Source: http://federaltaxcrimes.blogspot.com/2012/12/
Timestamp: 2019-04-24 19:56:21+00:00

Document:
William A. Hirst, a Pleasanton, Calif. attorney, pled guilty to making a false statement to the IRS (18 USC Section 1001, here). See press release of USAO ND CA, here. The press release has a link to the indictment; the link is here.
According to the plea agreement, in February 2004, Hirst assisted a client in estate tax planning. Hirst prepared 11 deeds gifting fractional interests in eleven parcels of his client’s real properties to his client’s daughter. On Feb. 12, 2004, Hirst also acted as the notary public for the client’s signature on all 11 deeds. Eight of the deeds were recorded with the county recorder in March 2004. The remaining three deeds were lost or destroyed after having been signed by the client. The client died on Feb. 27, 2004, and the estate’s accountant filed the estate’s federal estate tax return with the IRS on Feb. 2, 2005. That return did not list the daughter’s interests that were conveyed by the three lost or destroyed deeds. Hirst re-drafted the three missing deeds and signed the client’s name. They were recorded on April 4, 2005. During an IRS estate tax return audit, Hirst was served a summons to produce his notary log reflecting the execution of the 11 deeds and was later questioned by IRS estate tax attorneys about the deeds, including the three deeds recorded on April 4, 2005. Hirst told the IRS he found the three lost deeds in a file and recorded them, which was false since Hirst knew he signed the client’s signature to the three deeds recorded on April 4, 2005.
This is a variation of a theme we have see before. See Cincinnati Attorney Pleads to Tax Obstruction (Federal Tax Crimes Blog 5/3/12), here.
The Circuit Splits Blog has this entry, Circuits Split Over Standard of Review Involving the Denial of an Advice-of-Counsel Jury Instruction (Circuit Splits Blog 12/17/12), here, addressing the First Circuit's decision in United States v. Powers, 702 F.3d 1 (1st Cir. 12/14/12), here. The advice of counsel defense is often encountered in tax cases as a specific nuance on the requirement that the defendant have acted with intent to violate a known legal duty; if the defendant relied upon advice of counsel that it was not a legal duty, then the defendant should be acquitted.
When a defendant's argument at trial boils down to, "My attorney advised me that it was okay to proceed, so I did.", a defendant may ask the court to give the jury such an instruction. When the court's response is "No.", should an appellate court review the lower court's determination de novo or apply an abuse-of-discretion standard?
One unusual aspect of Powers is that the Government itself asked for the reliance on counsel instruction, in anticipation of the defendant raising the defense as it he claimed he would. But then, the defendant's evidence was less than expected, so the Government withdrew the request and the Court refused to give the instruction.
The other circuits that have expressly considered the issue have concluded that the statute of limitations for section 7201 offenses runs from the later date of either: when the tax return was due or the defendant's last affirmative act of tax evasion. In Dandy, The Sixth Circuit addressed facts similar to those at issue here, where the defendant did not file tax returns for 1982 and 1983, but the last act of evasion did not occur until 1985. The Dandy court found that the statute of limitation runs from the last evasive act because it is these evasive acts which form the basis of the crimes alleged in the indictment." In Ferris, the First Circuit supported the rule by pointedly stating, the defendant, however, by deceitful statements continued his tax evasion through date of last act of evasion. No circuit has rejected the last affirmative act of tax evasion rule.
The rule, therefore, is well-supported in Supreme Court precedent and in the caselaw of other circuits. One element of the section 7201 offense is the commission of an affirmative act seeking to evade tax liability, which can be shown through the individual's willful failure to file a tax return, or through continued evasive acts intending to avoid the payment of taxes. The statute of limitations accrues from the later of the two.
Irby last acted to evade the payment of his taxes in 2006, by using nominee trusts to conceal his assets. Because he was indicted in 2011, the district court did not err in concluding that Count I was not barred by the statute of limitations.
In United States v. Farr, 701 F.3d 1274 (10th Cir. 12/27/12), here, the defendant served as administrator of her late husband's medical clinic. The clinic did not withhold from its employees (by paying them net of withholding) but failed to pay over the deemed withheld amount to the Government. The IRS assessed a trust fund recovery penalty (TFRP) under Section 6672, here. She dilly-dallied. "When . . . Farr did not pay the penalty assessed against her, a civil proceeding evolved into a criminal one." The Government then charged her with tax evasion under Section 7201, here. After some trial level sparring and some appeals, the Government sought a new indictment for tax evasion under Section 7201. The defendant was convicted. This appeal ensued.
Farr argues, as she did in her motion to dismiss, that the Internal Revenue Code (IRC) "provides a specific criminal penalty for those responsible for collecting and paying trust fund taxes who willfully fail to do so under § 7202." App. at 29-30. She argues that the indictment should therefore have charged her with violating § 7202 rather than § 7201. In support, she asserts that "[w]hile ordinarily the government is free to charge under whatever statute it deems appropriate under the facts in question, when Congress sets forth provisions governing the duties, penalties, and procedures with respect to specific conduct or individuals as it did in Section 7202 . . . , the government may not ignore th[at] provision specifically deemed by Congress to be the appropriate vehicle under which to impose prosecution, simply because it favors another better." Id. at 31.
The indictment alleges a Klein conspiracy "to defraud the United States, to conceal from the IRS the existence of bank accounts maintained at Swiss Bank No. 1, and the income earned in these accounts (hereafter "the undeclared accounts"), and to evade U.S. taxes on income generated in those accounts." Specifically, they (with other client advisors of Swiss Bank No. 1"conspired with U.S. taxpayer-clients to hide at least $423,000,000 in assets from the IRS." The U.S. taxpayer-clients are alleged to be members of the conspiracy. The trio, in the order listed, "personally managed undeclared U.S. taxpayer assets worth at least $104,000,000, $14,800,000, and $5,400,000 respectively."
Now familiar acts of stealth to impair or impede the IRS are alleged: (i) code names; (ii) no mail to U.S.; (iii) meetings in Switzerland; (iv) meetings in the U.S., (v) sham corporate entities, (vi) use of a correspondent bank account in the U.S. for client access to funds, and (vii) U.S. taxpayer-clients filed false returns and failed to file FBARs. UBS appears several times as a bank from which funds were transferred into Swiss Bank No. 1 after the pressure and resulting publicity on UBS beginning in 2008.
The indictment makes specific allegations for clients names "Client 1," "Client 2," and so forth, but these merely make specific allegations in the nature of the stealth allegations summarized above.
On my quick review, I saw nothing out of the ordinary in this indictment of the enablers. If I have or obtain from others any more insight of potential use to readers, I will post it.
I write today on the Second Circuit's detour in Coplan to question the foundations of the expansive reading in Hammerschmidt of the defraud conspiracy (a Klein conspiracy in a tax setting). Readers of this blog will know that I have a long-term interest in the subject -- see e.g., my earlier post on the Coplan case, Coplan #1 - Panel Questions Validity of Klein Conspiracy (Federal Tax Crimes Blog 12/1/12), here, and my 2009 article covering the scope of the Klein conspiracy and its Code counterpart, tax obstruction under Section 7212(a), John A. Townsend, Is Making the IRS's Job Harder Enough?, 9 Hous. & Bus. Tax L.J. 260 (2009), here).
Tax Notes Today has an article on the topic, Shamik Trivedi, Is Klein on the Ropes?, 2012 TNT 244-1 (12/19/12). I thought I would use this pulpit -- not a bully pulpit, but my pulpit -- to address some of the issues raised in the article.
This article is a short discussion of some ideas for reform.
This article discusses the development of the original offshore initiative in the late 1990s, dealing with credit cards issued by banks in some Caribbean countries which seemed to offer an evidence proof method of repatriating money in offshore banks; but the John Doe summons to credit card companies and processers and good stealth detective work helped the IRS identify many U.S. taxpayers and the first offshore voluntary disclosure initiative drew in many taxpayers.
The ABA Tax Section is sponsoring a CLE Teleconference and Live Audio Webcast titled: Through the Looking Glass (Parts I and II): Opting Out of the OVDI Penalty Structure and Litigating FBAR Penalties, on January 16, 2013 1-3pm.. The weib site for the presentation, with a link for signing up, is here. The participants are major players in the OVDI brouhaha, so I look forward to learning from them.
I have a separate blog entry reporting on this webinar: Report on Webinar on Opting Out and Litigating FBAR Penalties (Federal Tax Crimes Blog 1/17/13), here.
This panel will discuss matters relating to opting out of the IRS Offshore Voluntary Disclosure Initiative, including “opt-out” mechanics and procedures, and issues relating to examination, negotiation and settlement expectations arising in various “opt-out” scenarios. The panel will also emphasize procedural and substantive issues that are emerging in FBAR assessments and litigation.
In United States v. Catlett, (4th Cir. 12/11/12), here, an unpublished opinion, the Court affirmed Catlett's conviction for "conspiracy to defraud the Internal Revenue Service, in violation of 18 U.S.C. § 371 (2006); ten counts of aiding in the preparation of false tax returns, in violation of 26 U.S.C. § 7206(2) (2006); and corruptly endeavoring to obstruct the administration of the internal revenue laws and aiding and abetting, in violation of 18 U.S.C. § 2 (2006), 26 U.S.C. § 7212(a) (2006)." The opinion is unpublished and seems to have little ongoing import, since it covers ground previous covered.
Catlett also argues that the district court erred in refusing his proposed jury instruction on the definition of reasonable doubt. However, the district court did not err as "[i]t is well settled in this circuit that a district court should not attempt to define the term 'reasonable doubt' in a jury instruction absent a specific request for such a definition from the jury." United States v. Oriakhi, 57 F.3d 1290, 1300 (4th Cir. 1995) (citation omitted).
This is an odd notion that courts tell the jury that they must convict beyond a reasonable doubt but then do not, at the beginning, offer to tell them what the concept means. In those circuits that offer no further explanation -- at least until the jury inquires -- there is an assumption that the jury knows what those words mean. And most juries do not inquire further. Do they know what it means? I don't know, for as we know (and have discussed on this blog), juries are a bit of a black box in terms of how they reach their verdict. See e.g., Coplan #2 - The Sufficiency Challenge for the Conspiracy Counts (Federal Tax Crimes Blog 12/2/12), here.
I offer as a download here the portion of my Federal Tax Crimes book dealing with the concept of reasonable doubt and explaining it to a jury.
ABC Corp., John Doe 1, and John Doe 2 are subjects of an ongoing grand jury investigation into an alleged criminal tax scheme.1 As part of that scheme, ABC Corp., under the direction of John Doe 1 and John Doe 2, purchased and subsequently sold numerous companies. These consolidated appeals concern whether documents and testimony relating to legal advice obtained by ABC Corp. in connection with these transactions are shielded by the attorney-client and work product privileges.
When ABC Corp. objected that the Government had improperly served a subpoena for documents on ABC Corp., the Government issued grand jury subpoenas for those documents to ABC Corp.'s current outside counsel—LaCheen, Wittels & Greenberg, LLP, and Blank Rome, LLP. Later, it also served subpoenas for documents and testimony on three attorneys formerly employed by ABC Corp. as in-house counsel. In each instance, the firms and counsel asserted attorney-client and work product privileges on ABC Corp.'s behalf, the Government moved to enforce the subpoenas, and ABC Corp. opposed the motion as the purported privilege holder.
The District Court granted the Government's motions to enforce based in part on the crime-fraud exception, which permits the Government to obtain access to otherwise privileged communications and work product when they are used in furtherance of an ongoing or future crime. Finding that the requested communications and work product either did not qualify as privileged or that any protection afforded was vitiated by this exception, the Court largely rejected ABC Corp.'s privilege claims and issued corresponding disclosure orders—the first directed to ABC Corp., LaCheen Wittels, and Blank Rome in March 2012 (the "March Order"), and the second directed to the three in-house counsel in June 2012 (the "June Order").
Another Required Records Case; Another Government Win (12/11/12).
We have another required records case and the Government continues its trend of winning these cases. In re Grand Jury Subpoena Dated February 2, 2012, 908 F. Supp. 2d 348 (ED NY 12/10/12), Bianco, J. There is nothing particularly exceptional about the case except perhaps two makeweight predicate taxpayer (in this context, "witness") arguments before reaching the required records issue.
[R]espondent's argument that the government already possesses the information requested by the Subpoena is based upon sheer speculation and is denied by the government. (See Gov't Reply Mem. of Law at 2) ("The respondent's argument begins with the false premise that the government already possesses the records sought by the Subpoena."); (id.) ("The respondent . . . has no basis for his contention that the government 'already possesses the documents sought by the subpoena.'" (quoting Resp't's Mem. of Law in Opp'n at 3)). Although the government attached to its motion to compel a selection of documents from one foreign bank account with dates spanning from 1992 to August 2008, those documents are hardly (on their face) co-extensive with the scope of the Subpoena. Specifically, the Subpoena required the production of documents for a five-year period prior to February 2012. Thus, the government's selection does not contain any documents for the majority of the five-year period covered by the Subpoena. Moreover, there are no documents from other foreign banks at which the respondent, unbeknownst to the government, may have had accounts. In other words, it is self-evident that the government would have no way of ensuring that all such records from all foreign bank accounts — for which respondent has a financial interest, or is a signatory, or has authority over — have been uncovered unless respondent complies with the Subpoena. In short, there is no reason to believe that the government already possesses all documents sought by the Subpoena. Additionally, the fact that the government has some of respondent's foreign bank records clearly does not preclude it from seeking all such relevant foreign bank records. See, e.g., United States v. Dionisio, 410 U.S. 1, 13 (1973) ("The grand jury may well find it desirable to call numerous witnesses in the course of an investigation. It does not follow that each witness may resist a subpoena on the ground that too many witnesses have been called.").
Readers interested in the broader role of plea agreements in the Federal criminal universe, should read a new article, Kyle Graham, Crimes, Widgets, and Plea Bargaining: An Analysis of Charge Content, Pleas and Trials, 100 Calif. L. Rev. 1572 (2012), here.
In the final analysis, this Article argues that in at least one important way, crimes should be treated more like widgets, or at least more like "normal" products. Just as corporations engage in market studies prior to a product launch, they also will periodically assess whether their existing products have generated substantial profits, or are leading to losses. Congress and state legislatures have manufactured thousands of crimes. It is difficult to believe that all of these crimes have produced the "profits" - social gains - that legislators believed they would. Close review of crime-specific data would allow states and the federal government to shut down poor-performing product lines, streamline others, and perhaps even add a few new models. Crimes may [*1630] not represent widgets, but that does not mean we cannot take an inventory of our previous orders.
a. The IRS has more John Doe Summonses being prepared, targeting banks and other entities in countries other than Switzerland.
b. The IRS' increased activity, including prosecutions, will increase the incentive to join OVDP.
c. The IRS is deploying the resources to handle the opt outs consistently through experienced agents, managers and counsel.
d. Opt out agents are taking "neutral positions" in order to properly apply the penalties."
e. Treaty requests are increasing and productive.
f. Checking the schedule B foreign account question "no" will not necessarily result in the willful penalty.
a. enablers of foreign bank accounts have found it in their interests to provide information to DOJ Tax.
3. Kevin Downing, a practitioner and formerly major DOJ Tax player in the offshore prosecutions: "taxpayers can expect future bombshell announcements to come from the government, in part because of whistleblower activity"
In 2006 CI was running 4,000 open investigations per year, and the most recent figures, from 2011, show more than 5,100 investigations per year, Speier [Richard Speier, former Chief of CI and now on the good side] said. "So I'm trying to figure out, with the escalation of enforcement priority devoted to refund crime, what that leaves for the rest?"
Ian M. Comisky of Blank Rome LLP was more direct: "You're taking the finest financial investigators in the world, and you're having them do street crime."
I doubt that I will be spending much, if any, time on this blog with SIRF.
In Tucker v. United States, 2012 U.S. App. LEXIS 25076 (4th Cir. 12/5/12), here, unpublished, the taxpayer sued the United States for alleged wrongful disclosures of tax return information under Sections 6103, here, and 7431, here. The alleged wrongful disclosures were by CI agents assisting in a tax grand jury investigation. The alleged disclosures were that (1) someone -- being the taxpayer -- would be going to jail for tax evasion (or some variation thereof) and (2) that the CI agents were assisting a grand jury conducting a tax investigation. The district court rejected the taxpayer's claims. The Fourth Circuit affirmed.
We agree with the district court that the alleged "up the river" comment did not constitute a disclosure of Tucker's return information as defined in § 6103(b)(2)(A), and therefore, is not actionable under § 7431(a)(1). Accordingly, we affirm the judgment in favor of the government with respect to this statement.
This holding is too cryptic to comment on it. However, the Fourth Circuit panel's ex cathedra conclusion without analysis does not give a great deal of comfort that the holding is correct. It may be; I just don't know. Certainly, the statement as quoted does contain an allegation that "somebody else" committed a crime and, in context, that "somebody else" appears to be the taxpayer. And, since that conclusion was likely reached based at least in part upon information developed in the IRS phase of the investigation, that information would appear to be return information. So, I can wonder, but can conclude only that the Fourth Circuit did not articulate a basis for its conclusion.
I posted an earlier blog on a report from the American Bar Association Section of Taxation's annual National Institute on Criminal Tax Fraud in Las Vegas. See IRS and Practitioners Comment on Streamlined OVDI Procedure (12/7/12), here, reporting on Shamik Trivedi, IRS Urges Low Risk Account Holders to Apply Under Streamlined Procedures, 2012 TNT 236-3 (12/7/12).
1. Per Kathryn Keneally, AAG TAX, DOJ Tax and IRS priority is to identify those who moved money "from one investigated bank to another, especially to those banks that may not have any U.S. operations;" their time is running out. I think this is a bit too cryptic. There's some detail behind it that I could speculate. My speculations are often wrong, so I refrain and spare the reader.
2. Per IRS Deputy Chief Counsel, the IRS is getting information from "lots of whistleblowers," treaty requests and data mining of information received from other taxpayers in the offshore voluntary disclosure programs.
These are in effect pleas / warnings to taxpayers to turn themselves in by joining OVDP 2012. I suspect that the truth is that, if a significant number of taxpayers do not turn themselves in, the IRS will have limited ability to discover, investigate and prosecute criminally or civilly all of that dataset. DOJ Tax and the IRS are trying to convince taxpayers that the form of audit lottery they play going far now will have worse odds than it had previously. Perhaps everyone involved will not suffer the consequences, but many will and, among the many that will, could be you. And the consequences could be far worse than if you come clean now and get right for the past and going forward.
Hale Sheppard, a frequent commentator on the IRS's offshore account initiative, has published a new article on the Williams case that has been a frequent topic on this blog. The new article appears in the December 2012 issue of Journal of Taxation and is titled Third Time's the Charm: Government Finally Collects ‘Willful’ FBAR Penalty in Williams. The article can be obtained from the Tax Blawg blog entry titled IRS Finally Collects Civil “Willful” FBAR Penalty in Williams Case – Court Introduces New Lower Standard for Penalizing Taxpayers with Unreported Foreign Accounts (Tax Blawg 12/7/12), here (providing a link with a summary) or directly with this link, here, provided on that blog here. The article itself has a good history of the civil and criminal journey of Mr. Williams which produced several noteworthy case opinions.
Alarmists might conclude that Williams stands for the proposition that (i) the standard for asserting civil FBAR penalties is willfulness, (ii) in this context, the government can establish willfulness by showing that the taxpayer was merely reckless, (iii) recklessness exists where a taxpayer does not read and understand every aspect of a complex tax return, including all schedules and statements attached to the return (including Schedule B), as well as any separate forms (including the FBAR) alluded to in the schedules, and (iv) the taxpayer’s motive for not filing an FBAR is not relevant. Pragmatists, on the other hand, might see Williams as an aberration, based on narrow facts, with little precedential value, and with questionable real-world applicability. Most people likely will fall somewhere in between. Regardless of the viewpoint, it is undeniable that Williams introduced issues critical to the FBAR debate, many of which remain unresolved. Taxpayers and their advisors would be wise to follow the evolving issues, as the incidence of FBAR and other international tax enforcement issues will continue to rise in the future.
Taxpayers who do not necessarily meet all the factors under the IRS's streamlined filing compliance procedures for previously unreported offshore accounts should nonetheless apply to the program if they are low-risk account holders, senior IRS officials said December 6.
The streamlined program, introduced August 31, was meant as a way to allow low-risk, noncompliant account holders to come clean to the government. It introduced a $1,500 threshold for tax due in a year, as well as factors that would increase a taxpayer's risk. Those taxpayers that had no risk factors and met the $1,500 threshold would have their applications "processed in a streamlined manner," the IRS said at the time.
Just because a taxpayer fails to qualify under the criteria as being low risk is not a reason to avoid applying to the program, said David Horton, director of the IRS Large Business and International Division's international individual compliance function. Missing one of the factors only means that a revenue agent will review the taxpayer's application, Horton said at the American Bar Association Section of Taxation's annual National Institute on Criminal Tax Fraud in Las Vegas.
I am a bit late on this report but it comes from a nontax criminal case of some prominence. It is United States v. Gupta, 2012 U.S. Dist. LEXIS 154226 (SD NY 10/24/12), here, where a former Goldman Sachs director was sentenced for conviction of one count of conspiracy and three counts of securities fraud. Judge Rakoff is yet another in a long line of judges who complain about the numbers approach of the Sentencing Guidelines. Tax crimes practitioners need to be aware of criticisms of the Guidelines because they maybe able to use them some day.
Imposing a sentence on a fellow human being is a formidable responsibility. It requires a court to consider, with great care and sensitivity, a large complex of facts, and factors. The notion that this complicated analysis, and moral responsibility, can be reduced to the mechanical adding-up of a small set of numbers artificially assigned to a few arbitrarily-selected variables wars with common sense. Whereas apples and oranges may have but a few salient qualities, human beings in their interactions with society are too complicated to be treated-like commodities, and the attempt to do so can only lead to bizarre results.
Nowhere is this more obvious than in this very case, where the Sentencing Guidelines assign just 2 points to Mr. Gupta for his abuse of a position of trust -- the very heart of his offense -- yet assign him no fewer than 18 points for the resultant but unpredictable monetary gains made by others, from which Mr. Gupta did not in any direct sense receive one penny.
The Seventh Circuit today decided United States v. Wolfe, 701 F.3d 1206 (7th Cir. 2012), here,, cert. den. 133 S. Ct. 2797 (2013), adopting the minority view that restitution is a civil penalty that does not require the jury to determine the facts. Doug Berman has a good discussion for an overview of the holding. See Seventh Circuit rejects extending Southern Union to restitution based on (minority) view it is not a criminal penalty (Sentencing Law and Policy Blog 12/5/12), here.
Aside from the substantive merits of the restitution issue, Judge Bauer addresses the pressure on a court to override a circuit court precedent to conform with the majority of the circuits.
But a "compelling reason" is required to overrule our Circuit's precedent. United States v. Kendrick, 647 F.3d 732, 734 (7th Cir. 2011). Being in the minority is not enough. This is true even if the trend is against us. See Patel v. Holder, 563 F.3d 565, 569-71 (7th Cir. 2009) (Ripple, J., concurring) (agreeing with the court's judgment because it was based on this Circuit's precedent but writing separately to discuss how our interpretation of the statute "puts us on the distinct minority side of an intercircuit split"); but see Russ v. Watts, 414 F.3d 783, 788 (7th Cir. 2005) (describing why we may overturn our Circuit precedent if no other circuit accepts it (quoting United States v. Hill, 48 F.3d 228, 232 (7th Cir. 1995))).
Readers will recall that mandatory restitution is not permitted for the Title 26 tax crimes, but is for the Title 28 tax crimes (most prominently, conspiracy). Usually pleas for Title 26 crimes will include a restitution for the taxes involved. That provision will then permit the remedies normally available for restitution, as well as the recently enacted tax assessment remedies for restitution. See New Statute for Civil Effect of Restitution in Tax Cases (at Least Title 26 Crimes of Conviction) (2/11/11), here.
The opinion is lengthy and complex, and resists easy summarization. It is well worth reading because it discusses in detail a kaleidoscope of issues relevant to any "white collar" criminal trial, from evidentiary rulings to jury instructions to sentencing. This commentary is limited to the sufficiency of evidence claims, and some of their implications for lawyers as potential defendants.
The panel in Coplan displayed a remarkable willingness to comb through an extremely complicated trial record and test every nuanced inference that the government urged could be drawn from the evidence in support of the verdicts. The bottom-line holding of the panel was that, after making all inferences in favor of the government, the convictions had to be vacated because the evidence of guilt was at best in equipose.
Although this general principle can be stated easily, its practical application in Coplan involved the panel conducting a particularized review of the evidence that appellate courts often forego. For example, one important fact for Shapiro was that a tax opinion letter provided to shelter clients stated that, for the purposes of the "economic substance" test governing tax-related transactions, the clients had a "substantial nontax business purpose" (OK, per the Coplan panel), rather than stating, as it had before Shapiro’s revisions, that the clients had a "principle" (sic - principal) investment purpose. Likewise, although Shapiro had reviewed letters and attended phone conferences deemed incriminating by the government, his involvement in such conduct was not "habitual" or otherwise substantial. As for Nissenbaum’s Section 7212(a) conviction, his response to the IDR that the government characterized as obstructive – a partial explanation of the clients’ subjective business reasons for participating in the　tax shelters – could not sustain the conviction because the IDR drafted by the IRS had sought all reasons held by the clients, rather than their primary reason. If this sounds somewhat murky and convoluted, it is. The point is that multiple convictions for very significant offenses were vacated after much effort at extremely fine line-drawing.
This conspiracy count was different from the conspiracy count on which the others were tried which involved a defraud / Klein conspiracy objective and two offense objectives (evasion (§ 7201, here) and false statement (18 USC § 1001).
That cover story attributed a key step in the Add-On transaction—the transfer of digital options from the individual partnership to a newly formed LLC—to a request from trader Andrew Krieger to consolidate accounts for administrative convenience. There was no meaningful dispute at trial that the "consolidation cover story" was false.
On appeal, Bolton challenged the procedural and substantive reasonableness of his 15 month sentence.
I continue discussion of the issues in United States v. Coplan, et al., 703 F.3d 46 (2d Cir. 11/29/12), here and here.
The Court affirmed the economic substance instruction. Economic substance is not a clearly defined concept in the tax law, and there are various interpretations of it. Hence, in my view, it is a difficult concept to convey to a jury. [Remember the black box nature of the jury I discussed in an earlier blog on Coplan, Coplan #2 - The Sufficiency Challenge for the Conspiracy Counts (Federal Tax Crimes Blog 12/2/12), here. Nevertheless, in a criminal tax case, the courts seem to adopt the most taxpayer friendly version of the economic substance concept (except to the extent they are bound by Circuit precedent) and instruct the jury accordingly. I think that is what happened in Coplan (subject to Circuit precedent) and the other principal tax shelter criminal tax cases. I am not saying that is right, because even as thus interpreted, the concept is a difficult one for a lay jury to understand.
In order to establish that a transaction lacks economic substance, the government must prove two elements beyond a reasonable doubt: The first element is that there was no reasonable possibility that the transaction would result in a profit. The second element is that the relevant taxpayer had no business purpose for engaging in the transaction in question apart from the creation of the tax deduction.
Now, let me say a few words about your determination as to whether or not there was a reasonable possibility that the shelter would result in a profit. This element requires you to reach an objective judgment about whether the government has proved that there was no reasonable possibility that the shelter would result in a profit. In other words, this does not depend upon what the taxpayer believed about the profit potential. It requires you to consider all of the evidence and reach a conclusion about whether the government has proved beyond a reasonable doubt that there was no reasonable possibility of a profit on the tax shelter after the fees and other costs were paid. If you find that the government has proved beyond a reasonable doubt that there was no reasonable possibility of a profit, then you move on to the second element, whether the relevant taxpayer had no business purpose for engaging in the tax shelter. If you find that the government has not proved the lack of a reasonable possibility of a profit, then you must reject the government's theory and find the defendants not guilty.
A VI: 424/6176-77 (paragraph breaks omitted).
I have blogged on Joseph B. Williams III before. He is the gentleman subject to the FBAR willful penalty that drew such a problematic opinion from the Fourth Circuit imposing the penalty. See Fourth Circuit Reverses Williams on Willfulness (Federal Tax Crimes Blog 7/20/12; revised 7/24/12), here. There was a related civil proceeding regarding his income taxes. I reported the Tax Court decision in that case earlier. The Williams Offshore Account Saga Continues - You Win Some, You Lose Some (4/28/11), here. The Fourth Circuit has now decided the appeal in the Tax Court case, Williams v. Commissioner (4th Cir. - No. No. 11-1804 12/3/12), here, an unpublished opinion, holding against Mr. Williams on the points he raised on appeal.
1. A guilty plea to income tax evasion for one or more years will be collateral estoppel in an ensuing civil case involving the same years. Collateral estoppel after a guilty plea for income tax evasion will govern the unlimited statute of limitations in Section 6501(c)(1), here, and the civil fraud penalty in Section 6663, here. Depending upon the plea and the allocution, It may not determine anything other than a minimum number for the tax liability itself.
2. Tax evasion under Section 7201, here, encompasses evasion of assessment or evasion of payment, or both (it is fair to say that evasion of assessment involves evasion of payment).
Readers will recall that I have discussed in these blogs the concept of conscious avoidance which appears under various labels (most prominently now, willful blindness (see fn 39 of the opinion below). The concept, in summary (at risk of losing nuance), is that the statutory requirement for a specific intent (willfulness for a tax crime) can be satisfied if a defendant does not have that intent but consciously avoids learning of a fact that would be a key element of criminality. Three defendants in Coplan appealed the use a conscious avoidance instruction.
In determining if a defendant acted knowingly, you may consider whether he deliberately closed his eyes to what otherwise would have been obvious to him. If, for example, you find beyond a reasonable doubt that the defendant you are considering was aware of a high probability that a CDS Add-On shelter transaction lacked a reasonable possibility of a profit, and that the defendant acted with a conscious purpose to avoid learning the truth about whether or not the shelter had a reasonable possibility of a profit, then the knowledge element is satisfied. In other words, it is no defense that a defendant deliberately closed his eyes to what was right in front of him. On the other hand, if you find that a shelter lacked a reasonable possibility of a profit but that the defendant you are considering actually believed in good faith that the shelter had a reasonable possibility of a profit, then the defendant cannot be convicted of tax evasion on the substantive count you are considering.
The defendants further argue that there was no factual basis for the conscious avoidance instruction in connection with Counts Two and Three, the tax evasion charges. "'A conscious avoidance instruction permits a jury to find that a defendant had culpable knowledge of a fact when the evidence shows that the defendant intentionally avoided confirming the fact.'" United States v. Quinones, 635 F.3d 590, 594 (2d Cir. 2011) (quoting United States v. Ferrarini, 219 F.3d 145, 154 (2d Cir. 2000)). fn39 A conscious avoidance instruction is appropriate only when (1) "a defendant asserts the lack of some specific aspect of knowledge required for conviction," and (2) "the appropriate factual predicate for the charge exists, i.e., the evidence is such that a rational juror may reach the conclusion beyond a reasonable doubt that the defendant was aware of a high probability of the fact in dispute and consciously avoided confirming that fact." United States v. Ferguson, 676 F.3d 260, 278 (2d Cir. 2011) (quotation marks omitted). The Government need not choose between an "actual knowledge" and a "conscious avoidance" theory. United States v. Kaplan, 490 F.3d 110, 128 n.7 (2d Cir. 2007).
In this case, the defendants proposed a jury instruction on Count One that emphasized the distinction between acts that made the IRS's job more difficult and acts that were done deceitfully or dishonestly. Their requested instruction included a number of examples that, in the defendants' view, could not constitute a conspiracy to defraud, in order to advance the defense theory that their conduct was legitimate advocacy on behalf of their clients. See, e.g., A VI: 262 (proposed jury instruction) ("It is not illegal simply to make the IRS's job harder. This is particularly true for the defendants, whose professional obligations as attorneys or certified public accountants required them to represent the interests of their clients vigorously in their dealings with adversaries, such as the IRS."). The District Court adopted the substance of the proposed charge, but declined to include the defendants' examples or to inform the jury about the special obligations of tax professionals who represent clients in an adversarial setting.
We affirm the District Court's ruling primarily because the defendants' proposed charge did not "accurately represent[ ] the law in every respect." Feliciano, 223 F.3d at 116 (quotation marks omitted). The examples of purportedly lawful conduct proffered by the defendants included the following: "an agreement between witnesses not to tell the government something unless specifically asked about it; advice from an attorney to a client to assert his constitutional right not to speak to government investigators; an agreement not to create a document that individuals had no obligation to create." A VI: 262. Although these acts are not necessarily deceitful, no bright line rule excludes such acts from supporting a conspiracy to defraud. See Cont'l Ore Co. v. Union Carbide & Carbon Corp., 370 U.S. 690, 707 (1962) ("[I]t is well settled that acts which are in themselves legal lose that character when they become constituent elements of an unlawful scheme."). We are not unsympathetic to the defendants' view that a lay jury may struggle to fully apprehend the obligations of tax professionals zealously (and lawfully) representing clients before the IRS. Nevertheless, because the current understanding of the Klein doctrine does not categorically exclude the foregoing acts, the District Court properly omitted the proposed examples from the jury instructions.
This is the third in the series on the major and lengthy opinion in United States v. Coplan, et al., 703 F.3d 46 (2d Cir. 11/29/12), here and here (bookmarked version). Venue is the topic of this blog.
One of the defendants, Vaughan, challenged venue for the false statement count (18 USC 1001, here) in the Southern District of New York, DOJ's preferred venue for the mega tax shelter trials) rather than in Tennessee where he made the statement. The key facts are that the statement was made in Tennessee but worked its way to SDNY where the agents considered the statement in the investigation being conducted in SDNY. Essentially, the Court held that the false statement crime can be committee wherever the statement is properly considered, so that venue can be in the district where the statement is made and the district where the statement is considered.
Because "[p]roper venue in criminal proceedings was a matter of concern to the Nation's founders," the United States Constitution "twice safeguards the defendant's venue right." United States v. Cabrales, 524 U.S. 1, 6 (1998). Article III requires that "the Trial of all Crimes . . . shall be held in the State where the said Crimes shall have been committed." U.S. Const. art. III, § 2, cl. 3. The Sixth Amendment further provides that "[i]n all criminal prosecutions, the accused shall enjoy the right to a speedy and public trial, by an impartial jury of the State and district wherein the crime shall have been committed." Id. amend VI; fn31 see also Fed. R. Crim. P. 18 (requiring that "the government must prosecute an offense in a district where the offense was committed").
fn31 "Technically, Article III specifies 'venue' and the Sixth Amendment specifies 'vicinage,' but that refined distinction is no longer of practical importance." United States v. Royer, 549 F.3d 886, 893 n.8 (2d Cir. 2008).
In United States v. Moore, 2012 U.S. App. LEXIS 24621 (4th Cir. 11/28/12) (unpublished), here, the defendant raised many arguments, but I address only two here.
1. Error in Computing Tax Due at Trial then Conceded at Sentencing.
Moore also seeks a new trial based on newly discovered evidence. He argues that, at trial, the government's bank- deposits analysis overstated his taxable income for 2005 through 2007 by $191,236 because he had paid that amount in local and state taxes but did not deduct that amount from gross receipts. By the time of sentencing the government agreed that Moore should be credited with these payments, but at trial it had admitted only that the number should be decreased by about $92,000. Moore argues that Agent Rager's eventual concession at sentencing that the original calculation of Moore's unpaid tax liability was incorrect constituted newly discovered evidence, entitling him to a new trial. We disagree that this development merited a new trial.
I have previously written on the issue of a defense request to immunize a witness who invokes his Fifth Amendment privilege, thereby refusing to give testimony potentially helpful to the defense. The prosecution can grant immunity when it needs the testimony. The defense can't. The courts will not intervene to give some form of relief except in rare circumstances. I have previously blogged on various aspects of that issue, and list those blogs at the end of this blog.
I write today to provide some update links for information on this subject. The Circuit Split Blog has this discussion of and link to a law review note. See New Article Highlights Immunity Grants to Defense Witnesses (Circuit Split Blog 11/30/12), here. The note is Nathaniel Lipanovich, Resolving the Circuit Split on Defense Immunity: How the Prosecutorial Misconduct Test Has Failed Defendants and What the Supreme Court Should Do About It, 91 Tex. L. Rev. 175 (2012), here. I recommend review the Circuit Split Blog entry for its inclusion of a graphic graph.
Defense Witness Immunity: Prosecutor Discretion and Compelling Testimony of a Reluctant Witness in Criminal Cases (9/6/11), here.
The IRS has determined that the whistleblower award provided in 7623, here, does not allow awards for information leading to FBAR penalties. See PMTA 2012-10 (April 23,2012), here. Practitioners have questioned the propriety and the wisdom of that interpretation. See e.g., a National Whistleblower Center tome, dated 11/5/12, here.
The issue seems to turn upon whether the scope of Section 7623 covers collections related to non-tax matters administered by the IRS. I will not get into the merits because the items above do that adequately.
I will note that this possibility should give at least the bigger players in the offshore evasion game some concern. Even if Section 7623 were not to cover FBAR penalties, it would cover any of the related penalties (such as the 5471 penalty and the 3520 penalties). And, if the IRS were ever to impose an "in-lieu of" penalty instead of the FBAR penalty, that penalty would be subject to award. I know that the only "in lieu of" penalties on the table now are the OVDI / OVDP penalties where the taxpayer voluntary outs himself before the IRS knows about the taxpayer's offshore antics. But, it seems to me that the IRS could offer the whistleblown taxpayer an in lieu of penalty instead of an FBAR penalty in order to have a basis for a whistleblower award. Keep in mind that, at least for the 7623(b) award, over $2 million has to be involved, so that this opportunity to pay an award could generate some good leads and revenue for the IRS.
In Coplan, here and here, introduced in prior blogs, the Court next addressed the defendants' sufficiency challenges on appeal. Sufficiency is a term of art in a criminal appeal. It means basically that, on the evidence presented, no rational trier of fact -- the jury -- could have found the essential factual elements of the crime. As the panel notes, proving that circumstance is a very high bar. Everyone who has represented convicted defendants on appeal or observed the process knows that it is a high bar, and rarely met. In most cases, I suspect that the trial judge will recognize the deficiency and grant a FRCrP Rule 29, here, motion for acquittal, so a good sufficiency challenge will usually not get to the court of appeals. Which is to say that many inadequate sufficiency challenges do get to the court of appeals.
In the factfinding process, the author develops differences between a rational factfinding process -- with focus on the process rather than a particular factfinding -- and supernatural factfinding (such as trial by ordeal) in which God becomes the factfinder to speak the truth.
"As legal historian George Fisher points out, we use the jury not because it is an infallible factfinder, but because it gives us closure in a world in which infallible factfinders do not exist. The jury permits us to evade the inherent difficulties of factfinding, because, like God, the jury need not respond to questions or justify its results. But if so, we have not traveled as far from the supernatural proofs as we may think."
In Coplan, here and here, introduced in yesterday's blog (Major CA2 Decision on E&Y Tax Shelter Convictions (11/29/12), here), the Second Circuit panel's opening shot is to question validity of the defraud / Klein conspiracy. (The Klein conspiracy is a defraud conspiracy in a tax setting.) The Klein conspiracy is common in federal tax crimes. As it has been mused before, the first paragraph in the prosecutors' template indictment is a conspiracy count. And, in tax crimes, the Klein conspiracy is the first count in many of the prosecutions.
What does "defraud" mean? The panel questions the conventional wisdom as to what that word means in the statute as enacted by Congress many years ago.
The term "conspiracy to defraud the United States" therefore means that the defendants and their alleged co-conspirators are accused of conspiring to impede, impair, obstruct or defeat, by fraudulent or dishonest means, the lawful functions of the IRS to ascertain taxes and to collect lawfully due and owing tax revenue.

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