regime, except possibly if certain other returns or forms (such as for foreign corporations or trusts) were not filed.  But the "typical" U.S. taxpayer would only have foreign accounts with no foreign entities to muddy the water with other penalties that might apply and could, in any event, probably avoid those penalties with true nonwillfulness.  The risk of opting out was that the taxpayer has miscalibrated as to his nonwillfulness.

In 2014, the IRS substantially amended its Streamlined Filing Compliance Procedures.  As I understand it, the design of the revision was to catch relatively innocent taxpayers -- those who could certify nonwillfulness and provide a supporting narrative -- who would otherwise choose not to join OVDP or, if they joined OVDP, would opt out.  The Streamlined tax and penalty regime was calibrated to impose, roughly, the result they might obtain upon audit (either audit if they did not join OVDP or audit after opt out if they did join OVDP).  The key to this procedure with substantially less financial cost than OVDP was that the taxpayer must certify that his income tax and FBAR noncompliance was nonwillful and provide a narrative supporting the certification.  Based upon that certification and narrative, the procedure requires 3 years of amended returns or, in the case of foreign resident taxpayers, delinquent returns during the period (a domestic taxpayer does not qualify if he filed no return in the key 3 year period) and 6 years for delinquent or amended FBARs (although the narrative make take some explaining about bank accounts omitted from original FBARs).  The income tax and interest is due for the three years; there is no accuracy related or other income tax penalties.  The MOP will be 0% for the foreign resident taxpayer and 5% for the domestic resident, based upon the high year-end balance in the 6 year period.  The Streamlined Procedure does not result in a closing agreement, the taxpayer can be audited (although as an initial step such an audit might focus on the validity of the certification and narrative), and the taxpayer is given no assurance that he will not be criminally prosecuted.  (I have recently noted that DOJ Tax has noised about potential criminal prosecutions for improper certifications and narratives, as well as the underlying conduct.)

Sunday, July 24, 2016

Tax Court Again Rejects Collateral Estoppel For Some Deficiency and Civil Fraud Penalty Where No Tax is Due (7/24/16)

I recently blogged on the case of Senyszyn v. Commissioner, 146 T.C. ___, No. 9 (2016), here, referred to as Senyszyn II to distinguish from the first opinion in the case in 2013, where the Tax Court declined the IRS's invitation to apply the doctrine of equitable estoppel arising from the taxpayer's conviction for tax evasion.  See Tax Evasion Conviction Does Not Compel a Finding of Deficiency Where There is No Deficiency (Federal Tax Crimes Blog 4/2/16), here.  An element fo the crime of tax evasion to which the taxpayer pled is tax evaded (some courts say it must only be some tax evaded; others say substantial tax evaded, although the substantial modifier is not a textual element of the crime).  Accordingly, the taxpayer's plea to tax evasion included a stipulation that he willfully failed to report income of $252,726 which, in most cases would mean a tax evaded, indeed a substantial tax evaded.  In the ensuing tax case involving the year, however, the evidence demonstrated that there was no evaded tax.  The IRS nevertheless urged that the Tax Court should find some minimal amount of tax evaded pursuant to the plea agreement as to that element of the crime.  The Tax Court declined to imposed collateral estoppel against the evidence it had before it.

The IRS was not pleased.  Conjuring the horrors that might result, the IRS asked for reconsideration, urging that collateral estoppel was mandatory rather than equitable subject to the court's discretion. The Tax Court (Judge Halpern) again rejected the position.  Senyszyn v. Commissioner, T.C. Memo. 2016-137, here.  The Court has a good history of the proceedings before the Tax Court, with the first opinion in 2013 and not, apparently, the last just last week.

Judge Halpern then explained the IRS' motion for reconsideration:
In that motion, respondent alleges that, in Senyszyn II, we "did not properly apply the standard for collateral estoppel." In particular, respondent argues that our claim of "broad discretion in the application of collateral  estoppel" was a substantial error of law because it "contradicts previous holdings of the Court of Appeals for the Third Circuit, the court to which any appeal in this case would lie." Finally, respondent alleges that proper application of the standard for collateral estoppel would result in "a substantial tax deficiency for petitioners." According to respondent, that Court of Appeals allows trial courts discretion in the application of collateral estoppel only when the doctrine is asserted by a claimant who was not a party to the prior litigation (i.e., cases of "non-mutual" collateral estoppel). By contrast, in cases involving "mutual" collateral estoppel, in which the doctrine is asserted by a party to the prior litigation, courts must apply the doctrine whenever the legal conditions to its application are met.
The Tax Court noted that the IRS' argument that collateral estoppel does not permit judicial discretion in its application was based on thin authority (Jean Alexander Cosmetics, Inc. v. L'Oreal USA Inc., 458 F.3d 244 (3d Cir. 2006), and in the discussion section of the opinion demonstrates that that case is not sufficient authority on the facts in the case.  Moreover,
Respondent also suggests we "consider the breadth of * * * [our] opinion." He worries that the discretion we have claimed in the application of collateral estoppel might encourage "many more challenges to clear-cut cases" that will "waste judicial resources and the resources of the parties, thereby frustrating the entire purpose of collateral estoppel." He also professes concern that our Opinion "might be used to challenge prior criminal convictions." Finally, respondent suggests that applying collateral estoppel would "save[] the Court from having to confront the question of a requirement to arbitrarily determine some 'substantial tax deficiency' in order to afford the District Court the comity to which it is due, in a case where this Court's factual analysis shows there really is no deficiency at all." "The better course", respondent recommends, "is to accept via collateral estoppel the liability to which Mr. Senyszyn stipulated in his guilty plea as a minimum deficiency."

Friday, July 22, 2016

Good Eleventh Circuit Analysis on the Meaning of Defraud in the Mail and Wire Fraud Statutes (7/22/16)

We have often discussed the word "defraud" as used in the federal criminal statutes.  To summarize the discussion, the word defraud as meant in most federal criminal statutes means, in my words, deceiving to take away something of value from victim.  However, in the federal criminal conspiracy statute, 18 USC § 371, here, which criminalizes in part pertinent a conspiracy "to defraud the United States," the word defraud, as interpreted, can mean a conspiracy to impair or impede the lawful function of a federal agency (such as most prominently for this blog, the IRS); the conspiracy need not have as its object the taking of money or value.  Now, there is a lot of nuance behind that general statement of the difference between defraud as used in the mail and wire fraud statutes and as used in the general conspiracy statute.  A good introduction, however, is provided by the Second Circuit in United States v. Coplan, 703 F.3d 46, 78 (2d Cir.2012), here, cert. denied, ––– U.S. ––––, 134 S.Ct. 71, 187 L.Ed.2d 29 (2013); I have discussed the issue in several blogs, I point readers now only to the one initially discussing Coplan, Coplan #1 - Panel Questions Validity of Klein Conspiracy (Federal Tax Crimes Blog 12/1/12), here; more detail on my thoughts on the difference is in John A. Townsend, Is Making the IRS's Job Harder Enough?, 9 Hous. & Bus. Tax L.J. 260 (2009), here.

In terms of the interests of this blog, the other key criminal statutes using the word "defraud" are the mail and wire fraud statutes which each criminal a "scheme or artifice to defraud."  18 USC §§ 1341, here; and 1343, here.  In United States v. Takhalov, ___ F.3d ___, 2016 U.S. App. LEXIS 12664 (11th Cir. 2016), here, in a colorful opinion, the panel applied the traditional interpretation of the word defraud.  The opinion has a short introduction that telescopes its reasoning:
The wire-fraud statute, 18 U.S.C. § 1343 does not enact as federal law the Ninth Commandment given to Moses on Sinai. n1 § 1343 forbids only schemes to defraud, not schemes to do other wicked things, e.g., schemes to lie, trick, or otherwise deceive. The difference, of course, is that deceiving does not always involve harming another person; defrauding does. That a defendant merely "induce[d] [the victim] to enter into [a] transaction" that he otherwise would have avoided is therefore "insufficient" to show wire fraud. See United States v. Starr, 816 F.2d 94, 98 (2d Cir. 1987).
   n1 See Exodus 20:16 ("Thou shalt not bear false witness against thy neighbor.") (KJV).
Here, the defendants feared that the jury might convict them of wire fraud based on "fraudulent inducements" alone. Hence they asked the district court to give the jurors the following instruction: that they must acquit if they found that the defendants had tricked the victims into entering a transaction but nevertheless gave the victims exactly what they asked for and charged them exactly what they agreed to pay. The district court refused to give that instruction, and the jury ultimately convicted the defendants of wire fraud and other crimes, most of which were predicated on the wire-fraud convictions. The question presented in this appeal is whether the district court abused its discretion when it refused to give the requested instruction.
Bottom line, the Eleventh Circuit panel held, over the Government's objection, that the requested instruction was indeed a correct instruction on the law and that the court had abused its discretion in refusing to give the requested instruction.  Criminal law enthusiasts will recall that it is not error to refuse a correct instruction where the point is adequately covered in other instructions (e.g., the general willfulness instruction in tax cases covers the concept of good faith) and, in any event, it may not be reversible error if error it be.

The relevant facts were that the defendants were owners of clubs that used what are called "Bar Girls" or "B-girls" to entice unsuspecting male customers into their bars.  Those girls did not disclose to the customers their relationship with the bar.  Defendants did not contest those facts.  But, they urged, that merely enticing unsuspecting and uninformed customers into the bar was not sufficient to meet the definition of defraud.  More would be required, they urged, in order to make a case that the conduct rose to the level of the word defraud in the statute.  Now, there was evidence that, after the customers entered the bar some conduct occurred which might meet the definition of defraud, but the defendants did contest whether they knew that such conduct occurred.  Since they contested that conduct and their knowledge of the conduct, they urged, the Government had to prove those facts beyond a reasonable doubt and, more importantly, they urged, they were entitled to an instruction to the jury that, if all the Government proved beyond a reasonable doubt was that they knew that the girls were deceiving the customers to enter the bar, that conduct did not establish that they intended to defraud the customers and they should be acquitted.  (In stating the defendants' claims, the panel does note an analogous episode from the classic movie Casablanca, noting that the defendant's defense was "what one might call the Casablanca defense, arguing that they were 'shocked, shocked' to learn that fraud was taking place within their South-Beach versions of Rick's Café Américain.n2 [citing in fn2 "See generally Casablanca (Warner Brothers 1942) ("Rick: How can you close [up my bar]? On what grounds? Captain Renault: I'm shocked, shocked to find that gambling is going on in here! Croupier: Your winnings, sir.")").