Source: https://federaltaxcrimes.blogspot.com/2011/12/
Timestamp: 2019-04-24 19:52:56+00:00

Document:
In Princeton Strategic Investment Fund, LLC v. United States, 2011 U.S. Dist. LEXIS 147339 (ND CA 2011) (will post a copy when I get a non-copyrighted copy), the principal issue was whether, in a civil TEFRA partnership case, a partnership was bound by the doctrine of collateral estoppel because of the prior convictions of principals affiliated with the partnership. The criminal case was the criminal convictions of Messrs. Robert Pfaff, John Larson and R. J. Ruble. (I refer to this criminal case as United States v. Pfaff (see prior blog on the Second Circuit's affirmance, here.) United States v. Pfaff was the remnant of the much larger indictment in United States v. Stein in which 13 of the defendants were dismissed for prosecutorial abuse. (See United States v. Stein, 541 F.3d 130 (2d Cir. 2008).) These cases arose from the KPMG related shelters, principally the BLIPS shelters.
Messrs. Pfaff and Larson were principals in the firms controlling the partnership and thus all the decisions regarding the BLIPS transaction. More importantly, they were convicted of a count of conviction for tax evasion with regard to the partnership and tax losses in question. So the issue was whether the partnership would be collaterally estopped because of their convictions.
There is an aphorism that the law is what the Supreme Court says it is. That aphorism probably means whatever the speaker or listener thinks or wants it to mean. To me, it does not mean that the Supreme Court makes decisions guided only by the world view of a majority of its Justices, but simply that, ultimately, the pronouncement of the majority as to the meaning of the law is the law. The role of the majority's world view is much more complex.
Ms. Greenhouse's article is Linda Greenhouse, What We Think About When We Think About the Court (NYT Opinionator 12/28/11), here.
In United States v. Cadet, ___ F.3d ___, 2011 U.S. App. LEXIS 25144 (2d Cir. 2011), here, the Second Circuit addressed several criminal tax issues that, while not particularly exceptional, offers good reminders to readers.
First the background of the case. The defendant was a return preparer who, allegedly, falsified tax returns for his clients. As the case went to trial, the charges were 20 counts for Aiding and Assisting, Section 7602(2) for claiming false deductions for the clients. The defendant was convicted of 16 counts and sentenced to 41 months incarceration and 36 months of supervised release.
The Court first addressed Rule 404(b) bad or other acts evidence. (Other acts may be a bit of a euphemism, since the whole point is for the prosecutor to bring bad stuff about the defendant to the jury's attention to influence their decision to convict.) The evidence was an IRS agent's testimony that, in a sting operation, upon the IRS agent's statement of concern about the indicated tax payment due, the defendant had offered to use "creative financing" -- really false deductions -- that reduced the indicated tax liability and generated an indicated refund. So the agent testified, the defendant generated this discussion and charged a higher fee for the indicated results.
Don Clark and Stephen Miller, An Eye for Investments and an Ear for Bluegrass (WSJ 12/20/11), here.
Adam Lashinsky, Sr., Remembering Warren Hellman (CNNMoney 10/19/11), here.
David R. Baker, Warren Hellman, financier and philanthropist, dies at 77 (SFGaste 10/19/11), here.
In Warren Hellman we are reminded that those of outsized achievements can be mensches as well.
In addition to the link on the bottom right to the Hardly Strictly Bluegrass web site, here is the link to the Facebook page.
In ILM 201150029 (11/9/11), the IRS concludes that the Section 6677 penalty for failing to file a foreign trust information return is not divisible for purposes of conferring jurisdiction in a refund suit upon payment of less than the entire amount. The divisible tax concept deals with the predicates for litigating liability for the tax. The divisible tax concept mitigates the so-called Flora rule (Flora v. United States, 362 U.S. 145 (1960)) which generally requires full payment before a refund suit may be brought. For example, the trust fund recovery penalty (TFRP) is a divisible penalty per employee per quarter and thus, upon the IRS's assessment of the TFRP, the taxpayer may pay a relatively minimal amount of one quarter's assessment to litigate in a refund suit. The IRS's conclusion in this new ILM, if accepted by the courts, will make litigation of the Section 6677 penalty more onerous and, depending upon the taxpayer's financial condition, perhaps prohibitive. Astute readers of the ILM will be able to pick up and attempt to exploit counter-arguments.
Section 6048 contains three distinct and separate reporting obligations. First, under section 6048(a), a responsible party must inform the Service of each occasion upon which a U.S. person creates a foreign trust, transfers money or property to a foreign trust, or when a citizen or resident of the United States dies if the decedent owned a portion of a foreign trust. Second, under section 6048(b), a U.S. person treated as owning a foreign trust under the grantor trust rules (sections 671 through 679) must report information with respect to that trust and also must ensure that the trust itself reports information to the Service and to each U.S. person treated as owning, or receiving a distribution from, the trust. Lastly, under section 6048(c), any U.S. person who receives a distribution from a foreign trust during the taxable year must report information about that distribution to the Service.
In an affidavit filed in the California case in October, Josephine Bonaffini, the Federal/State Coordinator for the IRS’ Estate and Gift Tax Program, said the agency has so far examined 658 taxpayers identified as transferring property to relatives and concluded that 238 of them should have, but didn’t, file Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return. Twenty of those delinquent filers have already been assessed extra tax because they had exceeded the amount each person is allowed to transfer gift tax free, she said.
Sound like fertile ground for targeted use of limited audit resources.
The most famous use of the John Doe Summons -- at least in recent history -- is its use for offshore financial institutions, starting famously with the attack on the use of offshore credit cards and progressing most recently to its use against certain offshore banks, most prominently UBS.
In United States v. Kozeny, 667 F.3d 122 (2d Cir. 2011), here, the Second Circuit addressed the conscious avoidance concept in the context of an FCPA conviction which requires that the defendant act knowingly. I won't slice and dice here the theoretical differences, if any, between the element knowingly and the element willfully in tax crimes, for that distinction is irrelevant to the points I make in this blog entry. Suffice it to say that I believe that the conscious avoidance concept applies the same in both contexts.
The FCPA provides that a person's state of mind is knowing with respect to conduct, a circumstance, or a result if, and I'm quoting from the statute, the FCPA, if such person is aware that such person is engaging in such conduct; that such circumstance exist [sic] or that such result substantially is certain to occur, or such person has a firm belief that such circumstances exist or that such result is substantially certain to occur. That's the end of the quote.
When knowledge of existence of a particular fact is an element of the offense, such knowledge may be established when a person is aware of a high probability of its existence, and consciously and intentionally avoided confirming that fact. Knowledge may be proven in this manner if, but only if, the person suspects the fact, realized its high probability, but refrained from obtaining the final confirmation because he wanted to be able to deny knowledge.
On the other hand, knowledge is not established in this manner if the person merely failed to learn the fact through negligence or if the person actually believed that the transaction was legal.
The IRS published yesterday temporary and proposed regulations regarding the Section 6038D filing requirement. As previously noted, the Form 8938 is used, and will commence for tax years after March 18, 2010. The IRS web page for the Form 8938 is here. The IRS explains in a web page titled Explanation of Section 6038D Temporary and Proposed Regulations, here. The actual proposed and temporary regs are here and here, respectively, The following is from the version of the IRS Explanation web page dated 12/15/11, with some of the items simply cut and pasted from that web page:.
A new case, United States v. Clayton, 2011 U.S. Dist. LEXIS 144031 (MD NC 2011), just in time for the Christmas season, offers a reminder about the confluence of tax and the bankruptcy discharges. Generally, debtors are entitled to take bankruptcy and be discharged from their debts. The operative word here, of course, is generally. And, specifically with regard to tax debts, debtors may often be discharged from their tax debts. The operative word here is often.
Income taxes of individuals are not discharged for taxes in the following categories: (i) taxes where the due date for the return is within three years of the date the bankruptcy petition was filed; (ii) taxes due for a year for which no return was filed; (iii) taxes for a year for which a delinquent return was filed within 2 years of the bankruptcy petition date; and (iv) taxes (but not penalties) attributable to a fraudulent return or an attempt to evade or defeat the tax; and (v) taxes assessed within 240 days of the date of filing the bankruptcy petition, plus any time plus thirty days during which an offer in compromise was made within 240 days after the assessment was pending.
Clayton focuses on the procedure for the discharge in the context of the Government's claim that Section 523(a)(1) exempted the tax in question from discharge. That section exempts tax where "the debtor made a fraudulent return or willfully attempted in any manner to evade or defeat such tax." (The disjunctive "or" describes arguably different culpable acts, and that disjunctive is relevant to one argument made in Clayton.).
I have written before about government attempts to end run the strictures of FRE Rule 404(b) by arguing that the evidence in question, even if of the type the Rule 404(b), here, would prohibit, could still be admitted if it is intrinsic to the crime(s) charge. This type of evidence is usually prejudicial to the defendant which is why the prosecutors want it in and the defendant does not want it in. We have posted that the Seventh Circuit, having previously sanctioned an "inextricable intertwinement" test of intrinsic evidence, had backed away from that test. See Seventh Circuit Sounds the Death Knell for Inextricable Intertwinement as End-Run Around Rule 404 and 403 (8/3/10), here.
Rule 404(b) does not apply "to evidence of acts which are 'intrinsic' to the offense charged." Fed. R. Evid. 404(b) advisory committee's note to 1991 amendments. The Third Circuit recently rejected the definition of "intrinsic evidence," common in other circuits, as evidence that is "inextricably intertwined" with the charged offense. United States v. Green, 617 F.3d 233, 248 (3d Cir. 2010), cert. denied, 131 S. Ct. 363 (2010). n2 In Green, the Third Circuit held that the "intrinsic" label applies only to two narrow categories of evidence. The first category is evidence of uncharged acts that directly proves the charged offense. The second category is evidence of uncharged acts performed contemporaneously with the charged crime that "'facilitate the commission of the charged crime.'" For example, in a hypothetical case where the defendant is charged with the sale of contraband, the defendant's necessary possession of that contraband would be a facilitating act. Evidence of other acts outside of these two narrow categories is extrinsic.
n2 The Third Circuit has distinguished its definition of intrinsic evidence from "most courts of appeals," which "hold that acts are 'intrinsic' to the charged offense if they are 'inextricably intertwined' with that offense." Green, 617 F.3d at 245. Before renouncing the "inextricably intertwined" test in Green, the Third Circuit critiqued the definitions of intrinsic evidence as either inextricably intertwined with the charged offense or completing the story' of the charged offense as too narrow and too broad, respectively. However, the Green Court noted that it is unlikely that our holding will exclude much, if any, evidence that is currently admissible as background or 'completes the story' evidence under the inextricably intertwined test.
In ILM 201146017 (10/14/11), here, the IRS concludes that it may summons a taxpayer's electronic data files (or backup files) in order to obtain associated metadata. That is the bottom-line conclusion, but the ILM applies the rule in several discrete circumstances.
Generally, metadata is information that describes how, when, and by whom a particular item or set of electronic information was collected, created, accessed, modified, and formatted. The questions above arise in the context of examinations of taxpayers that keep their business records electronically with metadata automatically created as an integral part of the records. In many instances, the Service's examinations would be advanced by accessing metadata that identifies the original date a transaction was entered in the electronic records, the dates of any changes to the entries, and the username of the person who made the entries. The value inherent in an examiner's ability to obtain the date and source of recorded entries is self-evident; the information tends to support or undermine the credibility of the entries in the business records.
See also for types of metadata, the Wikipedia entry on Metadata, here.
There has been a lot of speculation all over the lot about what the IRS will do on so-called opt-outs from the OVDI and OVDP. Much of the speculation is that the IRS will be draconian in determining the presence of willfulness for the FBAR willfulness penalty or in applying the FBAR nonwillful penalty. I personally do not think the IRS will be draconian, but realize that that conclusion is in the eye of the beholder.
I offer this blog entry so that readers can offer real world experiences as to what has happened to them (or, if in process, what is happening to them) after they opt out. I hope readers will also offer hints and strategies as to how others might mitigate the damage on the opt out. There is a lot of angst, particularly in the taxpayer community, about the opt out process. I hope that the comments will offer some comfort to those in the stage of considering whether to opt out or, having made the decision, are at the early stages of the process.
Readers might want to review other blogs relating to the opt out process, which I collect under the links below.
"Opting Out" #2 (3/2/12), here.
Our understanding of the statutory elements as expressed in Palivos and Hooks appears to be in tension with the text of the statute. Section 7206(2) literally says that a person commits the crime by assisting in "the preparation or presentation" of fraudulent documents in connection with matters arising under the internal revenue laws. This court and the Ninth Circuit, however, read the statute in the conjunctive to require that a defendant assist in both preparing and filing the document. See United States v. Kellogg, 955 F.2d 1244, 1248-49 (9th Cir. 1992) (citing United States v. Dahlstrom, 713 F.2d 1423, 1429 (9th Cir. 1983)). Five other circuits appear to have a contrary view. Three circuits have held—although two of them in unpublished decisions—that preparing a fraudulent return or other document, whether or not filed, is sufficient to violate the statute. United States v. McLain, 646 F.3d 599, 604 (8th Cir. 2011); United States v. Borden, 269 F. App'x 903, 904-05 (11th Cir. 2008) (nonprecedential decision); United States v. Feaster, 843 F.2d 1392, 1988 WL 33814, at *2 (6th Cir. Apr. 15, 1988) (nonprecedential decision). Two other circuits have expressed doubt that the act of filing is an essential element under § 7206(2); both courts hold that even if filing is an element, that element is met when a defendant gives a false return to a third party who is obligated by law to file the return with the IRS. United States v. Cutler, 948 F.2d 691, 694-95 (10th Cir. 1991); United States v. Monteiro, 871 F.2d 204, 209-10 (1st Cir. 1989). It is not necessary to resolve this issue here because there is no question that Joyner-Williams both prepared and filed false tax returns. Moreover, the district court instructed the jury using this court's conjunctive reading of § 7206(2), which, as recognized by the circuits that disagree with us, is more favorable to defendants than the statutory language would seem to permit.
In United States v. Stierhoff, 2011 U.S. Dist. LEXIS 138418 (D RI 2011), decided 11/30/11, the defendant was a stalker who also had failed to report and pay tax. He was convicted by the state of Rhode Island for stalking. The feds then slammed him with indictment for income tax evasion of approaching $460,000. He was convicted. He appealed. He lost. United States v. Stierhoff, 549 F.3d 19 (1st Cir. 2008). Stierhoff took another grasp with a motion "a motion to vacate, set aside or correct a sentence pursuant to 28 U.S.C. § 2255." He lost again. United States v. Stierhoff, 2011 U.S. Dist. LEXIS 138418 (D RI 2011).
What was his most recent gripe? He claimed his right to effective representation was denied. That is usually done in a 2255 proceeding, so nothing unusual here. As the court noted, "Success on a claimed violation of the right to effective representation of counsel requires a showing of both "deficient performance by counsel and resulting prejudice." [Citations and quotes omitted] He urged a number of failures by his trial counsel, but the only failure the court could find was his failure to meet the requirements for success.
He raised several points which I find generally unexceptional, but one of his arguments does address a theme I have discussed before -- the interplay between a Cheek good faith defense and the need for a defendant to testify in order to successfully assert the defense. See my prior blog Making a Cheek Good Faith Defense without Testifying (11/24/11), here.
that trial counsel was ineffective because he advised Stierhoff not to testify and thus failed to have Stierhoff testify about whether he believed he had a legal duty to pay taxes. Likewise, Stierhoff claims that appellate counsel was ineffective for failing to raise the issue. Stierhoff argues that this testimony would have been particularly important to disprove willful intent. Stierhoff contends that trial counsel did not explain to him that the "only way . . . to... counter the substantial amount of circumstantial evidence" would be for him to testify about his good faith belief that he was not violating tax law.
Amir Zavieh, a naturalized citizen and resident of San Francisco, has been indicted in the Southern District of Florida. The indictment is here and the DOJ press release is here. I have only been able to review the indictment lightly, but I do note that Renzo Gadola, a former Swiss banker cooperating with the Government plays a prominent role as an alleged co-conspirator. For prior blogs on Gadola, see here. It is payback time for DOJ's generosity to Gadola! And Gadola's former sidekick, Martin Lack, is involved as well, also named an alleged co-conspirator. Lack is or was a Swiss banker who was indicted in August. See my prior blog, New Swiss Enabler Indictment (8/2/11), here. Last I heard, Lack is on the lam and likely to remain so.
It is a familiar pattern of skulduggery and trying to avoid detection. For those with time on their hands, the alleged Overt Acts of the conspiray may be a good cure for insomnia (alright it is interesting to some tax crime afficionados).
The purpose of today's blog entry is to offer to readers of this blog only some anecdotal indications of what to do if a reasonably complete package cannot be posted by tomorrow. Readers must understand that these are only anecdotal indications of what to do and in no way binds the IRS.
First, and probably the most direct way to get some indication from the IRS is to call the OVDI Hotline or some other person associated with the process. At the recommendation of a fellow practitioner, I yesterday called Carl Barkow, OVDI Supervisor in Austin (512) 460-8953. Basically, he said that, in the event that despite due diligence, the taxpayer is unable to submit a reasonably complete package, the taxpayer should submit whatever he or she could submit, along with a cover letter explaining why the package is not reasonably complete and then submit the other items no later than 12/31/11. I gave him my name, but I don't think he recorded it, and he did say that he was getting a number of calls on this and was giving this advice / suggestion. So, I think this advice was intended to be generic and not specific to me or my client.
I have written before on the mens rea requirement for most tax crimes -- willfullness, defined as the intentional violation of a known legal duty. This requirement asks what the actor intended in doing that which, together with the this mens rea, the law criminalized (e.g., in the case of evasion, a tax due and owing and an affirmative act of evasion).
How does one prove or disprove the existence of the required intentional violation of a known legal duty? Unless the defendant admits his or her intent, the Government makes its case on circumstantial evidence that permits a jury to infer beyond a reasonable doubt the existence of the intent. The defendant must either then testify as to his or her lack of such intent or introduce rebuttal evidence that will permit and hopefully convince the jury to conclude that the Government's circumstantial evidence is insufficient.
In a prior blog, I discussed the issue related issues of the role of good faith. Good faith, if present, proves that the defendant did not have the required intent -- the required intent to violate a known legal duty. See my prior blogs on this issue here. Readers will recall that defendants will usually want a specific good faith instruction in addition to the general willfulness instruction which subsumes the good faith defense.
In a recent nonprecedential opinion, United States v. Abramson-Schmeiler, 2011 U.S. App. LEXIS 23789 (10th Cir. 2011), here, the Court addressed variations on this theme. The defendant attempt to introduce lay opinion testimony from the defendant's tax accountant. The defendant sought to have the accountant testify that "if the payments were underreported that he didn't believe that she did it on purpose." The trial court summarily refused to permit the testimony.
Michael A. Hase, whose guilty plea was previously discussed here, was sentenced on 12/2/11. The blog discussing the guilty plea Another UBS Client Pleads -- With the Baggage of Illegal Income (9/27/11), here. I have seen the DOJ press release but it is not yet posted on the DOJ Tax press release site. When it is posted, I will link it here. But readers should note particularly that this is an atypical case because of the key charge of Theft of Government Property which probably skewed the sentencing results toward greater punishment. Had this been a tax related charge (some tax charge(s) without the other charge), I would not have expected, for example, an incarceration sentence of 29 months.
Guilt: By Plea Agreement - 2 counts - theft of government property 18 USC 641 (one count); tax perjury (Section 7206(1)) (1 count covering 10 years).
FBAR Penalty: $1.937,767 + (Based on 50% of the indicated highest balance of $3,875,934 in 2006).
I will update the spreadsheet later.
As reported, the relief is only for U.S. / Canadian dual citizens living in Canada. I can understand why such dual citizens living in the U.S. would be excluded, but what about such dual citizens whose center of gravity was in Canada but they resided outside both the U.S. and Canada?
The second test they must past is that they owe no U.S. taxes. Under the two initiatives to date, U.S. persons (regardless of dual nationality) could be penalized even if they owed no U.S. tax (usually because of foreign tax credits or related deductions that might have offset any offshore income); if they failed to report the income even though owing no additional tax, they were subject to penalty. So this is some relief that would be available.
While the IRS spokesperson didn't provide any details on what that guidance will provide, Jacobson said in the Globe and Mail interview that the IRS will make it clear that if a dual citizen living in Canada files a U.S. tax return late and owes no taxes, there will be no penalties for failure to file. The guidance also will provide that those who were unaware of the FBAR filing requirement will be able to file previous reports now, along with a statement explaining why they're filing late, and that no penalty will be imposed if the IRS determines that there is reasonable cause. Finally, individuals who took part in the IRS's 2011 offshore voluntary disclosure initiative or in the 2009 special offshore voluntary disclosure program will be able to get back penalties already paid, according to Jacobson.
Jacobson said in the interview that it is unclear how many years of back taxes will be covered or what would happen to people who owe relatively small amounts of tax to the IRS.
Barrie McKenna, U.S. taxman to go easy on American residents in Canada (The Globe and Mail 12/2/11), here.

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