Source: https://fallgatterlaw.com/legal-pleadings/motion-to-strike-restitution-claims/
Timestamp: 2019-04-19 08:53:41+00:00

Document:
Motion to Strike – Restitution Claims | Fallgatter Catlin & Varon, P.A.
1. On September 17, Dr. C., through counsel, filed his Motion for Restitution (“C.’s Motion”) .
2. On September 22, Defendants’ filed their Opposition to Motion for Restitution and reiterated that opposition with their October 16, Notice of Opposition to Motion for Restitution.
3. On October 19, Mr. D. filed his Motion for Production of Discovery and Records Relevant to C. Restitution Claims (hereinafter “Motion for C. Discovery”).
4. On October 27, Magistrate Judge held a telephonic conference with the parties, including counsel for Dr. C., and granted D.’s Motion for C. Discovery (which granting was later confirmed by a minute order entered by the Court on November 14). Those orders directed counsel for Dr. C. to comply with the Motion for C. Discovery by November 17.
5. On November 17, contrary to the Motion for C. Discovery and contrary to the orders of the court, C. filed his “C.’s Supplement to Motion for Restitution. As the title itself signifies, this “Supplement” is merely a supplement to the C. Motion – and does not comply with the discovery requests or orders. Indeed, this C. Supplement wholly fails to comply with either the discovery motion or the orders granting said motion, notwithstanding the assurances of counsel for C., at the October 27, telephonic conference he would fully comply.
6. However, in a second telephonic conference, held on November 28, Magistrate M. effectively rescinded his earlier order, and instructed counsel for Dr. C. he would only be obliged to produce records related to the “IRS Penalty” set forth in the two C. pleadings but, since C. had the burden of proof, should he fail to prove he is due restitution, the Court would deny his requests.
b. Attorney Fees – W. [items # 6 and 7 of the C. Motion].
a. “principal amount stolen” (and the corresponding “Interest on principal amount stolen) [items # 1 and 2 of the C. Motion] [see our analysis in Part B, infra].
b. “IRS Penalty” (and the corresponding “Interest on IRS penalty) [items # 3 and 4 of the C. Motion] [see our analysis in Part C, infra].
c. “J. & S. lawyer fees/costs” [item # 8 of the C. Motion] [see our analysis in Part D, infra].
d. “settlement with L. L. B.” [item # 9 of the C. Motion] [see our analysis in Part C, infra].
10. Of course, the burden of proof as to the amount of compensable loss sustained by an alleged victim lies with the “attorney for the Government.” 18 U.S.C. §3664(e).
Mr. R.: First, I do agree Your Honor that the items that involve loss of the corpus that had been put in the insurance company don’t have anything to do with this criminal case, it involves tax issues.
The Court: Don’t have anything to do with restitution, determination of restitution. Right, are unrecoverable by restitution because they are not direct.
Transcript of Sentencing Hearing, Vol. I (p. 10:13-19) (emphasis added).
12. Thus, not only was the Motion for C. Discovery necessitated for reason that the original C.’s Motion for Restitution provided no explanation or basis for his restitution request – but because Judge M. made it entirely clear, as does the statute, that the investment losses (and, by extension, any attorney fees involved in pursuing those losses), are not compensable under the restitution statute. Thus, it was, and is, incumbent on C. to provide proof (including the requested documentation) his current claims are not extinguished by both the statute and Judge M.’s rulings.
13. That legal requirement, and the proposition that C.’s investment losses are not compensable under the federal restitution statutes, was reinforced by Magistrate M., during the December 4, restitution hearing (regarding the government’s claim for restitution to IRS), at which hearing Judge M. reiterated that investment losses are not a proper subject of restitution, since those investment losses are not directly related to the indictment crime charged.
14. As will be discussed below, that fatal deficiency in the C. restitution claims applies to all of his claims – including the IRS From 3520 penalty – since they are not “directly related” to the charged crime (as required by 18 U.S.C. §§3663 and 3663A), and thus are not recoverable.
15. Although alleging the investment funds (and now the premium) were “stolen,” C. provides no proof of that claim – other than his bare assertion. For that reason, his claim (even if true, which it is not) must fall. He provides no financial statements of the trust, and no accounting records of any kind.
17. In reality, the trust funds, subject to the gains and/or losses to which the C. investments experienced, remained in the trust. However, due to the fraudulent N. litigation brought by C., the trust also had to expend substantial sums to defend itself from these spurious claims, thus depleting the trust.
19. Nor would that failure to file a Form 3520 would not be a Title 18 violation, even if it were charged. It is a Title 26 matter, which is not a statute for which restitution can be awarded. 18 U.S.C. §3663A(c)(1)(A); United States v. Campbell, 552 Fed. Appx. 339, 344 (5th Cir.).
20. Stated another way, and for that reason, it follows that C. cannot meet the “directly and proximately harmed” test of the federal restitution statutes – either factually or legally – especially since C. was the one responsible for filing the 3520 with his own tax returns.
21. Just as with the civil suit C. filed against L. B., at worst, this matter of the 3520 might be addressed in a separate, and unrelated civil suit – but certainly not in the context of criminal restitution. Indeed, we would expect summary judgment against C., should any such civil suit be filed, since it was his responsibility to file. Plus, C. received an annual year-end financial statement, which informed him of all the financial components necessary to complete the 3520.
22. C. purchased his own, individual, legal opinion, from L. B., as to the lawfulness of the BPP structure, and, specifically, the deductibility, under §162, of the premiums he paid for the risk policies. DX 10I (see the §162 reference at p. 1). C. informed the IRS he acquired this personal opinion to assure himself of the “legality of the asset protection plan and the BPP.” IRS Memorandum of Interview (“MOI”) (DX 36B) at ¶6. Indeed, the “Law and Analysis” section of the L. B. opinion explained the deduction must be for an ordinary and necessary business expense. DX 10I, p. 11, ¶4.A. C. then testified at trial he wanted an official opinion of a certified tax attorney, as to whether his premiums were deductible, and he would not sign an official IRS tax form – under penalty of perjury – without such a professional legal opinion, from real tax attorneys. As a result, C. clearly understood any business risk insurance must be “ordinary and necessary” to his business. Id.
23. In obtaining that personal tax opinion, that opinion relied on representations from C. DX 10I, p. 5, ¶2. He assured L. B. the “description of the Transactions … is accurate and complete in all respects.” DX 10I, p. 8, ¶29. In short, he assured L. B. the business risk policies he was purchasing – were valid risks of his business. DX 10I, p. 9, ¶33.
24. Of course, not only did the law require C., as the taxpayer (who has to sign his tax returns, under penalty of perjury) to be the decision-maker as to whether his business needed such risk coverage, but the insurance and trust companies had every client sign the requisite forms, confirming the taxpayer had to make those tax decisions – not the insurance or trust companies. For example, the “Declaration and Agreements” section of his Application for Business Protection (DX 36C), at ¶3, provided that the insurance company makes no representations about the tax deductibility of the premiums paid for this product and advises the applicant to consult a tax professional for such information – which C. did. He consulted with L. B., CPA H. and tax attorney T. L.
26. Asset protection was so important to C., that he would have purchased the BPP risk insurance “even if there was no tax advantage to you.” DX 36R at p. 22.
The Taxpayer’s sole purpose in creating the JDC Family Trust was not for tax avoidance purposes but was for very real and legitimate business reasons, namely to establish a business protection-asset protection trust and to obtain business protection-malpractice insurance coverage so as to be able to perform lasik surgery procedures.
DX 36A at p. JS 0117.
a. Tax law – IRC §162.
b. IRS income tax forms he filed (signed under penalty of perjury).
c. L. B. tax opinion.
d. The certifications and guarantees with F. Trust he signed.
e. His engagement letter with F. & D.
g. His assurances to IRS (during the 3520 penalty dialogue).
29. As a result, C. cannot be heard now to assert his premium was not for a valid business purpose.
30. It cannot be gainsaid that C. had a personal responsibility to file the Form 3520. Proof of that reality comes from countless sources, some of which we will catalog in this section.
31. First, of course, IRS law hold the taxpayer responsible for the filing of his required returns.
As a U.S. person who is considered the owner of any portion of a foreign trust … is responsible for ensuring that complete and accurate returns are timely filed with the Internal Revenue Service.
Doc. 459-4 at 18 (emphasis added).
33. Third, the very first IRS demand regarding the failure to file the Form 3520, likewise informed C. of his obligation to file the Form 3520. Incredibly, although warned of the “35 percent” penalty, and that it increased “$10,000 for each 30-day period,” and given a deadline of “February 20th” to respond, C. ignored this letter – just like he ignored his filing responsibilities.
34. Fourth, as with all tax forms, the 3520 required C. to sign it, as the “person filing this return,” and confirm he was doing so “Under penalties of perjury.” Clearly, C. was the “person” responsible for filing.
35. Fifth, C. had yearend statements from the trust, and thus had a ready ability to file the 3520 (and did).
The CPA failed to file the Form 3520 for the tax year and the IRS assessed a penalty pursuant to IRS section 6677(a).
The … penalty in the amount of $437,500.00, [was] solely attributable to the CPA’s negligence in failing to file the Form 3520 for the tax year.
Doc. 459 at 5 (emphasis added).
First F. … suggests that you retain professional advice before implementing an offshore business or investment plan that included a foreign trust. p. 2 [and, of course, C. did – utilizing the services of CPA H., attorney L., and L. B.].
I hereby warrant … I am subject to applicable Federal, State and Local laws regarding the taxation and reporting requirements of certain financial and business transactions … p. 9, ¶3.
I hereby warrant … that I understand I am personally responsible for any applicable Federal, State and/or Local tax and reporting requirements. p. 9, ¶4.
38. Of course, one of those “federal tax … reporting requirements” is the filing of the foreign trust disclosure form – From 3520.
39. Eight, C. filed his IRS Form 926 – Return by U.S. Transferor of Property to a Foreign Corporation, on 8/7. DX 36A, at JS 0132-0134 CPA H. (who was contracted to file the 3520), also signed as the “Preparer.” Thus, both C. and H. knew they were reporting the transfer of property to a foreign corporation. The fact C. filed that form, reporting that transfer, provides additional compelling proof he knew he had funds in a foreign corporation.
40. Nine, attached as Exhibit 5 is a statement of T. B. confirming the trust company sent C. the form 3520, and it was standard business practice for the company to simultaneously send over the 3520A.
41. As a result, C. cannot be heard now to assert it was not his responsibility to file the form 3520.
42. C.’s [next to] last pleading – “C.’s Restitution Proffer” – attaches, as Exhibit 1, a three-page “Engagement Letter,” dated November 29, in which C. engages F. & D. to provide “international strategic consulting.” Although the “Proffer” fails to explain the relevance of this document, presumably, C. seeks to use it to claim responsibility of D. for the investment losses. However, as noted, those are not compensable.
a. Consultancy Only (p. 3) – F. & D., Ltd. is a consultancy firm only. F. & D., Ltd. does not provide legal advice, investment advice or accounting services.
c. Non-Confidentiality (p. 3) – C. was “encouraged to disclose … to your lawyers, accountants, advisors and other third-parties” the existence of this engagement agreement.
44. Clearly, C. knew, some years ago (and prior to investing his money in the trust), that F. & D. was not being retained to give him any legal, investment, accounting, or tax preparation advice or services. Of course, it is also undisputed that F. & D. had no role in the trusts, let alone have any responsibility for providing 3520A forms to taxpayers. Hence, this effort to place F. & D. into a restitution claim is unfounded.
45. Of course, it must also be observed that F. & D. is not a party to this case, such that, even if their engagement letter had any relevance, it would not apply to Mr. D.
46. The form 3520A is sent to the owner of the trust, who was C. Indeed, even the Amended Form 3520, filed by C.’s tax team (during their efforts to avoid the $700K penalty), listed C. as the “person filing,” and listed his own address – not the address of some CPA.
47. C. relies on an email from CPA H., stating he did not get the 3520A. But that is because the form was sent to C. – not H.. And, as noted above, C. ignored the first demand letter from IRS, and did not even respond until the second letter was sent out two months later. Clearly, C. is, at a minimum, careless about IRS forms and deadlines.
48. Moreover, among the documents provided by counsel for C. (in his December 3 production), is a “2/29 L. Law Firm” transmittal (either to or from C. attorney L.) of the Form 3520-A. Thus, it is clear that C. did have the Form 3520A – and had it an entire year prior to the IRS penalty inquiry, which was sent to Dr. C. – and yet failed to file the 3520.
49. C.’s unsubstantiated claim he did not get the Form 3520A is inconsistent with the standard business practices of the trust company (and/or OTS, their administrative arm, who helps send out the forms). Attached as Exhibit 5 is an Affidavit from Toni Brady, Former Accountant for OTS. Her Affidavit confirms that all Forms 3530 and 3520A were sent out to the appropriate parties “in the course of ordinary course of business.” Importantly, she confirms the “crying wolf” aspect of C.’s claim, noting that, until attorney G. R. reported C.’s spurious claim, no one had ever previously reported any such claim to her. Clearly, this claim is a fabrication.
50. Of course, as a matter of law, even if the trust company failed to provide C. the Form 3520A, it was C. and CPA H. who were negligent in not filing, especially since they had the year-end trust statements, and knew they were supposed to file. If C. truly did not get the Form 3520A, it was incumbent on him to either get it, or file it himself – not ignore it for three years – like he ignored the first IRS penalty notice (for two months).
51. This entire claim by C., regarding the IRS 3520 penalty issue, involves a scam on IRS, by C., who would say anything to avoid the $700K penalty IRS assessed on him.
52. His advocate for this scam was attorney H., who wrote a 20 page letter to IRS. In short, C. offered to rescind his $500,000 premium deduction (and reclassify it as income), for that tax year (2002), if IRS would forgo their $700K penalty. Of course, the scam was that C. had a loss that year of $766,144 – such that “recapturing” $500,000 in “income” still left him $296,144 in the hole. DX 36A at JS 0135 (and DX 36M). Thus, the “recapture of $500,000 in alleged income – did not cost C. a dime.
53. However, C. had, and still has, a $700K motive to fabricate his claims to the IRS, just as he has done with this Court.
54. Notwithstanding this Court’s [amended] order granting discovery, and ordering counsel for C. to produce the IRS records regarding the alleged payment of a “$450,000” “IRS Penalty,” C.’s counsel has failed to do so.
55. Instead, C. claims, without record evidence, “The $700,000 penalty was negotiated down to $437,500 (confirmed by [unidentified] North Carolina counsel.” Doc. 457 at 5.
a. The attached “Protective Filing” Doc. 459 at 4-7 is unsigned, undated, and bears no evidence of authenticity.
b. The email and Protective Filing further confirm the complete absence of any documents from IRS, either confirming (1) the alleged “penalty in the amount of $437,500.00,” or (2) that C. ever paid that sum.
57. In short, no checks, notices or receipts from IRS, or any other documentation has been provided establishing that (1) IRS imposed this penalty, or that (2) C. paid this sum.
58. Thus, there are no records to confirm this number, the “North Carolina counsel” was not identified, and, remarkably, the latest $437,500 claim is contrary to the 450,000 claim set forth in Declarations in the two prior filings. Doc. 389 and 443.
59. In short, there is a complete failure of proof as to either the IRS penalty, or whether it was paid.
60. As noted, the original discovery order compelling C. to produce records of the L. B. settlement has been rescinded.
61. However, the C. Supplement reports a “gross recovery [of] $3 million” from L. B. As such, that amount exceeds the claimed IRS penalty of $450,000 by a factor of six. C. cannot claim restitution against the defendants, when he has already recovered six-fold from L. B.
62. Among the records produced (on December 4) by C., is a letter dated October 17, from one of his many attorneys, to IRS, seeking, under the “doctrine of equitable recoupment,” that IRS give a credit for Dr. C. for the tax penalties he claims were paid. Thus, it appears that C. may be successful in eliminating his [unsupported] claim he paid a penalty to IRS. If so, then, of course, there would be no loss (assuming that penalty was a compensable forfeiture loss, which, for the reasons set forth herein, it is not).
63. Thus, any claim by C. should be suspended, pending a determination by IRS as to whether they will honor his latest request.
64. C. advances a one sentence claim the $500,000 premium is a compensable forfeiture loss, merely, and inexplicably, asserting “The Defendants appear to concede that the $500,000 ‘insurance’ premium is recoverable, as the verdict concluded the insurance was a sham.” Doc. 457 at 1. Defendants have not, and do not, make any such concession.
65. Just as with the “investment” losses claim, this claim is legally barred. The defendants were not charged with insurance fraud, and C. was never asserted to be a victim of insurance fraud.
66. In short, “insurance fraud” is not the offense of conviction, any more than the “investment fraud” is the offense of conviction. The indictment charged only tax fraud. Thus, the prerequisite to a restitution recovery is absent, since this claimed “loss” is not directly related to the only crime charged – tax fraud.
67. This analysis is set forth above, in Part C.3., supra. In short, C. cannot assure IRS this premium was ordinary and necessary, and now claim a refund of the premium.
68. As noted above, C. never made a claim against his malpractice policy. Thus, he received the benefit of the insurance, and has no standing to claim a refund, 15 years later.
69. This analysis is set forth above, in Part C.5., supra. In short, C. is not permitted a double recovery.
70. The only documents provided in support of this claim were various cryptic time sheet entries for costs and fees incurred by Dr. C. by the J. firm. However, no records proving said costs or fees were “incurred during participation in the investigation or prosecution of the offense or attendance at proceedings related to the offense” (as mandated by the discovery motion and orders, as well as the restitution statute) were provided.
71. Indeed, the billing records commence on December 1 – well before any criminal investigation was made public (and, indeed, seven years prior to the indictment).
72. Nor do any of the records confirm whether the costs or fees are related to the very “Principal Amount Stolen” alleged as the very first entry in the Declaration attached to the original C. Motion, and thus are not recoverable. Presumably, since at least 3/4th of the “restitution” claimed by C. is based on the non-recoverable investment losses, it follows that the attorney fees and costs for the J. firm surely involved that same non-recoverable category.
73. More to the point, attached hereto as Exhibit 1 is a copy of the J. time sheets on which we have highlighted all the entries that apply to the very litigation C. has correctly abandoned as a restitution claim.
75. C., having correctly abandoned any claim for attorney fees for attorneys who were not working on matters “directly” related to the charged indictment, cannot then properly seek recovery for the attorney fees for Mr. J., when working with those same attorneys.
76. For example, regarding attorney H. (whose attorney fees have been abandoned), Mr. J. has 19 entries for conferring with H. – starting the very month J. was hired (that is, 12/06), through 7/10 (a period of 4 years). Mr. J. started on “discovery” the very next month (1/07), so, clearly, that was the purpose of his engagement – not to work on restitution in a criminal case. Moreover, the 11/16 entry was to review the very time sheets for H. C. has now withdrawn – but, nevertheless, want to claim J.’s time for reviewing H.’s time sheets? That is illogical and improper. Clearly, none of that time is compensable.
77. Similarly, regarding C. (the N. litigation), the J. billings assert compensation for 12 entries for dealings with C., starting 6/10, and extending to 7/17 – a period of 7 years.
78. The J. billings also recite civil discovery – related to these unrelated pieces of litigation. There are 7 entries for discovery, starting in January – some years prior to our indictment. Those entries are clearly part of his dealings with either H. or N. counsel.
79. There are additional entries for dealings with attorney C., who is a L. B. attorney. Hence, it follows those entries are dealing with litigation with L. B., over the corpus of the investment funds. Just as recovery for investment funds is not compensable, neither is attorney time seeking that recovery. However, Mr. J. seeks recovery for entries for J. communications with C. – including an 3/21 entry, which was years before our indictment.
80. Lastly, there is time entered for the “L. lawsuit” (see the 6/16 entry). Clearly, that lawsuit is not related to our criminal case.
81. In short, the J. billings do not recite compensable attorney time.
82. Unfortunately, Mr. J. filed a “Declaration”, asserting that all of his time entries were “all related to the instant, Tampa criminal matter.” That is a demonstrably incorrect statement, such that the Court should not rely on that Declaration for any support for the J. attorney fees claims.
83. Just as he did with IRS, to seek to avoid a $700K penalty, C. has fabricated restitution claims.
84. In addition, he has wholly failed to provide the records required to carry his burden of proof.
WHEREFORE, it is respectfully requested that this motion be granted, and the Court strike C.’s Restitution Claims, or alternatively, disallow them.

References: §3664
 §3663
 v. 
 §162
 §162
 §162