Source: http://federaltaxcrimes.blogspot.com/2013/08/
Timestamp: 2019-04-24 20:14:37+00:00

Document:
The Villanova Law Review has announced the 2013 Norman J. Shachoy Symposium on Selective Issues in Tax Administration, to be held on Friday, September 27, 2013. The schedule of presentations and presenters is here. The enrollment information is here.
Discussion of the sentencing phase of criminal tax cases, focusing on principles of fairness and deterrence in regards to both the individual defendant and as to all taxpayers.
In addition, Kathy Keneally, DOJ Tax AAG, will give the keynote talk. I expect some significant portion of her talk will address issues related to criminal tax enforcement.
In the case of any information which is required to be reported to the Secretary pursuant to an election under section 1295 (b) or under section 1298 (f), 6038, 6038A, 6038B, 6038D, 6046, 6046A, or 6048, the time for assessment of any tax imposed by this title with respect to any tax return, event, or period to which such information relates shall not expire before the date which is 3 years after the date on which the Secretary is furnished the information required to be reported under such section.
If the failure to furnish the information referred to in subparagraph (A) is due to reasonable cause and not willful neglect, subparagraph (A) shall apply only to the item or items related to such failure.
Most tax practitioners understand the basic assessment statute of limitations rules in the Code: three years after the return is filed, six years after the return is filed for 25% omission of income, or forever in the case of fraud and/or failure to file. Practitioners may be less familiar with the raft of additional special assessment statutes of limitation rules found in the Code, but one of these additional rules demands special attention. That rule is section 6501(c)(8) which provides that in the case of any information on foreign activities which is required under section 6038, 6038A, 6038B, 6046, 6046A, or 6048, the time for assessment of any tax shall not expire until three years after the date on which the IRS is furnished the information required to be reported.
Until recently, section 6501(c)(8) was often overlooked both for assessment and financial statement tax provision purposes. As stated above, section 6501(c)(8) set forth an exception to the general rule. In March of 2010 the Hiring Incentives to Restore Employment Act (the “HIRE Act”), amended the section 6501(c)(8) exception to the general statute of limitations and it has been made applicable to the entire income tax return – not just the tax consequences related to the information required under the relevant foreign information reporting provision. The new section 6501(c)(8) is applicable to any tax return filed after March 18, 2010 and any other return for which the assessment period specified in section 6501 had not yet expired as of that date. As long as a failure to comply with one of the specified foreign information reporting requirements for a tax return exists, the limitations period for that tax return remains open indefinitely. The statute will not commence to run until the time at which the information required under the reporting provision is filed with the IRS and will not expire before three years after the filing of the required information.
Practitioners and students of tax crimes know that most of the commonly charged tax crimes have an element of willfulness which the Supreme Court interpreted in Cheek to mean a voluntary intentional violation of a known legal duty. In other words, conviction requires that the Government prove that the defendant knew the law and intended to violate the law. In Cheek, the Court said that proof that the defendant acted in good faith would perforce negate willfulness. Some tax crimes do not have an explicit requirement of willfulness but have an equivalent element that substantially overlaps willfulness. E.g., Section 7212(a)'s requirement that the defendant act corruptly and even the defraud conspiracy in 18 USC 371. See John A. Townsend, Tax Obstruction Crimes: Is Making the IRS's Job Harder Enough, 9 Hous. Bus. & Tax. L.J. 255, 277-314 (2009), here.
But not all tax crimes will have such a heightened mens rea requirement as in Cheek.
Unlike the crimes charged in Cheek, 18 U.S.C. § 287 does not require "willfulness." As the Court in Cheek noted, "[t]he general rule that ignorance of the law or a mistake of law is no defense to criminal prosecution is deeply rooted in the American legal system," and Congress can soften the impact of this common law presumption by making "specific intent to violate the law an element" of the crime. 498 U.S. at 199-200. Congress has not done so here. Thus Cheek does not persuade us to conclude that evidence of a good faith belief defense is relevant. See United States v. Hildebrandt, 961 F.2d 116, 118-19 (8th Cir. 1992) (concluding Cheek did not mandate a good faith defense instruction because its holding was premised on the complexity of the tax laws, and the defendant in Hildebrandt was convicted under a statute similar to § 287-18 U.S.C. § 1001).
DOJ Tax announces, here, a guilty plea related to the Israeli back-to-back loan scheme.
Banks: Bank A and Bank B, both Israeli banks; Bank A has Los Angeles branch; Cayman Islands bank.
Tax Loss: $66,640 (estimate at 28% of omitted income of $238,000).
According to court documents, Cohen, a U.S. citizen, maintained undeclared bank accounts at two international banks headquartered in Tel Aviv, Israel, identified in court documents as Bank A and Bank B. One of Cohen’s undeclared accounts was maintained at a branch of Bank A located in the Cayman Islands. The accounts were held in the names of nominees in order to keep them secret from the U.S. Government. In or about 2000, Cohen began using the funds in his undeclared account in the Cayman Islands as collateral for back-to-back loans obtained from another branch of Bank A located in Los Angeles. Cohen’s ownership of the funds in the Cayman Islands accounts was not identified in the loan records maintained at the Los Angeles branch, thus concealing the fact that he was borrowing his own money, paying tax-deductible interest on the loans and not reporting the interest income he was earning in the Cayman Islands on his U.S. tax returns.
According to the plea agreement, in or about 2009, Cohen transferred approximately $2 million from his Cayman Islands account at Bank A to a new offshore account at Bank B in Israel. Cohen then used the funds in the new account as collateral to obtain a back-to-back loan from the Los Angeles branch of Bank B. Cohen failed to report any income from the accounts on his individual income tax returns that were filed with the IRS. For tax years 2006 through 2009, Cohen failed to report interest income of approximately $238,000. The highest balance in the undeclared accounts was approximately $3,450,000.
DOJ Tax Press Release is here. The press release links to two documents -- Joint Statement and Program, here, and Signed Joint Statement and Program, here.
The program holds banks to a higher degree of responsibility for opening secret accounts after it became publicly known that the department was actively investigating offshore tax evasion in Switzerland. Under the penalty provisions of the program, banks seeking a non-prosecution agreement must agree to a penalty in an amount equal to 20 percent of the maximum aggregate dollar value of all non-disclosed U.S. accounts that were held by the bank on Aug.1, 2008.
The penalty amount will increase to 30 percent for secret accounts that were opened after that date but before the end of February 2009 and to 50 percent for secret accounts opened later than that.
The program will significantly assist the department’s efforts to investigate and prosecute U.S. taxpayers who, when faced with the risk of detection, chose to move funds away from banks under investigation to banks that they believed might be better havens for tax secrecy. A key component of the program requires cooperating banks to provide information that will enable the United States to follow the money to other Swiss banks and to banks located in other countries.
Yesterday, Henry Seggerman pled guilty tax charges (noted below). The USAO SDNY press release is here. Seggerman is one of several siblings in a prominent (perhaps the same as wealthy) family who have been charged and pled guilty. In my spreadsheet, I have previously missed the charges and pleas of the other family members except Suzanne Seggerman. I have now added the others to the spreadsheet and will be posting the spreadsheet later this week.
I have not yet obtained the plea agreement but will try to track it down and post updates as appropriate.
Maximum Possible Sentence: 11 years.
SEGGERMAN was the son of a prominent New York businessman (“the Businessman”) who, upon passing away in May 2001, left an estate valued in excess of $24 million, more than half of which was maintained in secret and undeclared foreign bank accounts. Working with a Swiss lawyer and others, the Businessman arranged for over $12 million in the undeclared accounts to be left to his surviving spouse and five of his children, including SEGGERMAN. As a result of the successful implementation of that plan, and to hide the undeclared funds from the IRS, SEGGERMAN, who, together with three of his siblings, was an executor of his father’s estate, signed a tax return for his father’s estate that falsely under-reported the gross assets of the Businessman’s estate. In particular, the estate tax return fraudulently failed to report over $5 million left to the Businessman’s wife and over $7.5 million to be split among five of his children.
A deal is reported. See Martin de Sa'Pinto, Swiss government ready to sign tax deal with United States (Reuters 8/28/13), here.
A Swiss newspaper reported the host of banks not yet under formal investigation in the U.S. could face fines of as much as 50 percent of their American client assets. Government spokesman Andre Simonazzi said the terms and conditions of the program would not be immediately released, but would be communicated "as soon as possible"
The agreement deals mainly with a settlement for the roughly 100 Swiss banks that had U.S. clients, but are not yet being investigated by U.S. justice authorities.
Around a dozen banks are under U.S. investigation, including Credit Suisse (CSGN.VX), Julius Baer (BAER.VX), the Swiss arm of Britain's HSBC (HSBA.L), privately held Pictet and state-backed regional banks Zuercher Kantonalbank and Basler Kantonalbank (BSKP.S).
Several of those banks have said they are preparing information of client withdrawals demanded by U.S. investigators, after the Swiss government said it would allow them to circumvent secrecy and privacy laws to do so.
Here is another report. Details surface of US Justice, Swiss banks deal (update) (genevalunch.com 8/28/13), here.
Category 1 – banks already involved in a criminal investigation and therefore unable to benefit from the agreement.
Category 2 – banks which presumably violated US law and will be required to pay a fine related to any accounts with a balance of CHF50,000 or more at any point from 1 August 2008 on, with the amount of the fine ranging from 20 percent of the balance for accounts before 1 August 2009 to 50 percent for accounts opened after 28 February 2009. The percentage applies to the largest balance held during the period in question. The agreement nevertheless takes into account clearly detailed efforts by the bank to get the client to declare the assets to the IRS tax authorities.
Categories 3 and 4 won’t be asked to pay fines. The third group is banks that can prove they did not violate US law and the fourth group is local Swiss banks.
There is a lot of buzz in the sentencing world about long sentences, often the product of politicians playing to the base by getting tough on crime. One driver for questionably long sentences are mandatory minimum sentences which prevent a judge from fashioning an appropriate sentence based on the individual before the court. See e.g., Sari Horwitz, Holder seeks to avert mandatory minimum sentences for some low-level drug offenders (Washington Post 8/11/13), here. A variation on that theme was the problem with the "mandatory" sentencing guidelines which, while not as inflexible as mandatory minimum sentences, did limit the sentencing judge's ability to fashion an appropriate sentence. Fortunately, after years of mischief, the Supreme Court made the sentencing guidelines advisory only and permitted the sentencing judge to fashion its sentence with considerable discretion under 18 USC 3553(a), here.
The New York Times today has a remarkable story on a a person convicted of crime and sentenced to a significant incarceration period. The person, Shon R. Hopwood, redeemed himself and is now on a path to being a lawyer, with his first stop as clerk on a prestigious U.S. Court of Appeals. See Adam Liptak, Taking a Second Chance, and Running With It (NYT 8/26/13), here.
Here are the opening paragraphs which I hope will encourage you to read more.
A 23-year-old bank robber named Shon R. Hopwood stood before a federal judge in Lincoln, Neb. He asked for leniency, vowing to change.
Judge Kopf had just heard the news that Mr. Hopwood, now a law student, had won a glittering distinction: a clerkship for a judge on the United States Court of Appeals for the District of Columbia Circuit, which is generally considered the second most important court in the nation, after the Supreme Court.
Now this is an anecdotal instance. It is not representative of prisoners that their acts of redemption can reach such heights. But, I suspect there are many other acts of redemption throughout the system.
Readers of the excerpt and the whole article will note that Judge Kopf was not inclined to give this defendant a break when he encountered him as a brash 23 year old. He called the future wrong.
One question that might be asked is, like mandatory minimums and mandatory guidelines, refusing parole is an idea that should be reconsidered. In some ways, the denial of parole can function somewhat like mandatory minimums, at least for a judge who takes the sentencing commission "recommendations" seriously. Paroles can permit someone to take a later look to see if there mitigating factors exist that could not be known to the judge in fashioning a sentence, even with Booker discretion. Judges do not always predict the future well.
Today, I read a tax case serving as a key object lesson for students and practitioners. Read the rules carefully.
In United States v. Hafeez, 2013 U.S. Dist. LEXIS 118783 (ED LA 2013), the defendant was convicted of a tax crime was sentenced on a plea stipulation that the tax loss was between $80,000 and $173,278.89. The lower number is a key break point in the tax loss table (see here). After sentencing, the defendant sought to correct the tax loss to $68,308.92, which would achieve a 2 point reduction in his base offense level and in offense level for the sentencing table. He sought the correction under Rule 35(a), here. He timely filed the Rule 35(a) motion within the 14 day period allowed; but did not set the motion for hearing until after the 14 day period. Therein lay the rub.
IT IS HEREBY ORDERED that Abdul Hafeez's Motion to Correct and Reduce Sentence Based on Clear Error under Rule 35(a) of the Federal Rules of Criminal Procedure (Doc. #62) is DISMISSED FOR LACK OF JURISDICTION.
On January 3, 2013, defendant, Abdul Hafeez, pleaded guilty to a one-count Bill of Information in which he was charged with conspiracy to defraud the United States in violation of 18 U.S.C. § 371. In the plea agreement and factual basis, Hafeez and the government agreed that for the purposes calculating Hafeez's sentence under the United States Sentencing Guidelines, the combined tax loss caused by Hafeez's participation in the tax fraud scheme was no more than $173,278.89, and no less than $80,001.00. Hafeez and the government further agreed that the amount of restitution Hafeez owed to the government was $153,939.85.
After reviewing the presentence investigation report, the court applied the United States Sentencing Guidelines in accordance with the parties' agreements regarding the amount of the tax loss to the United States and Hafeez's minor role in the offense. Hafeez's offense level was 12, and his criminal history category was I, indicating, 10 to 16 months imprisonment, 1 to 3 years supervised release, and a $3,000 to $30,000 fine.
On July 25, 2013, Hafeez was sentenced to serve 10 months in the custody of the Bureau of Prisons, followed by a 3 year term of supervised release. Hafeez was also ordered to pay a fine in the amount of $30,000, plus interest, and restitution in the amount of $153,939.85, plus interest.
A German IT expert collaborating with German tax authorities has been sentenced to three years by a Swiss court in Bellinzona. He confessed to collecting and selling data on wealthy clients of a bank.
The Swiss court sentenced the man for selling client data from Swiss bank Julius Bär to the German tax authorities.
The 54-year-old German IT specialist who moved to Switzerland in 2005 confessed he'd filtered the data for German clients of the bank with more than 100,000 euros, Swiss francs, pounds sterling or US dollars and sent a sample of the information to an accomplice.
He handed over data on 2,700 German clients to be transferred to the German tax authorities and agreed on payment of 1.1 million euros ($1.5 million).
Judges ruled the man could serve half of his sentence on probation. Considering time already served, he may be released in as soon as six months.
Julius Bär agreed in 2011 to pay German tax authorities 50 million euros to close a tax investigation.
1. The U.S. has tightened its negotiating terms, but, according to the article, "the stiffer terms did not include higher fines for culpable banks."
2. The roughly dozen banks under active U.S. criminal investigation have been given "permission to hand over data to the U.S. that will allow them to avoid charges as they cut individual deals."
3. The other 90 or so banks that likely have or have had U.S. evasion deposits are in "legal limbo."
4. The U.S. leverage is increasing, according to Jeff Neiman, here, because of three "valuable tools:" "a database of voluntary disclosures from U.S. taxpayers; a relationship with Liechtenstein to obtain information; and a lucrative whistleblower program to entice Swiss bankers."
5. The uncertainty of the resolution will cause withdrawals from the Swiss financial sector. That sector is "bracing for up to 200 billion francs in withdrawals in the four years to 2016, out of 789 billion francs of untaxed assets in Swiss banks, according to consultancy Zeb/Rolfes Schierenbeck Associates."
Larry A. Campagna, Partner, Chamberlain, Hrdlicka, White, Williams & Aughtry, Houston, TX, here.
Mark E. Matthews, Partner, Caplin & Drysdale, Chartered, Washington, DC, here.
Pamela J. Naughton, Partner, Sheppard Mullin Richter & Hampton LLP, Shelton, CT, here.
Moderator: Jenny L. Johnson, Partner, Holland & Knight, LLP, Chicago, IL here.
1. Ms. Davis said that consensus enforcement of required records subpoenas "has not changed the landscape as much as the defense bar fears it has."
In United States v. Mobley, 2013 U.S. Dist. LEXIS 115392 (SD AL 2013), here, the defendant, a return preparer brought a 2255 proceeding to overturn her conviction by plea. The defendant had been charged with a 99-count Second Superseding Indictment with preparing false and fraudulent returns. The defendant pled to 4 counts: (1) conspiracy count, (2) aiding and assisting, (3) wire fraud, and (4) aggravated identity theft.
The defendant was sentenced to 51 months, at the low-end of the guidelines sentencing range. That calculation was made using a 21 base offense level, driven by a stipulated estimated tax loss between $400,000 and $1,000,000. With other adjustments, the guidelines range was 51 to 63 months.
Furthermore, there is no indication that any "better plea agreement" could have been obtained, irrespective of who was representing Mobley. n5 Petitioner offers no specifics as to what sort of deal she thinks conflict-free counsel might have procured. There is no evidence or reason to believe that a more favorable deal could have been available to her under any circumstances. More fundamentally, Mobley steadfastly admits to this day, "I do not seek to vacate my conviction because I am guilty of the crimes to which I pled guilty." (Id. at 1.) Even in her objections to the Report and Recommendation, petitioner reiterates that "Mobley has not challenged her guilty plea." (Doc. 173, at 2.) In light of these admissions, her apparent suggestion that Attorney McCord betrayed her by not negotiating a plea deal that would have excused her from pleading guilty to those crimes (of which she is admittedly guilty and which plea she does not now challenge) borders on the absurd. Simply put, petitioner has not shown that there was any viable alternative strategy Attorney McCord could have utilized with respect to plea negotiations, but that she failed to follow because of the purported conflict. n6 For all of these reasons, Mobley's objection that she suffered an "adverse effect" from Attorney McCord's conflict because conflict-free counsel could have negotiated a better plea agreement is overruled.
n5 In her objections, defendant suggests that she was induced to plead guilty "without obvious benefits." (Doc. 173, at 3.) This statement is demonstrably incorrect. The benefits to Mobley for executing this plea agreement were numerous and tangible, to-wit: (i) the Government agreed to dismiss 95 counts against her and to refrain from bringing any additional related charges against her; (ii) the Government agreed to cap the monetary loss for sentencing purposes at $1 million, while preserving Mobley's opportunity to object to that amount; (iii) the Government agreed to recommend a low-end sentence; and (iv) by executing the plea agreement and timely changing her plea, Mobley availed herself of a full three-level reduction for acceptance of responsibility, which had the effect of lowering the bottom end of her guideline range from 70 months to 51 months (a 27% reduction). To the extent that Mobley persists in arguing that her sentence "would have been the same if the [other 95] counts had not been dismissed" (doc. 164), she is wrong. The Court was not bound to adhere to the low-end recommendation, and would have been less likely to do so had Mobley pled guilty to 99 counts rather than just four. More importantly, recall that the Indictment included 12 counts of aggravated identity theft, in violation of 18 U.S.C. § 1028A(a)(1). (See doc. 70, at Counts 88 - 99.) Eleven of those counts were dismissed pursuant to the plea agreement. Each of those counts carried the very real possibility of a two-year consecutive sentence pursuant to § 1028A(b)(2), although this Court would have had discretion under the statute to run them concurrently. Thus, the plea agreement removed the potential for Mobley to face an additional 22 years' worth of consecutive sentences on top of the low-end guideline sentence the Government had agreed to recommend. This is, indeed, an "obvious benefit" to the plea, even if Mobley does not appreciate it.
n6 In another objection, Mobley maintains that the plausible alternative strategy to her guilty plea was going to trial. On that point, Mobley reasons that "[i]f unconflicted counsel had been able to challenge the Government's case as relates to the alleged victims (McCord's parents), it is plausible that other challenges could have been made to the Government's case in total" and "it could have cast doubt in the jury's mind as to whether other alleged victims were actually participants." (Doc. 173, at 3.) With this argument, petitioner endeavors to have her cake and eat it too. One the one hand, she has repeatedly averred that she is not challenging or seeking to overturn her guilty plea. On the other hand, she seeks to establish a Sixth Amendment violation because her conflicted counsel persuaded her to plead guilty instead of going to trial. A § 2255 petitioner does not get to have it both ways. Besides, petitioner's argument does not establish the "reasonable alternative strategy" under the Reynolds line of cases. For Mobley to proceed to trial and attack D.B. [father] and E.B.[step-mother] as not being "victims" would have been foolish because, as discussed infra, the Government never, ever suggested that they were victims. The Indictment identifies numerous individuals on whose behalf Mobley prepared false/fraudulent tax returns, some of whom were aware of and participated in the fraud and some of whom did not know she was preparing tax returns for them at all. By the clear wording of the Indictment, D.B. and E.B. fell within the first category, not the second. In other words, it would not have been a reasonable alternative strategy for Mobley to go to trial to try to persuade the jury that D.B. and E.B. were not really victims, and that the Government's entire case was therefore of dubious worth, for the simple and obvious reason that the Government never contended that D.B. and E.B. were victims. Whatever else can be said, such an irrational trial strategy was not a viable alternative to a guilty plea that resulted in dismissal of 95 of the 99 counts against Mobley, leaving only four charges to which she even now concedes guilt.
Actually, the opinion turns out to be less than I had originally thought. So this will be the final installment.
Kerr argues that the "overt acts of the substantive offenses were required elements of the conspiracy count." (Doc. 314 at 10). Kerr claims that the Government failed to prove "any other knowledge or intent of illegality except for that required to prove the conspiracy–that the Defendants did this to defraud the IRS." (Id. at 11). Because the jury acquitted Kerr of conspiracy, he alleges that the elements of the substantive counts cannot be proven; therefore, the government "failed to prove the required illegal intent." (Id. at 10).
"[I]t is well-established that 'inconsistent verdicts may stand, even when a conviction is rationally incompatible with an acquittal, provided there is sufficient evidence to support a guilty verdict.'" United States v. Suarez, 682 F.3d 1214, 1218 (9th Cir. 2012) (internal citations omitted). In this case, the jury was instructed that they must find Kerr acted "willfully" to be guilty of the substantive counts. (Doc. 287 at 25, 28). The jury could have acquitted Kerr of conspiracy for reasons unrelated to Kerr's intent. For example, the jury could have determined that the Government did not prove there was an agreement between the co-conspirators. The jury was properly instructed about Kerr's intent for the substantive counts; thus, by finding Kerr guilty, the jury found that Kerr acted willfully. Therefore, the Court denies Kerr's motion for judgment of acquittal or a new trial under this theory.
I have previously written on the convictions and pre-trial proceeding for Stephen Kerr and Michael Quiel. I provide the blogs and links at the end of this blog. Today, I write on the district court's rejection of their motions for acquittal or, alternatively, a new trial. These types of motions are standard after a conviction. They are usually denied. The district court denied the motions here. See United States v. Kerr, 2013 U.S. Dist. LEXIS 116327 (D AZ 8/16/13), here.
The opinion is standard fare. I write principally because of the range of issues presented and, for students at least, to introduce them to the issues.
The facts are: The defendants were charged with conspiracy among themselves and Rusch, their attorney (the common count 1 of the indictment), tax perjury (relating to omission of income and false answer to the foreign account question on Schedule B) and FBAR violations. Both defendants were acquitted of the conspiracy count. Kerr was convicted of tax perjury and one FBAR violation. Quiel was convicted of the tax perjury charges but not the FBAR counts.
Testimony of Attorney; Attorney-client privilege.
This issue is introduced in my prior blog, titled Defendant Waives Attorney-Client Privilege by Asserting Reliance on FBAR Advice Defense (7/19/12), here. Kerr first claimed that his and Quiel's acquittals of the conspiracy charge meant that the testimony of their lawyer, Rusch, was not admissible under the crime-fraud exception to the attorney-client privilege. As you may have guessed (or have read in the earlier blogs), the attorney, Rusch, was their "lawyer" who helped orchestrate their machinations. Rusch pleaded guilty earlier. The problem with Kerr's first claim was that Rusch's testimony was not admitted under the crime-fraud exception. Rather, it was admitted because the defendant's claimed reliance on counsel as a defense.
This claim is inaccurate because Kerr presented this defense in both opening and closing arguments and requested and received a jury instruction encapsulating that defense. (See e.g. Doc. 325 at 124) ("Now this is their lawyer. This is a tax expert. They believe him. They rely upon this advice."); (Doc. 338 at 79) ("a very, very important jury instruction in the case . . . that's basically the instruction regarding the reliance on counsel"); (Doc. 287 at 35) (jury instruction for advice of counsel defense). Accordingly, the Court can find no error in the admission of Rusch's testimony, and such testimony will not be excluded when determining the sufficiency of the evidence under Rule 29(c)(2) or Rule 33(a).
Collateral consequences often attend tax crimes investigations and prosecutions and even in circumstances that raise the risk of criminal investigation and prosecution. One collateral consequence is that the IRS wants to collect the tax dollars that the taxpayer owes, along with penalties and interest.
2. Writ of Ne Exeat Republica - Constraining the Person.
Renunciation of citizenship has been much in the news recently, as the periodic reports indicate that record numbers of citizens are renouncing. For readers interested in this subject, I recommend this timely and good article Lacey E. Strachan, Tax Consequences Resulting From Renouncing U. S. Citizenship (Tax Controversy (Civil and Criminal) Report 8/9/13)), here. This article is on a blog sponsored by the law firm of Hochman, Salkin, Rettig, Toscher & Perez, P.C, here, which has a strong team in tax controversy matters, including specifically offshore account civil and criminal representation. Ms. Strachan's bio page is here. Readers might also want to review the firm's publications web site, here.
PALTZER also helped to repatriate funds to the U.S. taxpayers from their undeclared accounts in Switzerland in ways that were designed to ensure that U.S. authorities would not discover these undeclared accounts. For example, PALTZER helped a U.S. taxpayer repatriate assets in the form of jewelry in order to avoid detection of an account in Switzerland.
I have posted before on the continuing saga of James Simon, "Certified Public Accountant, a professor of accounting, and an entrepreneur," who was convicted of "filing false income tax returns, failing to file reports of foreign bank accounts, mail fraud and financial aid fraud." Yesterday, the Seventh Circuit rejected his appeal, thus affirming his convictions. United States v. Simon, 727 F.3d 682 (7th Cir. 2013), here. Simon was always the atypical case because of the "other crimes" involved and the egregious fact pattern. So I am not sure what lessons it teaches except as a variation of the old saying, "Bulls make money, bears make money, pigs get slaughtered."
For tax years 2003 through 2006, the Simon family received approximately $1.8 million from JAS Partners, Elekta, JS Elekta, Ichua and William R. Simon Farms, Inc., most of this recorded as loans in Simon's personal financial records. Simon and his family spent approximately $1.7 million during this same period of time. Yet Simon paid just $328 in income taxes for 2005, and claimed refunds for the other three years, at the same time pleading poverty to financial aid programs in order to gain need-based scholarships for his children at private schools. The government charged Simon with four counts of filing false tax returns, in violation of 26 U.S.C. § 7206(1) and 18 U.S.C. § 2; four counts of failing to file reports related to foreign bank accounts, in violation of 31 U.S.C. §§ 5314, 5322 and 18 U.S.C. § 2; eleven counts of mail fraud, in violation of 18 U.S.C. §§ 1341 and 2; and four counts of financial aid fraud, in violation of 20 U.S.C. § 1097 and 18 U.S.C. § 2.
On appeal, Simon first contends that his convictions for failing to file reports of foreign bank accounts must be reversed because he filed the required documents within the time allotted by extensions granted by the IRS. He characterizes the issue as one of conflicting interpretations of the law by the Treasury Department and the Justice Department. He maintains that the courts should defer to the agency entrusted with implementing the statute at issue, in this case the Treasury Department, and that deferring to Treasury would require reversal of those counts. Second, Simon argues that evidentiary errors and jury instruction errors require reversal of his convictions for filing false tax returns. He complains that the court's rulings in limine prevented him from presenting a valid defense to the charges when he was not allowed to present certain evidence of his basis in JAS Partners. He also challenges the government's second theory underlying the false tax return counts: that the returns were false because Simon failed to check the "yes" box on Schedule B of his return in response to a question regarding whether he had signature authority over foreign bank accounts. If the conviction on the foreign bank reporting counts must be reversed, then the conviction on the false returns must also be reversed, he argues, because it was no more necessary to check the "yes" box revealing his signature authority over foreign accounts than it was to file reports for those accounts. Third, he maintains that the evidentiary errors he asserted on the false return counts led to an error in the jury instructions. Finally, Simon contends that if the false tax return counts are reversed, then he is also entitled to a new trial on the mail fraud and student loan fraud counts, because these convictions were dependent on the validity of the false tax return convictions.
Favato's proposed jury charge was incorrect. Favato requested a jury instruction stating that "it is the taxpayer who signed the return under penalties of perjury . . . who is ultimately responsible for the accuracy of the return that is filed." This instruction misstated the law and could have confused the jury because it could imply that assisting in the preparation of a false tax return is not a crime. However, assisting in tax fraud is a crime regardless of "whether or not such falsity or fraud is with the knowledge or consent of the [taxpayer]." See 26 U.S.C. § 7206(2).
As for willfulness, to establish a willful violation of the tax code, the government must prove "the voluntary, intentional violation of a known legal duty." United States v. McKee, 506 F.3d 225, 236 (3d Cir. 2007). Where a defendant proves that he had a good faith belief that he did not violate the tax code, regardless of whether that belief was objectively reasonable, he establishes that he did not act willfully. United States v. DeMuro, 677 F.3d 550, 557 (3d Cir. 2012). The District Court explained this standard through an instruction from the Third Circuit's pattern jury instruction on willfulness. This included an instruction that conduct is not willful if performed through negligence, mistake, accident, or due to a good faith misunderstanding of the requirements of the law. The District Court also included a separate instruction explaining that good faith on the part of Favato would be a complete defense—inconsistent with his acting knowingly, intentionally, or willfully. These instructions correctly stated the law and permitted Favato to argue his theory of the case regarding good faith accounting practices. Cf. United States v. Flores, 454 F.3d 149, 161 (3d Cir. 2006) ("So long as the court conveys the required meaning, the particular words used are irrelevant.").
I know Favato is a nonprecedential opinion but that is not an excuse for sloppiness in a judicial opinion with important consequences, particularly when the sloppiness is so fundamentally off. The Court says (emphasis supplied): "Where a defendant proves that he had a good faith belief that he did not violate the tax code, regardless of whether that belief was objectively reasonable, he establishes that he did not act willfully." I don't think it is the defendant's burden to prove that he acted in good faith and did not act willfully. That is the Government's burden. While the defendant may have some burden -- perhaps better stated as risk -- if the record does not put good faith in issue, if the record does put good faith in issue, it is not the defendant's burden to prove anything. The Government must prove willfulness which means proving that he did not act in good faith. I have no idea whether, on balance, the actual instructions given fairly presented that concept, but the Court of Appeals surely botches it.
I note in this regard that good faith is not an affirmative defense in a criminal case (although it is commonly characterized as a defense). Surely if the defendant affirmatively proves good faith, he is entitled to acquittal because willfulness cannot exist if there is good faith. The issue here, however, is where the risk lies with respect to good faith properly before the jury where the evidence does not affirmatively establish the defense but the record does not establish lack of good faith (willfulness) beyond a reasonable doubt. It should be with the Government.
In Gall, the Supreme Court emphasized that appellate courts must play a deferential role when reviewing sentences and stated that "[t]he fact that the appellate court might reasonably have concluded that a different sentence was appropriate is insufficient to justify reversal of the district court." Id. at 51. The Court reasoned, in part, that a "sentencing judge is in a superior position to find facts and judge their import under § 3553(a) in the individual case" because "[t]he judge sees and hears the evidence, makes credibility determinations, has full knowledge of the facts [*18] and gains insights not conveyed by the record." Id. (internal quotation marks omitted). Moreover, because the Guidelines are only advisory, the Supreme Court made clear that appellate courts cannot "require 'extraordinary' circumstances to justify a sentence outside the Guidelines range" or use a "rigid mathematical formula . . . as the standard for determining the strength of the justification required for a specific sentence." Id. at 47.
If [a district court] decides that an outside-Guidelines sentence is warranted, he must consider the extent of the deviation and ensure that the justification is sufficiently compelling to support the degree of the variance. We find it uncontroversial that a major departure should be supported by a more significant justification than a minor one. After settling on the appropriate sentence, [a district court] must adequately explain the chosen sentence to allow for meaningful appellate review and to promote the perception of fair sentencing.
Id. at 50. The principle that "a major departure should be supported by a more significant justification than a minor one," id., applies regardless of whether the district court is varying above or below the advisory Guideline sentence. See id. at 43 (explaining that the defendant had a Guideline range of 30 to 37 months imprisonment but that the district court varied downward and imposed a sentence of 36 months probation).
I previously wrote on the proposal adopted by the U.S. Sentencing Commission regarding unclaimed deductions and credits. See Sentencing Guideline Amendment on Unclaimed Credits, Deductions and Exemptions (Federal Tax Crimes 4/13/13), here. I thought I would do an update here, based on USSC Amendments to the Sentencing Guidelines (4/30/12) (compilation of the unofficial text of the amendments), here.
The amendment resolves the conflict by amending the Commentary to §2T1.1 to establish a new application note regarding the consideration of unclaimed credits, deductions, or exemptions in calculating a defendant's tax loss. This amendment reflects the Commission's view that consideration of legitimate unclaimed credits, deductions, or exemptions, subject to certain limitations and exclusions, is most consistent with existing provisions regarding the calculation of tax loss in §2T1.1. See, e.g., USSG §2T1.1, comment. (n.1) ("the guidelines contemplate that the court will simply make a reasonable estimate based on the available facts"); USSG §2T1.1, comment. (backg'd.) ("a greater tax loss is obviously more harmful to the treasury and more serious than a smaller one with otherwise similar characteristics"); USSG §2T1.1, comment. (n.1) (allowing a sentencing court to go beyond the presumptions set forth in the guideline if "the government or defense provides sufficient information for a more accurate assessment of the tax loss," and providing "the court should use any method of determining the tax loss that appears appropriate to reasonably calculate the loss that would have resulted had the offense been successfully completed").
The new application note first provides that courts should always account for the standard deduction and personal and dependent exemptions to which the defendant was entitled. The Commission received public comment and testimony that such deductions and exemptions are commonly considered and accepted by the government during the course of its investigation and during the course of plea negotiations. Consistent with this standard practice, the Commission determined that accounting for these generally undisputed and readily verifiable deductions and exemptions where they are not previously claimed (most commonly where the offense involves a failure to file a tax return) is appropriate.
The new application note further provides that courts should also account for any other previously unclaimed credit, deduction, or exemption that is needed to ensure a reasonable estimate of the tax loss, but only to the extent certain conditions are met. First, the credit, deduction, or exemption must be one that was related to the tax offense and could have been claimed at the time the tax offense was committed. This condition reflects the Commission's determination that a defendant should not be permitted to invoke unforeseen or after-the-fact changes or characterizations — such as offsetting losses that occur before or after the relevant tax year or substituting a more advantageous depreciation method or filing status — to lower the tax loss. To permit a defendant to optimize his return in this manner would unjustly reward defendants, and could require unjustifiable speculation and complexity at the sentencing hearing.
A new tax procedure blog, Procedurally Taxing, here, has a new blog entry written by Professor Leslie Book, here, titled Cheating and Visibility on Taxes: IRS Efforts to Regulate Tax Return Preparers Should Continue (Procedurally Taxing 8/6/13), here.
It comes as no surprise that people cheat on their taxes. There is a rich literature discussing tax noncompliance, analyzing its causes and discussing ways that the government can deter, detect and if necessary sanction those who would cheat or help others cheat. I too have contributed to the discussion, primarily considering the role that commercial preparers play in decisions to comply with our tax laws in research reports commissioned by the Taxpayer Advocate Service and made part of the National Taxpayer Advocate Reports to Congress in 2007 and 2008.
The blog entry then follows with some very interesting insight and research on cheating and how the findings of this research can be deployed by increasing visibility in tax settings. I particularly commend to readers the Halloween research study. Visibility is enhanced through information reporting and the IRS's return preparer initiatives, one facet of which is in play in the recent Loving case now on appeal to the D.C. Circuit.
The Department of Justice is investigating banks, including Credit Suisse Group AG (CSGN) and Julius Baer Group Ltd. (BAER), after last year indicting Wegelin & Co. UBS AG, Switzerland’s largest bank, avoided prosecution in 2009 by paying $780 million, admitting it aided U.S. tax evasion and handing over data on 4,500 accounts. S&P didn’t disclose a figure for Basler’s legal costs, which the ratings company said would be offset by earnings.
Caveat, this discussion should be considered in light of a subsequent blog, IRS Authority to Settle After Referral to DOJ Tax (Federal Tax Crimes Blog 11/11/13), here.
In United States v. Jackson, 2013 U.S. App. LEXIS 1674 (3d Cir. 2013), here. This is a non-precedential opinion, but it has a interpretation of a key provision of the statute dealing with the interface of DOJ Tax and the IRS.
The facts are simply stated. The IRS referred a case to DOJ Tax to obtain a judgment against a taxpayer on a tax assessment. DOJ Tax obtained the judgment and thereafter seems to have sent the case back to the IRS for collection action on the judgment. The taxpayer and the IRS interacted. I am deliberately fuzzy about that interaction. It seems, however, that the taxpayer filed returns for at least some of the relevant years indicating less tax due and made payments. The IRS apparently accepted the returns and abated the tax (apparently the IRS just processed and abated without substantive consideration). Importantly, the IRS abated without DOJ Tax consent. The taxpayer claimed that the result of the interaction was that the IRS compromised or affirmatively abated he tax liability (which might mean that the only way the IRS could restore the assessment was to invoke the deficiency procedures if there were sufficient time on the statute). The taxpayer then moved to have the judgment declared satisfied.
The Secretary may compromise any civil or criminal case arising under the internal revenue laws prior to reference to the Department of Justice for prosecution or defense; and the Attorney General or his delegate may compromise any such case after reference to the Department of Justice for prosecution or defense.
Jackson's main contention is that the IRS abated his tax liabilities. Under 26 U.S.C. § 7122(a), the IRS "may compromise any civil or criminal case arising under the internal revenue laws prior to reference to the [DOJ] for prosecution and defense; and the Attorney General or his delegate may compromise any such case after reference to the [DOJ] for prosecution or defense." However, "[o]nce a tax matter is referred to the [DOJ], only the Attorney General or a person to whom authority has been delegated by the Attorney General may settle the matter." United States v. Forma, 784 F. Supp. 1132, 1139 (S.D.N.Y. 1992); see also Slovacek v. United States, 40 Fed. Cl. 828, 833 (1998) (agreeing with Forma); Int'l Paper Co. v. United States, 36 Fed. Cl. 313, 321 (1996) (agreeing with Forma); Brubaker v. United States, 342 F.2d 655, 662 (7th Cir. 1965) (determining that excess tax "liabilities cannot be compromised by the Attorney General or the [DOJ] unless and until the Commissioner refers [the matter] to the [DOJ] for prosecution or defense"); cf. Bergh v. Dep't of Transp., 794 F.2d 1575, 1577 (Fed. Cir. 1986) (noting that a compromise is "within the discretion of the agency conducting the litigation").
In United States v. Brock, 2013 U.S. App. LEXIS 15574 (7th Cir. 2013). here, the Seventh Circuit offers a good summary of the marital privileges that can be invoked to prevent one spouse from testifying adversely to the other. The opinion is a good succinct read.
1. General Justification for Spousal Privileges.
The general societal value supported by the spousal privileges is the integrity of the marriage unit. The justification for the particular subset of marital privileges are usually more fine-tuned than that, focusing on the nature of the testimony, its potential adverse effect on the marriage unit or marriage in general, and harm to society that justifies the privilege to deny access to information in dispensing justice. For present purposes, readers should just recall that it is the marital unit and the societal value of fostering the marital unit that justifies these privileges.
The spousal or marital confidential communications privilege covers “information privately disclosed between husband and wife in the confidence of the marital relationship" Trammel v. United States, 445 U.S. 40, 51 (1980). The societal benefit is to ensure that spouses communicate confidentially without fear of exposure in court. Either spouse “may invoke the privilege to avoid testifying or to prevent the other from testifying about the privileged communication.” Either spouse may assert this privilege as to both that spouse’s communications to the other spouse and the other spouse’s communications to that spouse.
[T]he protected subject matter includes only what one spouse communicates to the other, not what one spouse learns about the other in other ways, such as by observing the other's actions. In Mr. Brock's trial, the marital communications privilege could have applied to Mrs. Brock's testimony that he told her to take two guns from their home and put them in a car. It would not have applied to her testimony about Mr. Brock handling the guns or shooting possums.

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